This week Peter Misek, an analyst at Jefferies & Co., wrote in an investor note that Apple's (NASDAQ:AAPL) would increase the price of the so-called iPhone 6 because this year will be relatively quiet for new high-end smartphone releases.
Apple's iPhone is already a premium device that costs a lot of money. But no, the company hasn't lost its mind if it does indeed end up charging more for the iPhone 6. Before we write off Apple as an insanely greedy company (for one, there's no confirmation the company will indeed raise the price), let's talk a little about why this idea makes sense.
The best option right now
Here's what Misek, wrote in his investor note about a possibly higher-priced iPhone 6:
The possibility may at first seem farfetched in light of investor concerns regarding possible carrier subsidy and handset price cuts due to smartphone saturation and lack of differentiation. But we think this general lack of differentiation could be the reason why Apple may be able to get a price increase. Carriers realize that the iPhone 6 will likely be the only headline-worthy high-end phone launched this year and that they will lose subs if they do not offer it [...].
He thinks that Apple's new iPhone 6 will be the only noteworthy device this year, which will entice consumers and make it easier for Apple to raise the price -- even if carriers aren't keen on the idea.
That's a plausible reason. But there's also another explanation for a price increase -- the iPhone 6 display will likely be bigger than its predecessor's.
Screens aren't cheap
The Wall Street Journal reported in January that Apple wants to launch two new iPhones, one with a screen bigger than 4.5-inches and the other bigger than 5 inches. That comes after Bloomberg said in November Apple is working on 4.7-inch and 5.5-inch iPhones.
If Apple ups the inches on its next iPhone, it's going to increase the iPhone's bill of materials (BOM). In the past, the cost of the iPhone's new tech has mostly been offset by falling prices of other materials or improvements to efficiency, which evens out of the total BOM and keeps the cost relatively stable.
For example, the BOM of the iPhone 4 was about $188, compared to the BOM cost of the much more powerful and larger iPhone 5 at $199. When Apple introduced the 5s with a 64-bit A7 processor, better camera, M7 motion sensor chip, and Touch ID, the BOM still remained at $199.
One of the biggest bill of materials expenses comes from the phone's display. The iPhone 5s' display costs $41 out of the total $199 BOM.
Apple likes to keep its profit margins high on the iPhone, so if it makes a major jump from a 4-inch screen to two bigger sizes, then it will obviously want to recoup those costs.
Who pays for a bigger screen
Instead of Apple eating the entire cost of a bigger iPhone, and lowering its margins, it could pass the cost on to carriers, which eventually (most likely) get passed on to consumers.
But it doesn't have to be bad news. If Apple does indeed launch two new phones, it could keep the 4.7-inch device the same cost as the current iPhone 5s, which would be similar to the company's strategy when it jumped screen sizes from a 3.5-inch iPhone 4s to the 5-inch iPhone. The 16GB iPhone 5 had the subsidized price of $199 when it launched, the same cost as the its smaller-screen 16GB 4S predecessor.
But, to make up for the huge leap in screen size to a possibly 5.5-inch screen, Apple could raise the larger iPhone price anywhere from $50 to $100, as Misek suggested, in order to keep the iPhone's profit margin intact.
Foolish final thoughts
If Apple releases two new screen sizes for the new iPhone 6, I think the company will keep the same price for the smaller device as the current iPhone 5s, while raising the price for the biggest screen iPhone. Doing so would both keep to Apple's previous pricing structure -- which would make consumers happy -- and also keep profit margins relatively unchanged, which should make investors happy.
Misek estimated that a $50 price increase -- assuming no change in units sold -- would increase revenue by 2% and earnings per share by 11%. If the iPhone price went up by $100, the change would be a 6% revenue increase and a 24% EPS jump.
Either way, investors would definitely welcome those numbers. Unfortunately, besides the WSJ and Bloomberg reports, it's still up in the air whether Apple will definitely release a larger iPhone 6. But it's clear that if the company did so, can satisfy both consumers and investors.