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More Evidence That Apple, Inc.'s iPhone SE Was the Right Call

By Evan Niu, CFA - Apr 6, 2016 at 3:20PM

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Over half of U.S. iPhone users still use smaller phones.

iPhone SE. Image source: Apple.

Apple's (AAPL 2.54%) new iPhone SE went on sale last week, but it seems that the launch may have been somewhat "lackluster," according to KGI Securities analyst Ming-Chi Kuo. Among other data points, Kuo cited Localytics data that put iPhone SE penetration at a meager 0.1%. The analyst also questioned demand in China.

Meanwhile, there was another notable product unveiling that happened last Thursday as well: Tesla's Model 3. The electric automaker started taking in-store reservations that same morning, which could have diverted some potential foot traffic from Apple retail stores. Tens of thousands of people showed up at Tesla stores to put $1,000 down on a car they'd never seen before.

Nonetheless, there's some more evidence that suggests that Apple's iPhone SE was the right strategic move.

Survey says
Market researcher Kantar Worldpanel ComTech has released some new estimates that suggest the majority of U.S. iPhone users are still using 4-inch iPhones. Specifically, 58% of iPhone users are still using an iPhone 5s or older, and these models are getting old. Kantar estimates that the average life cycle of these devices is 27.5 months.

Image source: Apple.

That's longer than the typical two-year upgrade cycle that characterizes the market. In fact, the U.S. market has actually been seeing upgrade cycles get shorter in recent years as the major carriers shift to leasing, installment, and early upgrade programs. The average life cycle for the overall market is 20.9 months, according to Kantar. The iPhone SE is the perfect device for these customers to jump to, as an affordable upgrade that brings the latest and greatest tech specs inside the same chassis.

Kantar's figures also suggest that 49% of these 4-inch iPhone users intend to upgrade within the next year, and 84% of them will stay within Apple's ecosystem.

Moving on down
The iPhone SE is positioned to appeal precisely to these customers -- the segment of users that simply prefer a smaller handset. Kuo's perspective on the Chinese market is somewhat skewed, since larger phones are extremely popular in the Middle Kingdom. Remember that it's precisely this popularity that pushed Apple to launch the larger 4.7-inch and 5.5-inch iPhones in the first place.

The flip side is that the iPhone SE, starting at $399, may put some downward pressure on average selling prices. But the strong performance of the iPhone 6s and 6s Plus have helped push ASPs to record levels (nearly $700 last quarter), so Apple can afford to give a little back. Besides, most of those iPhone SE buyers should probably upgrade from the base 16 GB model anyway and quadruple storage capacity for the extra $100.

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