The Great Irony of Apple's iPhone Price Increases




 

Apple (NASDAQ: AAPL) has been extraordinarily successful in generating revenue growth out of stagnating unit sales over the past year, primarily thanks to the widely discussed price increases that the company has been implementing ever since introducing the iPhone X in 2017, which started at $999. The company's ability to grow overall iPhone revenue should be what matters most. Apple certainly agrees, which is why it will no longer report unit sales and will only disclose iPhone revenue going forward.

Still, investors continue to fret over the prospect of weak unit sales, even if they will no longer be privy to official unit sales data. As iPhone suppliers continue to post soft results -- including lens supplier Largan Precision today -- Apple investors can't help but worry about unit volumes.

Data source: SEC filings. Chart by author.

Price increases compound the initial problem of longer upgrade cycles

Decelerating unit volumes continue to weigh on analyst sentiment. For example, this week New Street Research analyst Pierre Ferragu worried that "all [average selling price] gains of recent years could be lost in unit decline in the coming years." Apple has ramped up promotional activity in recent weeks, which Ferragu sees as evidence of weak demand. CFRA analyst Angelo Zino wrote in a research note this morning that the company "continues to try to push toward these higher-price devices, and we think that is continuing to cause a slowdown in the replacement cycle."

Speaking of average selling price (ASP) gains, here's what Ferragu is referring to:

Data source: SEC filings. Chart by author.

Smartphone upgrade cycles have been steadily getting longer over time. In 2012, the average upgrade cycle was 22 months, according to Recon Analytics. It reached 28 months near the tail end of 2015, hitting 29 months for the first half of 2016, according to Citigroup. By the end of 2017, we're talking about 32 months, according to NPD. Beyond third-party estimates, even carriers are now exploring 36-month installment plans, arguably the most direct evidence, as carriers have firsthand data on upgrade cycles.

iPhone XS Max can cost upwards of $1,450. Image source: Apple.

Therein lies the great irony. My view has been that iPhone price increases are Apple's strategy of coping with longer upgrade cycles. Consider a customer that buys a $1,000 phone (like a base iPhone XS) and keeps it for two years compared to a customer that buys a $1,500 phone (like a fully loaded iPhone XS Max) and keeps it for three years. The annual revenue that Apple gets from that customer is the same. But by adopting this strategy of price increases as a way to offset longer upgrade cycles, the tech titan inadvertently encourages customers to keep those phones longer, too, further compounding the problem it was trying to initially address. The market will be at three-year upgrade cycles in no time.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

COMMENTS

More Related News

Chinese man guilty of defrauding Apple out of 1,500 iPhones
Chinese man guilty of defrauding Apple out of 1,500 iPhones

Over the span of two years, a Chinese national in Oregon sent devices that looked like iPhones to Apple, saying they wouldn't turn on and should be replaced under warranty. Apple responded by sending almost 1,500 replacement iPhones, each with an approximate resale value of $600. Jiang, 30, a former

Chip designer ARM halts work with Huawei after U.S. ban
Chip designer ARM halts work with Huawei after U.S. ban

Huawei, in common with Apple Inc and chipmakers such as Qualcomm, uses ARM blueprints to design the processors that power its smartphones. "ARM is complying with the latest restrictions set forth by the U.S. government and is having ongoing conversations with the appropriate U.S. government agencies to ensure we remain compliant," an ARM spokesman said in a statement. "ARM values its relationship with our longtime partner HiSilicon (Huawei's chip arm) and we are hopeful for a swift resolution on this matter." Huawei said it valued its close relationships with its partners, but it recognized the pressure some of them are under "as a result of politically motivated decisions".

Behold: This is the iPhone 11, but without that massive camera bump
Behold: This is the iPhone 11, but without that massive camera bump

As sure as we are that Apple will release new iPhone models each September, we're also sure that a vocal minority of people will find something silly to complain about when those new iPhones are released. And thanks to all the leaks and rumors we're privy to each year, we actually don't even have to wait for those new iPhones to hit store shelves to see what people's complaints will focus on each year. We already know everything there is to know about the upcoming iPhone 11 series design, which will look quite similar to Apple's iPhone XS design from last year and its iPhone X design from the year before. That's right, just as it did with the iPhone 6 design that stuck around for three...

Apple offered to buy Tesla back in 2013 for more than it
Apple offered to buy Tesla back in 2013 for more than it's worth today

For years, analysts have maintained that Apple needs to move past the iPhone and look for additional revenue streams. Consequently, many analysts over the years have proposed that Apple would be well advised to make a blockbuster acquisition and snatch up a company like Netflix or Tesla.Interestingly enough, it turns out that Apple actually did make an effort to acquire Tesla six years ago at a valuation of $240 a share. Incidentally, Tesla's share price has been reeling lately and is currently hovering in the $200 range. Word of Apple's efforts to acquire Tesla was brought to light by analyst Craig Irwin of Roth Capital Partners who revealed the interesting tidbit on CNBC (via Electrek)...

Lumentum says halting all Huawei shipments, cuts quarterly forecast
Lumentum says halting all Huawei shipments, cuts quarterly forecast

The company, which is seen as a major supplier of Apple Inc's Face ID technology, said it cannot predict when it will be able to resume shipments. The Trump administration last week added Huawei to a trade blacklist, a move that bans the company from buying parts and components from American firms without U.S. government approval. While most of the U.S. suppliers have not issued statements on their position on the Huawei ban, Bloomberg reported that Intel Corp, Qualcomm Inc, Xilinx Inc and Broadcom Inc have told their employees they will not supply to Huawei until further notice.

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Economy

facebook
Hit "Like"
Don't miss any important news
Thanks, you don't need to show me this anymore.