The lowest-cost iPhone that Apple (NASDAQ:AAPL) is expected to launch next year is a device with a full-face 6.1-inch liquid crystal display (LCD). The two higher-priced phones that are expected to debut alongside that iPhone should have 5.85-inch and 6.46-inch organic light-emitting diode (OLED) displays, respectively.
On social media, my friend Kurt Marko, who is an independent technology analyst, argued that the manufacturing cost differences between the 6.1-inch LCD iPhone and the 5.85-inch OLED iPhone won't be that large, making the idea of a lower-end 6.1-inch LCD iPhone questionable.
To be clear: It's extremely hard to get accurate cost breakdowns for individual components in products like the iPhone, and it's even harder to try to predict the relative cost structures of unreleased smartphones to any degree of precision.
What I'd like to do in this column is to qualitatively go over the different ways that Apple could cut costs in a potential iPhone with a 6.1-inch LCD relative to an iPhone with a 5.85-inch OLED display, which could ultimately justify the existence of a low-cost iPhone with a 6.1-inch LCD.
Arguably, the area where Apple has the biggest opportunity to save on costs is in the display. Even a year from now, a high-quality OLED display that meets Apple's specifications should be quite expensive to build. Not only are OLED displays inherently harder to build than LCDs on an apples-to-apples basis, but the supplier situations couldn't be more different.
Apple is likely to continue to source its OLED displays exclusively from Samsung (NASDAQOTH:SSNLF) Display. When a company is forced to buy components from a single source (in this case, no other supplier can build displays good enough for Apple), that single source naturally has significant pricing power over the buyer.
Apple sources many of its iPhone LCDs from a company called Japan Display. Japan Display is hardly the only company that can build high-quality mobile LCDs, but Japan Display's mobile business depends heavily on sales of mobile LCDs to Apple. Apple clearly has the upper hand in this relationship.
Additionally, Japan Display's business situation is quite dire. The company expects its revenue to drop by between 15% and 25% in the current fiscal year thanks to a slowdown in LCD shipments to Chinese smartphone vendors, increased competition in the market for mobile LCDs, as well as customer adoption of OLED displays (Japan Display can't currently manufacture OLED displays, though it's investing heavily to try to do so).
Japan Display is already being hurt by Apple's transition to OLED displays in some iPhones, so I think that it'll be quite willing to do whatever it reasonably can to keep as much of Apple's business as possible. Providing 6.1-inch LCDs to Apple for a high-volume iPhone is a good way to do that.
I don't know how much Apple will ultimately pay for either a 5.85-inch OLED display from Samsung or a 6.1-inch LCD from Japan Display, but I don't think the price differential between the two would be trivial.
Other cost-cutting tactics
Although the move from an OLED to an LCD is probably the single biggest cost reduction that Apple can achieve in going from a 5.85-inch OLED iPhone to a 6.1-inch LCD iPhone, it's hardly the only area.
For example, the current iPhone X has a stainless-steel frame while the iPhone 8 and iPhone 8 Plus use aluminum frames. Stainless steel is more expensive than aluminum, so I'd expect next year's LCD iPhone to continue to use an aluminum frame while the OLED models will use stainless steel.
Going beyond the casing, I expect Apple will use a less advanced rear-facing camera module in the next LCD iPhone compared to the ones that Apple will use in the OLED models. My guess is that the ones in the OLED iPhones will include dual-lens cameras, each with new sensors, new optics, as well as optical stabilization.
I expect the LCD iPhone will continue to use a dual-lens rear-camera setup to stay competitive with other similarly priced Android-based smartphones, but I don't expect Apple to use the same optics or even the same camera sensors in the LCD iPhone as it does in the OLED iPhone models. In fact, I think it quite likely that Apple will carry over the same camera sensors and optics from the iPhone 8 Plus for the 6.1-inch LCD iPhone.
The less advanced sensors and optics should allow Apple to shave off some additional costs compared to the 5.85-inch OLED iPhone that'll launch alongside it.
Speaking of cameras, I think there's a good chance that Apple could carry over the same TrueDepth camera that's used in this year's iPhone X and use it in the 6.1-inch LCD iPhone. The OLED models could get upgraded cameras with superior specs and capabilities.
Another way that Apple could make the 6.1-inch LCD iPhone cheaper than the OLED models would be to use less DRAM. I could see Apple using 3 GB of DRAM in the LCD iPhone while equipping the OLED models with up to 6 GB. Given that DRAM prices continue to be sky-high thanks to a tight industrywide supply-demand situation, this seems like a reasonable place for Apple to cut costs.
Beyond that, I could even see Apple furnishing the LCD iPhone with an older A11 Bionic processor -- the very same one that powers the current iPhone 8, 8 Plus, and X -- rather than with the next-generation A12 chip.
The A11 Bionic will almost certainly be cheaper to produce than the A12 (since the former will have been in mass production for a year and on a more mature chip-manufacturing technology), and I think the A11 Bionic is so fast that it would easily deliver a great user experience in the 6.1-inch LCD iPhone.
At the end of the day, what I think Apple will do is take the guts of this year's iPhone X (though with some improvements, such as better Wi-Fi and cellular connectivity) and transplant them into a cheaper-to-build casing and use a less-advanced display. Such a phone could have a cost structure that's not too far off from that of this year's iPhone 8 Plus, which Apple currently offers at the $799 price point, and it'd probably be quite a compelling offering.
Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
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