For years, a key pillar of Apple's (NASDAQ:AAPL) iPhone pricing strategy has been to sequentially cascade models down to successively lower price points each year following the release of new models. This has been crucial for a number of reasons. Doing so allowed Apple to address lower and more affordable price points, bolstering unit sales. The company was also able to get unrivaled bang for its development buck, since each model was typically sold for three years (or more, in some cases). No other smartphone vendor can viably sell aging smartphones in comparable volumes.
It sounds like the Mac maker could be walking away from that strategy with iPhone X.
The most short-lived iPhone Apple has ever made?
KGI Securities analyst Ming-Chi Kuo issued a research note today (via MacRumors) that argues Apple will discontinue the first-generation iPhone X later this year, adding some additional detail after initially making that prediction last week. It's worth noting that Kuo isn't the only analyst who believes Apple will kill the first-generation model: Rosenblatt Securities analyst Jun Zhang thinks the same thing.
Kuo believes there would be cannibalization risk if Apple were to offer the iPhone X at a lower price, as Apple is expected to launch a 6.1-inch iPhone including Face ID but with a traditional LCD display panel instead of an OLED display panel. Keeping some features like an OLED display exclusive to only the high-end flagship also helps differentiate that model, justifying the premium $999 starting price tag that has attracted so much controversy.
Offering iPhone X at a lower price point could be "negative to product brand value," in Kuo's view.
Other reasons to kill iPhone X
There are also supply chain considerations to look at. The OLED supply chain is still ramping up capacity to accommodate Apple's volumes for iPhone X. With Apple expected to launch two OLED-equipped models later this year, up from just one OLED-equipped iPhone in 2017, the company is already going to need significantly more OLED panels. Rumors suggest that LG Display is working hard to come onboard as an Apple suppler for OLED displays to supplement Samsung, but the company's production lines may not be ready for production volumes until 2019.
In addition to potential volume constraints, OLED panels are also extremely expensive. A 6.1-inch iPhone with an LCD display would likely be more profitable than iPhone X at a reduced price. The TrueDepth camera system that enables Face ID and other features that leverage 3D sensing is not a cost driver, estimated at just $4 to $5 per unit, making it an easy inclusion as Apple expands use of the technology. That OLED display module, on the other hand, is a huge cost driver, at an estimated $110 per unit -- or more than double what a traditional LCD display module costs.
Risk of cannibalization and brand dilution, combined with potential volume constraints and cost considerations, all point to pretty strong justifications for why Apple might kill off its most important flagship in years just one year after introduction.
Evan Niu, CFA owns shares of Apple. 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.