In 2015, Apple (NASDAQ:AAPL) introduced the iPhone 6s and 6s Plus series of smartphones. The unique selling point for those devices at the time was the inclusion of 3D Touch functionality. 3D Touch, according to Apple, allows compatible devices to sense "how deeply users press the display."
Developing this functionality was certainly non-trivial, and implementing it obviously increased the bill of materials of the iPhone 6s-series relative to the prior-generation iPhone 6-series devices.
According to DigiTimes, which doesn't cite specific sources, the current 3D Touch solution, which is "glass based," costs about $9. The report then goes on to say that Apple's next-generation OLED-based iPhone will require a fundamentally different "thin film-based 3D touch sensor."
That different sensor structure is expected to cost "over US$15," meaning that cost per device goes up by at least $6.
Why the OLED iPhone will be so expensive
The OLED iPhone that Apple is expected to release at some point soon is expected to be priced significantly higher than the standard iPhone models. Although some may view this as an Apple "money grab," the reality is that this new phone is likely to be much more expensive to manufacture than its non-OLED counterparts.
The OLED displays themselves are likely to be more expensive than the LCDs that Apple uses in other devices, clearly the 3D Touch implementation will get more expensive, and I wouldn't be surprised if the industrial design of the OLED iPhone is just more expensive to build in general.
These costs add up, which means that for Apple to simply maintain the same gross profit margin percentage on those devices as it does on its non-OLED iPhones, it needs to charge more.
Customers will likely pay for value
The bad news is that prices for something like an OLED iPhone are going to necessarily be higher than LCD-equipped iPhones. The good news, though, is that those cost-adders aren't being implemented just because Apple feels like making a more expensive phone -- these are features that Apple thinks customers are likely going to be willing to pay for.
Apple already saw a mix shift up toward its iPhone 7 Plus from the iPhone 7 in the early innings of the iPhone 7-series product cycle, likely driven by the dual-camera functionality on the former. If camera functionality is enough to drive a meaningful mix shift up, then a better industrial design and superior display should be enough to drive a large portion of the iPhone customer base toward a relatively expensive iPhone.
Segmentation will be key
While I do think there will be many customers interested in -- and willing to pay a premium for -- a more expensive OLED-based iPhone, there will be individuals who can't or simply won't pay for all those extra features.
For those customers, Apple still needs to put out compelling new products. Apple is rumored to be updating the current iPhone 7 and iPhone 7 Plus models with superior internals in what would be a typical "s" release. Simply updating the current-generation phones with better internals and features should drive the value proposition of those products up while keeping the price points the same.
The point, though, is that Apple will need to be smart about how it segments its product lines -- it needs to continue to offer compelling products at familiar price points while exploiting the latent demand for higher-end, higher-priced, and ultimately more feature-rich iPhones.
If Apple can pull that off, its iPhone business could be poised to enjoy significant revenue and profit growth in the coming product cycle -- and potentially beyond.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.