Apple (NASDAQ:AAPL) has had a great run with the newest iterations of its iPhone -- the iPhone 6 and iPhone 6 Plus -- pushing the stock to a record valuation of more than $700 billion. But for Wall Street analysts and Apple fans alike, that's old news; their interest has quickly moved to the next iteration of the smartphone, expected to be called the iPhone 6s (possibly joined by a smaller iPhone 6c) -- assuming Apple keeps its off-year naming convention intact.
There has already been a flurry of rumors regarding Apple's next smartphone from Asia's leaky supply chain. The rumors have been largely believable: Apple appears to be deepening its relationship with hard-core gamers with a RAM-memory refresh (its first since 2012). In addition, the company reportedly intends to bring its Force Touch technology to the phone to enable advanced gaming controls.
The newest rumor, courtesy of AppleInsider, is actually a clarification of the Force Touch technology rumor. According to the report, Apple will only offer Force Touch technology in the bigger variant -- the so-called iPhone 6s Plus. If true, this is slightly disappointing for prospective shoppers but good for shareholders.
This could be Apple's differentiating feature
In Apple's off-year iterations (read: letter additions, not number changes), the company generally provides a processor upgrade along with a key differentiation feature for user experience and interaction. The difference between the iPhone 5s over the iPhone 5 was Touch ID; the iPhone 4S added Siri over the iPhone 4. (In fact, Apple CEO Tim Cook acknowledged the "S" in the naming convention for the iPhone 4S was because of Siri.) Adding Force Touch technology is in line with this trend.
This rumor is entirely plausible. Since Apple began releasing two new versions of its phone each year, the company has distinguished them from one another in a variety of ways. With its iPhone 5s and 5c versions, Apple offered Touch ID only on the more-expensive 5s. The key difference between current-generation units is screen size (although the iPhone 6 Plus added optical image stabilization and longer battery life).
Force Touch added to bigger unit could improve product mix for Apple
In the event Apple adds this key feature only to its larger unit, it could increase margins as a result of what Wall Street calls a "favorable product mix". (Rough translation: the company sells more-profitable products.) For a current-year comparison, IHS Technology estimated the 16GB iPhone 6 costs $200.10 to manufacture while the corresponding iPhone 6 Plus costs only $15.50 more -- $215.60 -- while retailing for $100 more: $649 versus $749, respectively.
If Apple can push customers to the more-lucrative iPhone 6s Plus, investors could be handsomely rewarded. Even if Apple keeps the price differential the same and adds Force Touch functionality to the iPhone 6s Plus (AppleInsider estimated its cost at $14 per unit), its profit margin would still be higher than the current iPhone 6's. Unfortunately, this would force Apple fans to buy the largest unit in order to get the new, "cool" features.
The hidden risk in this move
There is a risk in this, of course. If Apple adds Force Touch technology only to its largest unit (the iPhone 6s Plus), it could hollow out demand for the iPhone 6s, especially among those who don't want the 5.5-inch screen. Right now, the rumor mill has pointed toward a RAM and processor upgrade and a carrier-agnostic SIM card for the iPhone 6s.
In the end, many Apple fans might trade down and get the off-year discounted iPhone 6 because the features might not justify the price difference. I think Apple's brand cachet and the desire for "the newest thing" will help Cupertino, but there is a risk in the smaller iPhone 6s not delivering on the value proposition to which Apple fans are accustomed.