On social media, noted leaker Benjamin Geskin tweeted out the following bit of speculation:
There is a possibility, that Apple will only show new #iPhone8.
— Benjamin Geskin (@VenyaGeskin1) May 31, 2017
And iPhone 7/7 Plus price drop.
By way of background, it has been widely rumored that Apple (NASDAQ:AAPL) plans to release not just one or even two new iPhone models this fall, but three. Two would be relatively straightforward updates to the current iPhone 7 and iPhone 7 Plus models, with tech spec upgrades and potentially even a glass back rather than an aluminum back.
Image source: Apple.
The third would be the premium iPhone with an OLED display that Geskin refers to in his tweet as the iPhone 8.
However, if Geskin's speculation above is to be believed, the updated mainstream models (which I'll refer to as iPhone 7s and iPhone 7s+) won't happen, and Apple will instead simply drop the prices on the current iPhone 7 and iPhone 7 Plus models.
Here's why this doesn't make any sense.
The rationale of the "premium" iPhone
When word began to circulate about Apple potentially building three new iPhones, with a premium model at the top of the product stack, the idea immediately made a lot of sense.
Although the average selling prices of Apple's iPhones are much higher than the industry average, the reality is that there have historically been a number of gating factors to Apple releasing iPhones with exactly the cutting-edge features its designers envision.
Firstly, there's the matter of supply chain dynamics; bleeding-edge technologies are difficult to manufacture, and a phone filled with technologies that are each bleeding-edge is exceptionally hard to build in mass quantities. Yield rates on ultra-advanced components are surely going to be lower than yield rates on components that use more mature technologies, which can limit both supply and lead to higher device cost structures.
There's also the simple fact that even if Apple could, through its sheer scale, manage to get these cutting-edge components at reasonable prices, current iPhone pricing structure would still limit the number of such components that could make it into the final devices.
What this rumored three-iPhone strategy allows Apple to do, then, is to relieve potential supply chain bottlenecks on certain difficult-to-manufacture components (since they would only be used in the very highest-end of the three iPhone models) as well as allow Apple to increase its cost structure on the premium iPhone without taking a hit on margins (since it would charge more for the devices) or seeing iPhone demand fall off because of a price hike (since there would still be "fresh" iPhones available at the traditional price points).
Just dropping the price on iPhone 7/7+ wouldn't do it
Apple could, as Geskin suggests, drop the prices on the iPhone 7 and iPhone 7+ in a bid to make them more attractive to customers and simply forgo releasing updated versions.
That strategy would be effective in boosting the demand for the iPhone 7 and iPhone 7+, but it'd be -- for lack of a better phrase -- an epic business fail for several reasons.
Firstly, in such a scenario, Apple would either offer the iPhone 8 at the traditional price points and take a hit on margins (since the device was almost certainly designed for a higher cost structure than previous iPhone models were), or it'd price the iPhone 8 as a "premium" device and leave a vacuum in between the price-reduced iPhone 7/7+ models and the premium iPhone 8.
In such a scenario, customers who want to buy iPhones would be forced to choose either the pricier iPhone 8, or they would, by default, choose a price-reduced iPhone 7-series model, which would negatively impact iPhone average selling prices. And, I would expect a sizable portion of the smartphone-buying population that would have considered buying iPhones would be put off by this and would be more likely to go for non-Apple smartphones.
As you can probably tell, it makes much more sense for Apple to have price-reduced iPhone 7/7+ models to serve the "mid-range" (though Apple's mid-range is what other smartphone vendors would refer to as the high end), updated iPhone 7s/7s+ phones to address the typical iPhone price points, and then the iPhone 8 at a premium price point to serve the most enthusiastic (or simply deep-pocketed buyers).
Such a stratification helps Apple maximize unit shipments, revenue, average selling prices, and ultimately profits, so it's what I fully expect the company to do.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.
