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3 Ways Apple Will Try to Maximize iPhone Average Selling Prices

By Ashraf Eassa - Aug 22, 2018 at 9:00AM

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Apple's tightening up its segmentation game.

During the first three quarters of Apple's ( AAPL 3.55% ) current fiscal year, the company's iPhone shipments were about flat to where they were during the first three quarters of the prior fiscal year. Despite that, Apple's total iPhone revenue during that time was up 15% year over year.  

In its most recent quarterly filing, Apple attributed that growth to "a different mix of iPhones resulting in higher average selling prices." 

One Apple iPhone X faceup and pointing to the left with another iPhone X, this time face down, underneath it.

Image source: Apple.

That average selling price increase was no doubt driven significantly by sales of the company's flagship iPhone, the iPhone X, which launched alongside the iPhone 8 and iPhone 8 Plus in September (although the iPhone X wasn't available for purchase until November 2). The iPhone X with the baseline amount of storage sells for $999, while the variant with additional storage goes for $1,149.

Apple's most expensive iPhone during its prior product cycle was the iPhone 7 Plus, which sold for $969 in its highest-end storage configuration. 

Since the iPhone X, per Apple CEO Tim Cook, "has been the top-selling iPhone since the launch," it's not surprising that Apple's iPhone average selling prices have risen so much. 

Thanks to a press release from market intelligence company TrendForce, we now have some insight into how Apple will try to maximize iPhone average selling prices during its upcoming iPhone product cycle.

1. OLED screens for pricier devices

Apple is said to be preparing to launch three new iPhones during the coming product cycle. One will have a 6.06-inch liquid crystal display (LCD), another will have a 5.85-inch organic light-emitting diode (OLED) display, and the final model will have a 6.46-inch OLED display.

"OLED technology delivers an incredibly high contrast ratio and high resolution," Apple says on its website. "OLED emits light through each pixel, allowing for a thinner display." 

The model with an LCD is expected to be the lowest-cost of the trio, with the 5.85-inch and 6.46-inch models coming in at higher prices (with the 6.46-inch model being the pricier of the two). 

Apple markets the screens found on today's iPhone X as "Super Retina HD" displays, while it calls the LCDs found on its iPhone 8 and iPhone 8 Plus by the term "Retina HD" display.

By limiting the so-called Super Retina HD displays to its pricier iPhones -- just as it did with the current lineup -- Apple is giving users at least one major reason to buy higher-end (read: pricier) devices. 

2. Limiting Apple Pencil support to OLED models

The TrendForce press release seems to indicate that the OLED iPhones will come with Apple Pencil support (although, admittedly, it's a bit ambiguous since the actual wording is as follows: "All three models would continue to feature Face ID, and two of them would be premium versions with an AMOLED screen. Apple Pencil would be offered as an option as well."). 

Let's assume, though, that TrendForce means that Apple will, in fact, limit Apple Pencil support to the OLED models. 

Apple's biggest smartphone rival, Samsung (NASDAQOTH: SSNLF), has offered a stylus as a key selling point for its Galaxy Note family of large-screen smartphones since 2011. By bringing the Apple Pencil to its own premium smartphones, Apple can help its iPhone business in several ways:

  • Eliminating a competitive advantage that Samsung and other smartphone vendors that offer styluses with their devices have, something that could allow Apple to protect, or even boost, its market share in the premium portion of the market. 
  • By limiting the Apple Pencil to the premium iPhone models, it'll give users who value that feature incentive to buy pricier devices, potentially boosting Apple's iPhone average selling prices. 
  • Adding Apple Pencil support to the OLED iPhones could also serve to accelerate upgrades among iPhone users who value the feature.

As an added bonus, keep in mind that Apple sells the Apple Pencil for $99 and the company could see an acceleration in Apple Pencil shipments if the technology is adopted on future iPhones. That would ultimately mean more Apple Pencil shipments and revenue for the company.

3. Higher storage tier for premium iPhones

When Apple introduced the current iPhone lineup, it offered every phone in just two storage configurations: 64 GB as the baseline and 256 GB for those willing to pay more to be able to store more. 

According to TrendForce, the 6.1-inch LCD iPhone will come in the same 64 GB and 256 GB storage configurations as the 2017 iPhones, but the 5.85-inch and 6.46-inch OLED models will come in 64 GB, 256 GB, and 512 GB configurations. 

There will be some potential buyers willing to pay more for iPhones with 512 GB of storage, and in the coming product cycle they'll apparently have the option to do so. 

Now, it's worth noting that TrendForce thinks that the 5.85-inch OLED model will start at between $899 and $949, with the bigger model coming in at $999. The starting price of the upcoming 5.85-inch OLED model is actually looking a bit lower than that of the current iPhone X (which also has a 5.85-inch OLED screen), but the addition of the 512 GB variant at the very high end could help to offset the average selling price headwind that the lower starting price could introduce. 

Investor takeaway

The reality is that the smartphone market is saturating, which means that iPhone unit growth could be harder for Apple to come by in the future than it has been in the past. Apple should, of course, continue to take actions to try to grow units even in a stagnant market (e.g., share gains), but it makes perfect sense for the company to also work to maximize the amount of revenue that it can squeeze out for each iPhone that it does sell as a means of delivering revenue growth. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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