The day we've been waiting for is finally here, and Apple (NASDAQ:AAPL) unveiled its new tech upgrades for the year -- including its brand new, thousand-dollar iPhone X.
In this episode of Industry Focus: Tech, host Dylan Lewis and senior tech specialist Evan Niu dive into the event and the updates that Apple is releasing on its Watch, its TV, and, of course, its iPhone. Find out how the Watch continues to grow, despite widespread skepticism; why Apple is just now releasing 4K HDR capabilities for their TVs; how the new iPhone 8 is different from the iPhone 7, and a few ways that it's not so different; what's so new and exciting about the iPhone X, and why it's commanding such a notoriously high price tag; and more.
A full transcript follows the video.
This video was recorded on Sept. 15, 2017.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, September 15th, and we finally know what the iPhone X looks like. I'm your host, Dylan Lewis, and I'm joined on Skype by fool.com senior tech specialist, Evan Niu. Evan, this is a show that we've been waiting basically a year to do.
Evan Niu: It's like an annual holiday.
Lewis: Yeah. It's one of my favorite days of the year, getting to see Apple's events. They're always fun to tune into, but I think this one was really great, because we knew they were going to be cooking up something pretty cool for the 10th anniversary of the iPhone.
Niu: Yeah, it's a milestone event. They spent a lot of time talking about Steve Jobs' legacy, the new theater. It's a decade, it's a pretty big milestone. They shipped over 1.2 billion iPhones over the past 10 years, so it's been quite a run so far.
Lewis: And we're going to talk about that product line. But first, like Apple did, we're going to run through some lesser products to build anticipation. Why don't we first start talking about the Apple Watch, and what they decided to announce with that product line?
Niu: Yeah, the Apple Watch Series 3. It's the new flagship. Really, the big addition here is LTE cellular connectivity directly integrated into the Watch itself as opposed to having to tether and rely on the connection of your iPhone. It gives it the potential to be a stand-alone device.
Lewis: And this is something that has been a major limitation of this device for quite some time. The idea of being able to go out for a run and receive calls or use Maps, you can stream Apple Music with the Series 3 as well if you decide to get the LTE option. I do think that builds out functionality in the use case for a lot of people. One device is only so helpful if you have to carry around two to really use it.
Niu: Right. I do think it has some potential. I think in practice, the whole tethering and reliance on the iPhone, which theoretically it does kind of hurt it as a stand-alone product, but I think in practice, it remains to be seen. Even on here, for example, I have an older Apple Watch right now and I've had to make phone calls on it occasionally if my phone is in the other room or something and my wife calls and I need to pick it up. And making a phone call on your Watch is really not a great experience. You can't hear them very well, they can't hear you very well, the mics aren't great. I'm sure the newer versions have better microphones and speakers. But just the experience itself isn't that great. And just because you could do that without your phone on the new version, I'm not sure that's going to be the game changing thing. It definitely helps in terms of increased functionality and increased independence, but I'm still waiting, I think it's too early to call on whether or not that's going to be the real thing that drives mainstream consumers to buy these things.
Lewis: One of the other things I saw them emphasizing quite a bit in the keynote was improvements to the wellness functionality of the device. They add the barometric altimeter, which is something that I think a lot of mountain bikers, runners, skiers, snowboarders will really appreciate. And you look at some of the Watch OS 4 updates that are going to be coming in mid-September, they redesigned their workout app, they provided some updates for swimmers, they made some changes to the heart rate monitoring and giving people some more advanced heart rate in metrics. I see all these things and it's like, they're making it pretty clear that this is a health and wellness device, in addition to being a cool consumer tech device.
Niu: Right. They're definitely betting really big on the health side. I think it's really interesting -- Tim Cook did an interview recently on this -- they invest in a lot of things on the health side that don't really need to be commercialized into the business, which I think is an interesting angle to take and also kind of an advantage, because since they can afford to invest in all these other partnerships with medical researchers, and the medical community at large, they can really expand their presence, and use that data to improve the Apple Watch, even if they're not monetizing those partnerships directly because obviously, Apple is so rich, they don't really need to. But, they just feel like they can do a lot of good for society if they can really advance this field, which I think is something that other smartwatch makers both don't really care as much about and also can't afford to do.
Lewis: And to that point, we did that show on wearables a couple of weeks ago, and we put out a call to listeners and said, "We talked about use cases here, and you and I are not particularly sold on the wearables environment in general, we don't really have use cases that make sense for us, but please write in if you have some that are super compelling for you and make it a must-have product," and a lot of people wrote in on health and wellness type stuff -- monitoring for very specific conditions, or things that force them to get in a little bit better shape. So, clearly it works for some people, and people with particular illnesses it can be particularly great for. So, it makes sense that Apple is moving that way.
Niu: And to build on that, I think it's important because, while the number of people that really take advantage of some of these more niche features, they might be a very small number of people, but for them, these features matter a lot. They can have really huge improvements on their life, even if they're a relatively small portion of the overall consumer base. But for them, these things are potentially game-changing to a small number of people, but huge impact.
Lewis: And looking at some of the details for the product for the Series 3, the Series 3 with cellular is going to be at $399. The Series 3 without cellular is going to be coming in at $329. They are available for order on 9/15, and actually available on the 22nd. Evan, they've also unveiled an update to the Apple TV line.
Niu: That's right. Apple TV, they added 4K HDR, which I think is kind of just keeping up because that's becoming the standard now. This move I didn't think was particularly exciting, just kind of catching up with what's out there already. As far as the hardware was concerned, that's about it. There's no big updates to Apple TV hardware. And of course, they're always building out the operating systems and features and functions there, but that's available across all their devices. It depends on if you even have a 4K HDR TV. For example, I don't, so I have no need for it and would not buy this device because it would literally be useless for me. And over time, that changes as people upgrade to 4K HDR TVs. But TV upgrade cycles are pretty long, usually about 5 to 7 years before you buy a new TV. It just takes a longer time for that 4K adoption to pick up, just because people don't buy TVs every two years like they do for smartphones.
Lewis: Yeah, and that upgrade cycle is a great point. In a lot of ways, Apple is late to the 4K party. You have all of these other streaming devices that are available and actually coming in at a lower price point. They're kind of a late mover in this sense, and they're doing it with a more expensive device. They might not really get dinged for it all that much if most of the market doesn't have 4K HDR TVs anyway, at this point, and they're making it available for when that wave comes on. But, for the folks who do have 4K enabled television at this point, there are a lot of other pretty solid options out there that sell for a far lower price.
Niu: That might also be why they felt they had the luxury to wait, because they know that not everyone has 4K TV, so maybe that's why they were like, this isn't a priority, we can wait on this a little bit, even if everyone else is beating us to it. Not everyone has 4K TVs, so maybe that's why they took their time.
Lewis: Yeah. And that actual price point is $179 for the 32 gig option, $199 for the 64 gig option. Like the updates to the Apple Watch line, they will be available for order on 9/15 and actually available the 22nd. As a reminder, we talk about these two segments, the Apple Watch and Apple TV, both of those have their revenue build into the other products category, where it's lumped Beats, accessories, and a lot of other of Apple's smaller businesses. And that total segment revenue is only about 5-6% of Apple's top line. We talk about the updates that are coming here and what it might eventually lead to in terms of market size and things like that, it's still kind of a drop in the bucket for them.
Niu: That's right. One thing that is interesting that Tim Cook mentioned was that Apple Watch is now the No. 1 watch in the world, versus a year ago, they said it was No. 2. So, we're seeing some growth in this category. Still not breaking it out financially, but they're giving more clues.
Lewis: We'll take every clue we can get since they won't give us any unit sales. Evan, fine, we can finally get to the iPhone stuff. We will save the iPhone X, though, for last. Why don't we start talking out with the iPhone 8 and what they showed off. What really stood out to you?
Niu: Really, if anything, I felt like it was pretty unimpressive, the 8. Interestingly, I actually thought the same thing about the 7 last year. Last year's 7 didn't seem like a big upgrade from the 6s, and that's why I personally didn't even upgrade, which was weird for me to not buy the newest iPhone. Even the 8, I don't see a huge appeal there, either. Coming from either a 6s or a 7, the 8 doesn't bring a whole lot new to the table. The big news here on the iPhone 8 is wireless charging. They tweaked the design, the overall design looks almost the same as it's been, which is kind of crazy, because this will be the fourth year in a row where they've used the same overall design, with the main exception being that now there's a clasp back that is required to enable this wireless charging feature. But, if the big feature of the 8 and 8 Plus is wireless charging, the flip side is they didn't really give a lot of detail on the technical specs of the wireless charging, and reportedly Apple might be using a slower, older version of Qi charging, which charges at a slower rate. Ironically, another feature these things have is, they support fast charging. So, if you plug it into supported fast charging, the phone actually charges extremely fast, whereas if you use wireless charging, there's a possibility that it's going to be kind of slow, which kind of undermines the feature itself if you're better off just plugging it in and getting a superfast charge anyways.
Lewis: And something I always worry about with the wireless nature of things in general is, if I'm out, I'm probably going to be using my cord anyway. The idea of being able to charge at home wirelessly is nice. But, I think for most people, I mean, I have to charge my phone at work every now and then, I'm just going to do that with the USB that plugs into my laptop to get some extra juice. So, while it's a nice add-on feature, I don't know how many people are going to absolutely love it. Although, look at what they do here with wireless charging in one of the updates they made to the iPhone 7 line, moving away from the headphone jack, and it's pretty clear that they think the future is wireless.
Niu: Oh, absolutely. When you're out and about, I will say that one other added convenience is, we're seeing an increased number of companies and locations adding these little wireless charging mats integrated into their locations. Think about hotels, airports, restaurants, coffee shops or whatever. And it's not really everywhere right now, but if you fast forward and imagine the future where lots more of these retailers and businesses want to have wireless charging mats built into the tables for convenience, that's kind of nice, because then you just put your phone on the table and it starts to charge. But, yeah, most of the time, I don't think it's going to be some game changer, and that's a future that's not here yet.
Lewis: Well, one other thing that I noticed with the line that they decided to switch up with this issue is, the base storage level for the iPhone 8 is going to be 64 gigs, and there's also going to be a 256 gig option. I think there's a lot of people out there who have been sitting with 16 gig iPhones for quite some time and are thrilled to see this change.
Niu: That's interesting, because I think that's also partially how they're justifying the price increase. They're jacking up the prices of these iPhones, which is kind of nuts. The base iPhone 8 now costs $700 as opposed to the $650 it used to cost before. That $650 used to be for the 32 gig. So, they're kind of forcing this on consumers, and it's not necessarily a bad thing. They're making you pay more, but you're getting a little bit more storage. Apple used to have three storage tiers. Add $100 for double storage or quadruple storage, and another tier. Now they're simplifying it to just two tiers, 64 and 256. But now, instead of a $100 bump between those tiers, it's a $150 bump. So, they're changing the way that they price their storage configurations. But ultimately, they're increasing the prices, and now the 8 Plus starts at $800, versus $770 last year. I think they're moving on up on the pricing scale.
Lewis: And I've long thought that was a lever they had to pull if they wanted to do something with average selling prices. For a lot of people 16 gigs isn't enough. While we do live in a cloud storage world, there are so many things that you actually want on your phone, whether it's music, podcasts, videos, and photos that you take. And with all the applications that you also have on your phone, very often you end up bumping up pretty close to that 16 gig total. So, forcing people into this is something that I think really makes sense. It's responding to what consumers want, and it should bear out pretty well in their financials. Looking at when these will be available, pre-orders are available on Sept. 15th, and like the other lines, they will start arriving on Sept. 22nd. There's also an update to iOS coming Sept.r 19th. Evan, I think we've let people wait long enough. Why don't we start talking about the iPhone X?
Niu: The main event.
Lewis: The main event. This is a totally new form factor. There's no home bezel on the screen, edge to edge display, glass front and back. I think they delivered a pretty cool device.
Niu: I think it looks pretty great. One of the things, if you looked at the Samsung Galaxy S8 earlier this year, one of the big things was, that screen looks awesome because it's edge to edge, has rounded corners, and it looks like a really nice display. And the reviews also reflected that, too. Everyone just loved that device. And it really put a lot of pressure that Apple needs to make the same move this year. Again, they've used this same iPhone design for, this will be the fourth year running. And people are used to it, it's getting kind of old. They need it to spice things up with a really impressive display, and I think they really delivered.
Lewis: And cosmetically, the phone looks quite a bit different, but I think once you start looking at some of the things under the hood that are powering the phone, that's where it starts to get really impressive.
Niu: Yeah. That new A11 bionic chip in particular looks like a beast. It's incredible, what Apple has done over the past seven years on their semiconductor team. These chips are basically comparable to low-end Intel chips that power MacBook Airs, and that's in a phone that you carry around in your pocket, and it's all custom-made by Apple. And for the first time ever, they're now making their own GPU, which we basically saw coming because they told their previous GPU supplier, Imagination Technologies, earlier this year that they would be ditching them. They had this little public spat, and Apple actually said that they told Imagination in 2015 that they were going to stop using their stuff, and Imagination doesn't think Apple can do it. But here we are, Apple has unveiled their first graphics processing unit embedded into the chip itself, and it looks like performance is going to be great. I'm sure there's going to be litigation because Imagination is going to dig into this thing and try to look for their IP, hoping to sue Apple or something. But Apple knows what it's doing, so I think they're probably going to be OK.
Lewis: You talked about all the various components that are in here, and how high-performance they are, I think that's something that can be kind of lost on a lot of the average consumers. Where you do see it on the user experience side is with all of the really interesting AI stuff and machine learning stuff that's going to be super visible for users of the new iPhones.
Niu: Yeah. The big feature on the iPhone X is the facial recognition and the 3D sensing, which they are calling the TrueDepth camera system. But, yeah, the amount of processing that's going to have to go into that to be able to recognize your face under various different conditions, they talked about how if you get a haircut, you grow a beard, you put a hat on, it'll still recognize you, and that's really all being driven by this neural engine that's inside the chip that can handle its type of special processing with AI.
Lewis: And that face ID system that they're going to be using, that's really the new touch ID for them. They are looking to move beyond that, because they think it's a more secure way for people to use their phones. I think they're also developing so much technology that will piggyback on to that getting people used to it is probably a good thing. But, it was pretty darn cool to see the demos of how the spot laser that basically shoots 30,000 dots on to your face, recognizes your face, kicks that all back into that A11 chip and unlocks your phone, actually works. Listeners, if you haven't watched any of the demos from the Apple announcement, I highly recommend checking them out.
Niu: To dig into that topic a little bit further, what's really going on here is Apple is using these small devices called vertical cavity service emitting lasers, which is kind of a mouthful.
Lewis: Say that five times fast.
Niu: Or VCSEL. So, they have these VCSEL arrays, which are basically tiny little lasers, you put a ton of them all next to each other and it becomes an array, and that's the dot projector that Apple was talking about. These lasers can be tuned across a wide range of wavelengths. In this case, they're using IR, infrared wavelengths, making everything invisible to the human eye. The way that these projectors work is, they shoot this pattern of dots out, and obviously, if you were shooting the pattern of dots onto a flat surface, you know it's going to be exactly what you expect. What it does,it analyzes the deformations in the pattern as they appear on your face to determine the depth. There's the projectors on one side, and they have the infrared cameras on the other side to look at this pattern from a different angle, and that's how this whole system works. The Flood illuminator basically shots a large IR Flood so that the system can see in the dark.
Lewis: Which is absolutely incredible. It's definitely next age technology. It's something that gets you pretty excited about getting this device. Looking at the dates, though, no one is going to be owning this anytime soon. They won't be available for order until Oct. 26th, and they'll actually start shipping Nov.3rd. Do you think a lot of people are going to be willing to pony up the just under $1,000 for the 64 gig phone, Evan?
Niu: I think that they will. If there's anything we know about Apple, it's that people always want the latest and greatest one, and they're willing to pay because Apple has incredible pricing power. And, people are also willing to wait. I don't think the iPhone 8 is very impressive. I think the iPhone X looks great. So, I think a lot of people are going to forgo the 8 in favor of the 10, even though the 8 is going to be cheaper and will be available faster. But, waiting until November isn't really a great thing anyway, and I think that has a lot to do with one of Apple's suppliers for these VCSEL sensors, Finisar. Last week reported that they're having some delays related to their manufacturing, because they had to change their manufacturing processes. And I think that delay is specifically what's causing the iPhone X to be delayed, because Finisar said they would be able to ramp in November, and as luck would have it, that's when Apple says this new device will be available. So, I think that's directly related to why we're seeing delays. As of last week, Apple hadn't given Finisar approval to begin volume production, so I think that's kind of a tough balancing act.
Lewis: And looking at some of these product release dates, I think you can only naturally go to, how is this going to impact Apple's financials? It seems like the phone might be in people's hands a little bit earlier than they actually are going to be. And the company reported pretty interesting guidance coming into next quarter. I believe it was something to the tune of 4-10% year over year growth that they would be looking at for the fiscal fourth quarter. I think a lot of people took that to mean that the newest iPhone model would ship during that period. It doesn't seem like that's going to happen.
Niu: Right, the guidance was really strong last month. We talked about this before when we did the earnings show, but it really suggested that the iPhone X would launch on time, because they were forecasting $49-52 billion in sales, which, at the high end would represent an all-time record for the September quarter. So, that's a very bullish outlook, and you and I talked about it, it made it sound like the 10 would be on time. And here we are, and they say that the 10 is going to be delayed until November. So, my theory is -- we just talked about the Finisar delays -- my theory is that when Apple issued guidance on Aug. 1st, these delays weren't there, so they were expecting a timely launch for the iPhone X. But things change within a matter of weeks. I think these delays came after that guidance. In my mind, I think Apple was caught off-guard by these delays, it thought it was going to be on time, issued the really strong guidance. It turns out the things were delayed. So, I think investors should be very cognizant that there's a real risk here that they're going to miss their guidance on this fiscal fourth quarter, which closes in a couple of weeks now. Because I don't know how they're going to hit that level of guidance on just the iPhone 8 and 8 Plus, which in my mind are not that great of updates.
Lewis: And that sounds bad, and I think that's the kind of thing that creates some volatility with the company's short-term. But in my view, these types of issues really just mean that phones are going to ship at different times. I don't think it's something that's going to really meaningfully impact total volume. It's just that we're going to see a pretty strong fiscal Q1 for them with the product actually shipping in the beginning of November. And I think you're going to see a pretty strong fiscal Q2, which is the calendar Q1 of 2018, because a lot of that demand is going to bleed into that quarter.
Niu: I definitely agree. On one hand, while there's a risk that they might miss on Q4, like we talked about, Apple customers are very loyal. They're willing to wait. And if it's just a matter of shifting the sale from one quarter to the next, and it's not a lost sale, that person isn't going out and buying a Samsung or an Android, it's really a short-term nature, just shifting it from one quarter to the next, it doesn't impact the long-term story. It's just kind of a quarterly bump in the road. Which, if anything, if the stock reacts negatively, it might be an opportunity to add more or buy back in. I don't think these sales are going anywhere, they're just being shifted a little bit. Ultimately, even if there is some risk there, I think it's pretty modest in the long-term. It's really just a short-term risk.
Lewis: Two other numbers that I think, looking at these products, you can start to wonder which way they might move, is the average selling price, which is one of the core numbers we look up for the iPhone segment, given that it makes up such a large portion of Apple's revenue. And you see that sticker price of $999 for the base model, with the larger storage it's obviously going to cost more. I think it's reasonable to say, once these start shipping, iPhone ASPs are probably going to go up.
Niu: Yeah, I would definitely expect that. I do think they're going to hit new records in terms of this metric. They did lower the price of the cheapest iPhone SE from $400 to $350. But the product is still the same, so it's not like it's going to be a huge sales driver. And with them bumping up the prices on this 8, 8 Plus, and 10, at the highest, 10 goes to $1150 for a 256 gig for an iPhone X. $1150 is like the price of a Mac, which is kind of crazy. So, yeah, I am going to expect to see some pretty nice gains on the average selling prices. It's probably going to break around $700. Right now, the current record is $695. I think we have some opportunity for some upside, between $700-750.
Lewis: And with that price hike, I think it's also natural to wonder what might happen to margins. Apple has this tendency for a device maker to make unusually high margins. Looking at a $1,000 phone, I don't know that they're going to be meaningfully improving their margins, because so much is going into the iPhone X to power it with all this new functionality that we've been talking about.
Niu: Right. Generally speaking, any time Apple introduces these new products, any brand new products you have starts at the height of the cost curve in terms of your R&D costs that you've capitalized and including into their manufacturing expenses, because when you have these new products, you usually have a new manufacturing processes and manufacturing infrastructure. It's a huge upfront cost, and before that can be spread out over time, when you're at the beginning of a new product line, your costs are really high. That's before we even get into the actual component costs, which as you touched on are also going up. The OLED panel itself, display panels are usually the most expensive component of any product, and in this case, the OLED panel is estimated at $120-130, compared to last year's LCD panels, which were about $50. So, we're talking about a pretty big increase in panel cost, $70-75. To put that into perspective, last year's iPhone 7 build materials, a third-party estimate was about $220 for the component costs. So, if we're coming off of a base of $220, used to be what these things cost, and now just one component alone increases that by $75, that's a huge increase. And Apple has its own margin profile to maintain, they want to add their margin on top, so that's where you get these big price increases. As far as the TrueDepth cameras, those VCSEL sensors are pretty cheap, they're about $5 worth of content in these phones, those are the estimates I've been reading. So, those aren't huge cost drivers, but I think the flip side is, a lot of that is very software intensive, they have to invest very heavily on the software engineering side to make this feature work, which adds to their overall costs.
Lewis: Evan, as is usually the case when we talk Apple, we tend to get a little long-winded. I see the fine folks over at Market Foolery waiting in the studio behind the glass right now to get in, so I think we need to wrap this conversation. But, before we do, I have to ask you, are you going to be buying the iPhone X?
Niu: I will be buying the 10. I've had the 6s for 2 years, I skipped the 7, so I'm due for an upgrade, and I'll be going with the 10.
Lewis: I, too, have the 6s right now, and I'm eagerly waiting to get my hands on a 10. Austin Morgan, man behind the glass, would you buy a $1,000 iPhone?
Austin Morgan: Currently, I'm kind of flying under the radar. Me and my brothers are on a family plan, and my mom is still fronting the bill, and I don't think she realizes I'm still in the plan. So, until that changes, I'm going to stick with my iPhone 7.
Lewis: Makes sense, you got to do what you got to do. Evan, thanks for hopping on and talking Apple.
Niu: No problem, thanks for having me.
Lewis: Listeners, that does it for this episode of Industry Focus. If you have feedback or questions, you can always shoot us an email at email@example.com, or tweet us @MFIndustryFocus. If you're looking for more of our stuff, you can subscribe on iTunes or check out The Fool's family of shows over at fool.com/podcasts.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass. For Evan Niu, I'm Dylan Lewis. Thanks for listening and Fool on!
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