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

How This Chinese Company Broke Apple
How This Chinese Company Broke Apple's Smartphone Domination
  • Tech
  • 2018-12-10 22:02:00Z

Huawei hits Apple with a solid strategy.

Wall St. ends choppy day higher; tech helps, Brexit weighs
Wall St. ends choppy day higher; tech helps, Brexit weighs

The energy index was the S&P's biggest percentage loser as oil prices declined and financial stocks tumbled with the S&P 500 bank index confirming it was in bear territory. It might explain a little bit the reversal," said David Joy, Ameriprise Chief Market Strategist.

China court bans iPhone sales in patent dispute: Qualcomm
China court bans iPhone sales in patent dispute: Qualcomm

A Chinese court ordered a ban in the country on iPhone sales in a patent dispute, US chipmaking giant Qualcomm said Monday. A Qualcomm statement said the Fuzhou Intermediate People's Court had granted its request for two preliminary injunctions against four subsidiaries of Apple, ordering them to immediately to stop selling the iPhone 6S, iPhone 6S Plus, iPhone 7, iPhone 7 Plus, iPhone 8, iPhone 8 Plus and iPhone X. "Apple continues to benefit from our intellectual property while refusing to compensate us.

China court bans import, sale of nearly all iPhone models
China court bans import, sale of nearly all iPhone models

A China court rules against Apple, granting Qualcomm's injunction against iPhone imports to China. Apple says it plans to dispute the ruling.

Qualcomm wins preliminary China import ruling against some iPhone models
Qualcomm wins preliminary China import ruling against some iPhone models

The preliminary order affects the iPhone 6S through the iPhone X. The ruling came from the Fuzhou Intermediate People's Court in China, the same court that earlier this year banned the import of some of memory chip maker Micron Technology Inc's (MU.O) chips into China. Qualcomm initially filed the

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.