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iPhone SE Is a Major Strategic Shift for Apple, Inc.

By Evan Niu, CFA – Mar 24, 2016 at 6:20PM

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Never before has the tech titan released an iPhone that had the latest and greatest tech at the most affordable price point.

iPhone SE. Image source: Apple.

Thus far, the investor reaction to Apple's (AAPL -0.16%) iPhone SE has been a collective "meh." But the new 4-inch iPhone signifies an important strategic shift for the company that investors don't seem to be appreciating. I'm not just talking about the fact that the iPhone SE appears to be aggressively targeting first-time smartphone buyers in emerging markets.

Here's how the iPhone SE is the first iPhone of its kind.

The old model is going out of style
For Apple, it has almost always used older models to address lower price points. Many years ago, Apple adopted a strategy of cascading models down to successively lower price points. The primary benefit of this strategy was that Apple could get an incredible amount of mileage for developing a single new iPhone model per year. A new model could easily enjoy a product cycle of three years (or more, in some cases), which is essentially unheard of in the smartphone market. That yielded great efficiencies with R&D spending, capital expenditures on tooling infrastructure, and more.

The biggest downside from a consumer perspective was that you always had to pay up in order to get the latest and greatest tech. Historically, only the flagship models would include the fastest processors and other relevant specs. But not anymore. The iPhone product strategy is evolving.

Latest, greatest, and most affordable
iPhone SE is the first time that the latest and greatest tech, most notably the A9 chip with its embedded M9, is available at the lowest starting price ever, $399. Even the iPhone 6, which starts at a $150 higher price point, uses an A8 with a discrete M8 motion coprocessor. The company has never made its newest technology this affordable, and this is the shift that I'm talking about.

Of course, the main trade-off comes in the display size, but that's also a matter of consumer preference. It's not as if a 4.7-inch display is inherently better than a 4-inch display (even if it is more expensive). A lot of people still prefer smaller phones, and for consumers that are content to remain in that market segment, the iPhone SE is an incredibly strong product. No longer are they relegated to older generations of iPhones.

iPad implications?
This shift has some potential implications for the iPad family, too -- specifically the Minis. The Minis have always been the most affordable iPads, in part due to the smaller display and form factor. But Apple's track record with how powerful it makes the Mini is mixed. The original Mini initially shipped with a previous-generation A5 processor. iPad Mini 2 launched with a then-current A7, but Mini 3 added only Touch ID, and the Mini 4 currently ships with a previous-generation A8.

If Apple implements the new strategy with the iPad line, it could strengthen the Mini family by similarly including the latest tech and specs at the most affordable price points.

Moving on down
JPMorgan analyst Rod Hall recently noted that Apple had very little market share to speak of in the sub-$450 segment. There were an estimated 43 million units in the $400-$450 segment last year, and Apple is now poised to grab significant share there with the SE. Previously, only second-hand iPhones could potentially address that segment, whereas now Apple is jumping in directly.

Grabbing a conservative 40% of this segment would translate into 17 million incremental iPhone units, and these sales should be incrementally additive since Apple has never directly played in this market before. And cannibalization risks are modest since there have always been secondhand iPhones available to consumers in this segment. Those consumers will just now be buying new models that will be included in Apple's results.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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