In a recent note (by way of MacRumors), analyst Steve Milunovich with UBS said that Apple (NASDAQ:AAPL) tends to price its devices "quite competitively." He therefore thinks that Apple isn't likely to "stray far from the price point of Samsung's (NASDAQOTH:SSNLF) most expensive [smartphone] model at $840-$850," with its upcoming premium OLED iPhone 8.
He further goes on to say that although the variant of the OLED iPhone with 256 GB of storage could run customers between $950 and $1,000, the entry-level version should come in at "only" between $850 and $900.
Although I get the point that Milunovich is making here, I'm not convinced that the company will price its upcoming flagship device so "cheaply."
This is supposed to be the ultimate iPhone
Apple has built great smartphones for years, but it has been fundamentally limited in what kinds of technologies that it can bring to market with each new device. Apple sells phones in quantities that other smartphone vendors can only dream of, and it enjoys per-device gross profit margins that dwarf those of many competitors.
Those are fundamentally good things, but they're also pretty limiting -- Apple needs to be sure that it builds phones that can be manufactured in extremely high volumes while simultaneously being manufactured with low-enough cost structures that it can maintain its desired high margins at the price points that it sells its phones.
Those restrictions certainly limit what Apple can afford to include in its devices.
By moving the price up with the premium iPhone -- and, to be clear, a move to $1,000 for the base model would be a significant step up -- Apple gains breathing room in the bill-of-materials cost. What this means is that it can build a fundamentally more expensive phone, but the idea is that those cost adders make for a much more attractive phone and that Apple can successfully charge a nice premium for it.
I think Apple wants to build what is essentially the ultimate iPhone and, in fact, the ultimate smartphone without worrying too much about potential cost constraints.
Justifying $1,000-plus pricing
I suspect that Apple will limit this premium iPhone to 128 GB and 256 GB storage configurations -- just as it did with the jet black iPhone 7 and iPhone 7 Plus. I also think that $1,000 for the 128 GB model and $1,150 for the 256 GB model could be reasonable price points given the potential level of innovation that this product may deliver.
Indeed, if Apple keeps the pricing of its standard iPhone models the same as they are currently, then $1,000 for a hypothetical 128 GB premium iPhone would represent just a $131 premium over the hypothetical 128 GB iPhone 7s Plus.
That $131 would, if the rumors are to be believed, buy the user quite a lot. The OLED display would improve the viewing experience on the device, the form factor is likely to be much more convenient, the device sleeker looking, and the addition of 3D sensing capabilities could enable interesting new usage models, too.
I think $1,000-plus pricing for the premium OLED iPhone 8, assuming that the device turns out to be fully loaded with intriguing new features and a phenomenal aesthetic, would be more than fair.
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.
More from The Motley Fool
Apple, Inc. Earnings: Why I'm Watching Guidance
Here's why Apple's guidance for its second quarter is so important.
Will This Be Apple's Biggest Mistake Since the Newton?
The Cupertino giant rarely makes a misstep, but when it does, it's usually dramatic.
3 Top Dividend Stocks to Buy in 2018 With Double-Digit Dividend Growth
Here are three market leaders with meaningful dividends, strong dividend growth potential, and a low-risk profile. Does it get any better than this?