It's hard to believe, but the Apple (NASDAQ:AAPL) iPhone 6 and 6 Plus have been available for sale for about four months now. Although these phones aren't even midway through their respective life cycles, the Apple rumor mill never sleeps, particularly as investors are always eager to learn what might be next in Apple's iPhone pipeline. Just a few days ago, Taiwan's TechNews reported on what might be the first truly believable iPhone 6s rumor.
More RAM, please
When the iPhone 6 and 6 Plus finally made it into the hands of customers, some were disappointed to find that Apple had packed in only 1 gigabyte of memory. Android flagship devices, however, have routinely packed 2, 3 or even -- in the case of the recently announced Xiaomi Mi Note and Asus ZenFone 2 devices -- 4 gigabytes of memory.
According to the TechNews report, Apple's next iPhone will pack 2 gigabytes of next-generation LPDDR4 memory, rather than the 1 gigabyte of LPDDR3 memory found in the iPhone 6/6 Plus today. That's great news for iPhone customers, especially if Apple's next iOS release -- likely called iOS 9 -- features more advanced multitasking features that takes advantage of the increased memory.
The cost impact sounds scary, though
If Apple were to just move from 1 gigabyte of LPDDR3 to 2 gigabytes of LPDDR3 in the next-generation iPhone, this would lead, most likely, to a doubling of Apple's memory costs. However, according to the TechNews report, LPDDR4 sells for a roughly 35% premium to LPDDR3. That means that if this rumor is true, Apple's memory costs are going to go way up for the next-generation iPhone -- by about a factor of 2.7 times.
Of course, I'm sure that with the volumes of LPDDR4 Apple will be buying, Apple may be able to negotiate a better deal than what a "typical" customer might need to pay. However, even if Apple were to negotiate away the LPDDR4 "premium" memory costs would still double for the next iPhone.
Impact to device margins
According to DRAMeXchange , the contract price of 1 gigabyte of LPDDR3 in the third quarter of 2014 averaged $8.30. Just doubling this figure leads to DRAM costs of $16.60, and assuming that Apple has to pay the "LPDDR4 tax" of about 35%, this implies next-generation iPhone DRAM cost of $22.41. That implies about $14.11 per unit lower gross profit than an iPhone 6 just from the memory increase.
Now, increased production costs aren't necessarily a bad thing. If more memory (as well as other features) leads to a more competitive product and sufficiently higher device sales, then Apple could still ultimately rake in higher gross profit from sales of the new device.
Apple's job? Convince people 1 gigabyte is too small
If Apple is going to bite the bullet and include more memory in the next generation iPhone (which I completely believe), then it's going to want to introduce a dramatically enhanced user experience that fully takes advantage of the additional memory in iOS 9 to convince people to upgrade.
Now, there are two ways that Apple can go about it. The first way is that the company could add enough features to enlarge the performance and memory requirements of iOS 9, which could lead to "less than optimal" user experience for devices with lower processing power or memory. This could lead users to simply choose to upgrade because their current device is "too slow."
The second way is that Apple could simply include enhanced features that take advantage of the additional memory and make these features exclusive to the latest iPhone. This doesn't seem likely, though, given that Apple has shown remarkably good support for previous generation devices, so the first way described seems more likely.