Demand for the new iPhones is split. Source: Apple
Apple's (AAPL +0.01%) iPhone 6 Plus is in high demand. A survey of 6,000 people by RBC Capital Markets found that 49% of people looking to buy one of the two new iPhones plan to get the bigger model and recent sales results seem to confirm this estimate.
That's apparently much higher than Apple expected, and waits for the 6 Plus have stretched to four weeks. Usage data from Mixpanel shows that there are about five times as many iPhone 6 models out in the wild compared with the 6 Plus, despite the nearly even demand.
This isn't the first time Apple underestimated the demand for its higher-cost model. Last year, it expected the new iPhone 5c to sell better than expected, but the high-end 5s ended up outselling the colorful mid-range model 2-to-1.
So why does Apple continue to underestimate the demand for its high-end models, and what can the high demand tell us about Apple's future?
Moving in the right direction
Last year, when Apple released the iPhone 5c with the new 5s model, its aim was to counteract a troubling trend. Older-model iPhones were cannibalizing sales of new iPhones.
In October 2012, the iPhone 5 accounted for 68% of iPhone unit sales. The other 32% consisted of the iPhone 4 and 4s. The effect was a drag on iPhone average selling price and gross margin.
As I mentioned, the 5s outsold the 5c 2-to-1 in the early months, indicating that a maximum of 67% of iPhone units sold in the early months were the 5s. (It was probably closer to 60%). Still, the decline wasn't as bad as Apple expected.
If RBC's survey is accurate, it looks like the move to increase the screen size will pay off handsomely for Apple. Of those planning to buy a new iPhone, 71% said they intend to buy either the iPhone 6 or 6 Plus. Surely, some of those are people switching from Android who left Apple for bigger screens (26% of respondents said they're switching platforms), but some could also be owners of older iPhones enticed to spend a few extra dollars on a bigger screen instead of settling for the previous generation.
The outsized demand for the new models, particularly the 6 Plus, means Apple's iPhone average selling price and revenue could be higher than the company initially anticipated.
Why people want expensive things
Many believe that Apple needs to move down the chain to target lower- and middle-class consumers to increase revenue. If the last two iPhone launches are any indication, they're incorrect. Increasing the price of the iPhone, by offering a model like the 6 Plus, seems to be the more effective way of increasing revenue without diminishing brand value.
Apple iPhones are what are called Veblen goods, as analyst Ben Thompson pointed out on his blog Stratechery.com. A Veblen good -- named for the economist who coined the term "conspicuous consumption" -- sees demand increase as price increases, seemingly contradicting the law of demand. Thompson, a former Apple employee himself, contends that the iPhone 6 Plus "will be the phone to have for anyone who cares to demonstrate just how well-off they are, especially in Asia -- the Chanel to the 4.7-inch Louis Vuitton."
Indeed, the 6 Plus certainly fits the bill for a Veblen good. It's big and always on you, so people can see it. (Note that the 5c, with its colorful casing, showed that the owner wasn't quite as well off.) The same goes for the Apple Watch and explains why Apple made the gold Apple Watch Edition. Even the ability to customize the Apple Watch with different bands will allow people to "personalize" it and display their wealth (or image of wealth).
The Apple Watch ASP will be much higher than $349
That RBC survey found that only 11% of people planning to buy a new iPhone intend to pick up an Apple Watch when it comes out next year, and 24% were undecided about purchasing the Watch. But that probably means 6 million to 7 million people already plan to buy the Apple Watch when it comes out, based on an estimated 55 million to 60 million iPhones sold in the fourth quarter.
Considering the Apple Watch's position as a Veblen good, its average selling price should be much higher than the entry-level $349 model. That means it could easily add a few extra billion dollars to the top line the quarter it's released.
Apple's revenue for the most recent quarter was $45.6 billion. If 7 million Apple Watches sold at a $650 average selling price, which I think is within reason, that would increase revenue 10% on top of improvements in other product lines. Even if the average selling price is only $500, it could increase revenue nearly 8%.
