Apple (NASDAQ:AAPL) is expected to launch a successor to the popular iPhone 5s in just under a month known as the iPhone SE. The device, per generally reliable KGI Securities analyst Ming-Chi Kuo (via AppleInsider), is expected to feature substantial hardware upgrades from the iPhone 5s. Indeed, it is said to be essentially an iPhone 6s in a 4-inch form factor, sans the costly 3D Touch feature.
The device is expected to be priced at between $400 and $500 (my bet is on $450 for the variant with 16 gigabytes of storage and $500 for 64 GB) -- quite a nice price for such a fully loaded iPhone.
Perhaps what's more interesting, though, is that Kuo believes that Apple will slash the price of its venerable iPhone 5s by a full 50%. The variant with 16 GB of storage sells for $450 off-contract, with the 32 GB model going for $50 more. A 50% price cut would bring these prices down to $225 and $250, respectively.
Let's take a closer look at what, if true, this might mean for investors.
This is a smart plan to bulk up the installed base
Apple customers tend to be loyal, so it's in the company's best interests to grow its installed base as much as possible. Once these buyers are hooked, there's a good chance they will bring revenue in the future through additional device purchases (iPad, Mac, etc.), upgrades to new iPhones later on, and even use of the company's growing (and lucrative) set of software and services.
The iPhone 5s, though hardly a leading-edge device these days, is a well-built, attractive, and fast device that should serve as a relatively low-cost gateway to the Apple/iOS ecosystem. At this point, it's also probably very cheap for Apple to make as manufacturing yields on this device are certainly quite high and the components inside are so old that Apple can probably acquire them quite cheaply.
Is there much risk of cannibalization?
Perhaps the biggest risk here is that of "cannibalization" of the company's newer large-screen iPhone 6/6s series of devices or even its upcoming 4-inch iPhone SE.
The first thing I should note is that I very much doubt that the iPhone 5s will continue to be offered in mature markets. It's quite likely that these "ultra-cheap" iPhones will be targeted at regions (think emerging markets) in which Apple has very little market segment share due to the high prices of its devices relative to average personal income in those countries.
I would peg cannibalization risk as quite minimal if Apple goes about this properly.
Risk of gross margin erosion?
Another risk that investors might be worried about is the potential gross profit margin erosion that may occur as a result of such a price cut. After all, an iPhone 5s sold at $450 is certainly going to bring in far more gross profit dollars than an iPhone 5s sold at just $225.
However, if Apple sees a substantial surge in demand for the devices, the incremental unit shipments (particularly in regions where iPhones are simply inaccessible) could be enough to allow for at least a similar amount of total gross profit dollars (gross profit per unit multiplied by number of units) even if per-unit margins are lower.
With that in mind, even if Apple doesn't sell enough incremental units to make up for the lost per-unit margins, it could justify this as a longer-term bet (installed base/user acquisition) that won't pay off until sometime down the road. Such a move obviously carries risk, but I doubt the decision makers at Apple will implement such a move without carefully weighing the benefits and risks.
If true, a good move from Apple
I think that a significant price cut on the iPhone 5s sold into certain, strategic regions makes quite a lot of sense. It's imperative that the company grow its installed base and raise awareness of its brand in markets where iPhones sold at today's prices are simply inaccessible.
By employing this strategy -- rather than developing targeted "low-cost" products -- Apple can sell what is undeniably a high-quality (if somewhat dated) product at an entry-level price point. No compromise of Apple's fundamental principles required.