Apple (NASDAQ:AAPL) unveiled three new iPhones on Wednesday. The iPhone Xs is a follow-up to last year’s iPhone X, priced at the same $999 as last year’s model. The iPhone Xs Max is a larger version of the phone, priced $100 higher. And the iPhone Xr is an entry-level model of the iPhone X, which uses some less costly components.
The iPhone Xr starts at $749. For reference, that’s $100 more than the lowest-priced iPhone 7 cost when it debuted two years ago. Last year, Apple upped the starting price for the iPhone 8 by $50, to $699. Apple is still offering those older models (for now) at $449 and $599 for the iPhone 7 and iPhone 8, respectively.
But for consumers who want one of the latest and greatest devices from Apple, they’ll now pay at least $100 more than they would have a couple of years ago.
Climbing average selling price
Apple’s price increases over the last couple of years appear very deliberate. As it’s struggled to grow unit sales due to various factors such as longer upgrade cycles and increased market saturation, higher average iPhone prices have driven Apple’s total revenue higher.
Through the first nine months of fiscal 2018, Apple’s revenue from iPhones increased 15% despite roughly flat unit sales. That’s largely thanks to the success of the iPhone X, which starts at $999. The iPhone X is the most popular smartphone in the world. Apple also benefited from higher prices for the iPhone 8 and iPhone 8 Plus compared to the previous year’s models.
But Apple is now lapping the introduction of the iPhone X. In order to continue growing revenue without much improvement in unit sales, it needs to scale to another pricing level. The iPhone Xr and iPhone Xs Max present two ways for Apple to increase average selling price for the iPhone.
Some analysts have been expecting another “super cycle” for the iPhone similar to what we saw with the introduction of the iPhone 6. The iPhone 6 launched in 2014 and sparked a cycle of strong consumer demand for the iPhone over the next year. Apple has been unable to achieve another step-up in demand like it saw that year.
The move to offer the iPhone X form factor at a lower price could very well cause a spike in unit sales, but Apple isn’t willing to leave its revenue growth to chance, relying on price increases that it hopes will be relatively easy to swallow (especially when broken up into monthly installments).
Balancing price and demand
Although the iPhone still accounts for the majority of Apple’s revenue — 64% in the nine months ended June 30, 2018 — an increasing portion of Apple’s revenue stems from subscription services. Apple needs to ensure it offers consumers a good reason to stick with its devices, since Apple’s services work best with its own devices.
Services is now Apple’s second-largest segment after iPhone, and the two are symbiotic. If Apple’s iPhone Xr pricing reduces demand, it could negatively impact growth in services. And subscription services are a recurring revenue segment, a source Apple can rely on quarter after quarter. A one-year spike in revenue from an iPhone price increase is much less reliable.
That said, I believe Apple is asking a fair price for the iPhone Xr, especially considering the success of the iPhone X last year. The impact on sales should be minimal, and if there’s truly pent-up demand for new iPhones, the iPhone Xr starting at $749 could be a great product for both consumers and investors in Apple.
Adam Levy 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.
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