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What Happens to Apple, Inc.'s iPhone SE Next Year?

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

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The iPhone SE might have a short life.

Image source: Apple.

Apple (AAPL -1.07%) has never done this before.

The Mac maker is packaging its highest-end tech in its lowest-end package with the iPhone SE. From a product strategy standpoint, it's incredibly smart since it provides a strong product for the large segment of the market that still prefers smaller phones. From a pricing strategy standpoint, the iPhone SE also serves as evidence that Apple is evolving as the global smartphone market matures.

The way it's always been
For many years, Apple has implemented a consistent strategy of cascading iPhone models down to successively lower price points, thereby extending the overall life cycle of each new model and streamlining development resources. The iPhone 5c was the first major departure from this strategy, but the 5c didn't fare well because it didn't convey a strong value proposition. The iPhone SE is another attempt -- and a more promising one, at that.

But the introduction of the iPhone SE raises some important questions about the iPhone portfolio. What's happening to the development cycle? Will the iPhone SE get a price reduction next year?

Let's say that Apple has decided to segment its iPhone offerings between smaller and more affordable devices, and larger and more expensive devices. Apple should keep strong, current products to capture both market segments, instead of relegating older devices to lower price points. This could be what's happening as we speak.

The way it might be now
If that's the case, then we might even expect Apple to discontinue the iPhone 6 and 6 Plus in 2016 (a relatively shorter two-year life cycle compared to the historical three-year life cycle), instead of dropping it to a lower price as we would have previously expected. Then the iPhone 6s and 6s Plus would drop to the mid-range price point and the new iPhone 7 and 7 Plus would come in as the new high-end flagships.

Since the iPhone SE was just introduced, I wouldn't expect any changes at the low end of the portfolio until next year. But at that point, would Apple really consider reducing the iPhone SE to an even lower price point of perhaps $300? That seems unlikely, even if it could potentially spur unit growth, since it would hurt average selling prices, margins, and risk diluting the brand.

Instead, what if Apple introduced an entirely redesigned 4-inch iPhone for 2017, while discontinuing the iPhone SE? That would be a remarkably short life cycle for the SE, but remember that the device shouldn't have required too much development work since it uses the same chassis and overall design as the 5s. The SE is just a 6s in a 5s body.

Another possibility is that since the iPhone 7 is expected to feature a new design, maybe Apple will make a smaller version of this new design and position it at the low end where the SE currently sits. That's what I think Apple will do.

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