Respected analyst Horace Dediu, well known for his commentary and analysis regarding Apple (AAPL 1.27%), recently posted the following tweet, in which he asks a very interesting question:
Is the iPhone ASP surge anomalous? This is a key question going forward. I'm betting on reversion to mean, but I was off by $60 last Q. pic.twitter.com/j8JrDWPsk6
— Horace Dediu (@asymco) February 5, 2018
What Dediu is referring to with respect to the "iPhone ASP surge" is the significant growth in iPhone average selling prices in Apple's most recently reported quarter. That growth is believed to have been due largely to Apple's shipping a significant quantity of its iPhone X smartphones, which start at $999 and go to $1,149.
Dediu's tweet suggests that he thinks Apple won't sustain structurally higher iPhone average selling prices, hence the comment about "reversion to mean."
In this column, I'd like to explain why I think Apple will do its best to maintain, or even grow, iPhone average selling prices in the years ahead.
A structurally slowing market
At this point, it's well understood that the overall smartphone market isn't going to grow all that much in the years ahead. Moreover, there are indications that the premium portion of the smartphone market is set to grow at a slower pace than the low-end and midrange markets -- markets that Apple doesn't really participate in.
This ultimately means that if Apple wants to grow its iPhone business, it has two potential paths: gains in market share, and growth in average selling prices.
Image source: Apple.
There's probably room for Apple to try to gain share within the portion of the market that it participates in, but it's not clear how large that opportunity is, as Apple already has a commanding share in the premium smartphone market.
I don't think it's very likely that Apple will make serious attempts to go after the sub-$350 smartphone market (even Apple's $350 offering -- the iPhone SE -- is a fairly niche product), so share gains would need to happen at the high end of the market.
Increases in average selling prices are another route that Apple can pursue, and it's probably Apple's best chance at sustainable iPhone revenue growth.
Since smartphone customers aren't upgrading as often as they used to, and given the increasing capabilities of low-end and midrange phones, it makes sense to try to maximize the revenue that it generates from each high-end iPhone sale.
Think of it this way: If iPhone users aren't upgrading every two years, and are instead upgrading every three to four years, then they're probably going to be more willing to spend more upfront, as they'll want a device that can work well for that longer ownership period.
There's a limit to what customers will pay for premium smartphones -- independent analyst Neil Cybart, who runs the Above Avalon newsletter, thinks that threshold is $1,500 ($350 more than the current top-end iPhone X configuration), and I tend to agree. But if it executes properly, Apple could drive meaningful increases in iPhone average selling prices at least over the next several years.
As long as Apple doesn't see iPhone shipment volumes decline as it increases average selling prices (with compelling-enough products, it could increase unit shipments via the aforementioned share gains), that would be a nice growth driver for Apple's iPhone business.
