Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Apple Inc. Won't Give the Base iPhone 7 32GB of Storage

By Ashraf Eassa - Feb 18, 2016 at 9:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This Fool shows the financial reason behind this controversial move from Apple.

Much to the chagrin of many Apple (AAPL -2.98%) iPhone customers, the iDevice maker offers its iPhones in storage tiers beginning with 16 gigabytes rather than, say, 32. This has the positive effect (for Apple) of pushing customers who need more storage space to pony up an extra $100 for the 64GB model and it's a move that is absolutely designed to maximize shareholder value.

This strategy worked flawlessly when the iPhone 6/6 Plus were Apple's flagship phones; if you wanted a large iPhone with 64GB of on-board storage, the iPhone 6 and 6 Plus were the only devices that fit the bill.

However, following the launch of the iPhone 6s and 6s Plus, the product stack gets a bit more, well, interesting.

What does $649 buy you?
If a customer wants to spend no more than $649 for an iPhone (off contract), then said customer now has two choices: pick up a 16GB iPhone 6s or a 64GB iPhone 6 for the same price.

Now, of course, with the iPhone 6s, one gets a substantially faster processor, higher-resolution camera, 3D Touch, more memory, and other better internals. However, I suspect that for customers who plan to load a lot of applications, music, and the like onto their phones, the iPhone 6 is simply going to offer a much more attractive value proposition.

Is this necessarily bad news for Apple?
Revenue of $649 is, well, $649 of revenue whether it comes from the sale of an iPhone 6 or an iPhone 6s. The question, then, is which of these devices is actually more expensive to produce. If the iPhone 6s (16GB) is more expensive, then this might actually be a net win for Apple from a gross profit margin perspective, but if the iPhone 6 (64GB) is, then it's a loss.

Let's do a head-to-head of the major subsystems of each device to try to determine which one is more expensive and why. I mark an "X" in the box of the device that I believe to be more expensive.

Subsystem

iPhone 6

iPhone 6s

Rationale

Display

 

X

iPhone 6s implements 3D Touch, which likely adds significant cost

Wireless

 

X

iPhone 6s uses more advanced cellular modem and Wi-Fi. Not only are main processing chips more expensive, but 6s likely requires more RF content to support advanced wireless functionality

DRAM

 

X

iPhone 6s uses 2GB of LPDDR4 (more expensive memory compared to LPDDR3) while the iPhone 6 uses just 1GB of LPDDR3

Casing

 

X

iPhone 6s uses more advanced 7000-series aluminum

Touch ID

 

X

2nd-generation Touch ID likely more complex and therefore costlier (though probably not by much) to build

Cameras

 

X

iPhone 6s uses more advanced 12MP rear/5MP front sensors

NAND flash

X

 

64GB of NAND flash is more expensive than 16GB of NAND flash

Data source: Author analysis.

Aside from the fact that the iPhone 6 has more flash storage, it would seem that the iPhone 6s is much more expensive across the board. This means that it's very likely beneficial to Apple to sell a $649 iPhone 6 than a $649 iPhone 6s.

Brilliant, simply brilliant.

How about a bump of base storage to 32 GB?
Although many customers are hoping to see Apple bump up the base storage of its next-generation iPhones to 32GB, I would say that there is practically zero chance of Apple doing this. It would much rather sell a previous-generation phone with a little bit more commodity NAND flash than sell the base configuration of its new iPhones for margin purposes.

Endowing the base configuration of the newest iPhone to 32GB might actually be gross margin dilutive as customers are more likely to choose it over the 64GB previous generation model.

Additionally, those older phones won't hold up as long as the newer ones do in terms of performance/features, so buyers of a $649 64GB previous-generation iPhone are more likely to upgrade sooner than those who buy the current $649 16GB iPhone.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$137.44 (-2.98%) $-4.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.