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Apple Inc. Wants Price Cuts on Key iPhone Component

By Ashraf Eassa – Apr 28, 2018 at 12:50PM

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This one isn't a shocker.

According to a report from DigiTimes, which cites industry sources, Apple (AAPL 0.66%) is trying to get Samsung (NASDAQOTH: SSNLF) to lower its asking prices for the organic light emitting diode (OLED) displays that'll be used in the company's next-generation high-end iPhone models. 

The display used in Apple's current iPhone X is believed to be the single most expensive component used in the device, with DigiTimes claiming that Samsung currently charges Apple $110 for the panels. The report says that Apple wants Samsung to lower its prices for the panels to $100.

Apple's iPhone X lineup.

Image source: Apple.

Although $10 might not seem like a huge reduction -- we're talking about a 9% drop in price -- that number suddenly doesn't seem so small when it's multiplied by 75 million, which is how many panels DigiTimes says that Apple will buy in support of its next-generation iPhone models.

Let's go over what such a price reduction would mean for both Apple and Samsung. 

Apple wants to sell a cheaper iPhone X

The iPhone X reportedly didn't sell as well as Apple had hoped, nor as well as many analysts had expected going into this product cycle. One of the main culprits for the disappointing sales performance of the device was, quite simply, the price tag -- there are only so many customers willing to pay $999+ for a smartphone. 

My suspicion is that Apple intends to offer the direct successor to the iPhone X at a lower price point than it does the current model while selling a larger version of that new iPhone X at the same price that the company offers the current iPhone X for. 

A lower price point on the second generation iPhone X could help boost demand for those devices, ultimately helping Apple's iPhone business. It's not surprising that, in support of a lower-priced iPhone X, Apple would want to find ways to lower manufacturing costs for that device. Considering how large a part of the bill of materials the display is, it's only logical that Apple would try to pressure Samsung Display to cut prices.

Samsung wants to maximize profits

Samsung Display's ultimate goal is to maximize its profits. Although it might seem, at first, that Samsung would be silly to cut display prices to Apple, especially when it appears that Apple's potential second source for OLED displays is having issues mass producing screens good enough to meet Apple's exacting standards. 

However, there's another factor that Samsung must consider -- shipment volumes. If Samsung Display doesn't cut prices, then Apple might have a hard time offering the next-generation iPhone X at lower prices. In that case, while Samsung's per-unit revenue and profit margins would remain high, Samsung could miss out on the potential volume upside that would come from Apple offering its next-generation iPhone X at reduced prices. 

Ultimately, Samsung has to weigh a wide range of variables in deciding whether to cut display panel prices to Apple in support of the coming iPhone product cycle. While we'll probably never know if Samsung Display does go ahead and cut prices, my guess is that Samsung -- knowing that it'll face intense competition for Apple's orders in the years ahead as other OLED display manufacturers clean up their acts -- will lower prices to improve its chances of staying in Apple's supply chain for the foreseeable future.

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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