Paying $100 Extra for Apple’s iPhone 6 Comes Down to Specs and Economics

by Matt Margolis

On Monday, Jefferies analyst Peter Misek, who covers Apple, indicated that Apple has been working with carriers to charge an additional $100 for the upcoming iPhone 6.  Wireless carriers typically charge consumers $199 (with a new 2 year contract) for Apple’s flagship phone and any price increase would be a change from Apple’s standards.  Various media outlets are crying foul on the reported price increase, but I think this one requires a little more investigation versus a knee jerk media reaction that I have grown accustomed to reading.

I’ve captured a few quotes from Misek price increase news that are very interesting and may shed some light on Apple’s plans.

While the initial response has been “no”, there seems to be an admission among the carriers that there is no other game-changing device this year and the analyst thinks Apple can get at least some of the increase. (Streetinsider.com)

“But we think this general lack of differentiation could be the reason why Apple may be able to get a price increase. Carriers realize that the iPhone 6 will likely be the only headline-worthy high-end phone launched this year and that they will lose subs if they do not offer it.” (Streetinsider.com)

I imagine Apple has been working closely with the wireless carriers for several months and has filled them in with every juicy detail and upgrade that they will be adding to the iPhone 6 lineup.  I’m not familiar with Misek’s coverage of Apple and have no idea if he is very reputable or not.  I can say that based on the choice of words above it does sound like he spoke to at least one wireless carrier that spilled enough news to create a headline for Misek.  As a consumer I will be happy to pay an extra $50 to $100 for a new iPhone 6 if Apple can indeed deliver the “only headline-worthy high-end phone launched this year” as well a “game-changing device”.   My game-changing list is at the very bottom of this article!

Consumer Expectations

As a consumer that is driven by value and I believe the price of goods is important but I have learned that sustained value is at the top of my shopping list.  For instance, I have learned that I will never buy a non-Apple laptop computer ever again.  Our family currently owns an iPad 2 along with a pair of iPhone 4s models and besides my iPhone 4s getting run over by a car and shattering my Gorilla Glass screen, I have no complaints related to the durability of any of my iDevices.  My iPad 2 is almost 3.5 years old and still functions like the day we bought it.  My daily frustration occurs when I log into my non-Apple laptop to write my next Obscure Analyst post and each and every night I’m crossing my fingers that my laptop will live another day.

Apple took some heat for not introducing a “cheap” iPhone model to sell in China, the main reason for their decision not to introduce a “cheap” iPhone is because they have standards and they don’t introduce junk (unlike Samsung) to sell at low prices.  Apple believes that they should receive fair value for their products and any decision on the final pricing of the iPhone 6 will not be influenced by the fact Apple ended 2013 with $159 billion dollars in cash/investments.

A Forbes article last fall still resonates with me all the time.  In this article the author pointed out the issue with  smartphones is the short life cycle, which average 18 months.  The author also points out that, “flexible, unbreakable displays on phones present a serious design challenge to companies like Samsung because they will last”.  Below are some interesting call-outs from the article:

The other major problem with the smartphone though is its short life.  According to the Environmental Literacy Council the average lifespan of a smartphone is about 18 months. This year Samsung launched dozens of new phones, 4 in the S4 category alone.

 

Mark Ragoswsky offered the opinion a week or so back that the flexible screen is not yet a viable technology. I’m not so sure of that. I think it presents a non-viable business model. Flexible, unbreakable displays on phones present a serious design challenge to companies like Samsung simply because they will last.

I’m a math, numbers, personal finance as well as a corporate finance/budget guy.  Dollars and cents are what comes naturally to me.  If Apple can create unbreakable cover screens, that protect the displays of their iPhones it will result in a serious blow to Samsung’s smartphone market share over time.  When I buy a phone, car, house, etc I am always looking at the total cost of ownership as well as my next purchase. These costs may include maintenance, repair, resale, trade-in value or just outright consumer to consumer sale.  Just for fun I went into my Sprint account to see how much Sprint would pay me in cash for Samsung devices versus Apple devices.  The results are not surprising, Apple products hold superior value (like an investment) and will be worth something (because they still work) far after your contract is up. I don’t advise selling your used iPhone to your wireless carrier because you can get a better return on your investment  by selling it elsewhere, but I used my carrier to drive down Apple’s durability and value proposition.

Conclusion

The economic impact if Apple raised their price by $100 would have a one-time economic charge to consumer wallets.  After consulting with a financially savvy friend or emailing the Obscure Analyst, consumers would realize that paying an extra $100 for the iPhone 6 will be paid back to you the next time you upgrade your device.  I paid $199 for my for my iPhone 4s at the time knowing full well I would be able to sell it for close for $150 to $200 when it was time to trade it in.  The $150-$200 that my iPhone 4s would fetch would be deposited directly against my $199 out-of-pocket expense for my next iPhone.  My first iPhone cost me $199, my second iPhone will cost me $0 to $49 out of pocket, which would continue to be my out of pocket cost for my third, fourth, fifth iPhone.

Now the real question for Apple is can they deliver a game-changing and head-line worthy iPhone 6 later this year?  Not only does Apple need to consider consumer willingness to fork out the dough but also the value the phone will have in the secondary market (2nd owner/trade-in market).  Apple realizes that if they made an unbreakable screen made of sapphire they could actually generate up $1000 of net profit over the lifetime of the device.   Think about it, your carrier buys the device from Apple for $600 and Apple collects a nice profit of roughly 36% or $212.  After two years you trade in that device and collect $150 but Apple turns around and sells it for another $400 to a carrier in the US and collects another $250 of profit.  Two years later Apple buys the same device back for $50 and turns around and sells it again for $200 and collects an additional profit of $150.  At this point over 6 years in this example Apple would have generated $612 of profit ($212 1st sale, $250 second sale, $150 third sale) just from introducing and selling one new iPhone.  The proof of this concept is evidenced by Apple’s announcement in January to sell the iPhone 4 (2010 initial release date) in India.  It is not clear whether Apple was making new iPhone 4’s for sale in India but you can bet they are trying to unload millions of iPhone 4’s that they bought back from previous customers and selling them at a premium once again.

As a consumer I expect every new iPhone I buy to be better than the previous version.  I expect it to be faster, thinner, lighter and have a longer battery life and allow me to perform more of my daily tasks via my mobile device.  A major selling point of Apple’s iPhone 6 will be the increased size of the phone.  I have spoken to a variety of different people and the consensus from different age groups as well as Samsung owners versus current Apple iPhone owners and bottom line is size matters.  A larger screen size is very important to consumers as more and more video streaming and video calling/conferencing is performed on a daily basis.

I know my mom enjoys seeing her grandchildren when we call her on Facetime, but a larger screen will make the user experience better for everyone.  The only issue I have with letting my kids Facetime with “Mema” is that I fear they will drop my phone and shatter my iPhone 4s screen.  Apple’s sapphire materials contract with GT Advanced Technology will provide a cure for shattered cover screens, GTAT is set to cover the 4.7″ and 5.5″ iPhone 6 models when they are released later in 2014 .  A bigger iPhone and sapphire cover screens would save me $50 on a screen protector, but I would rather split that savings with Apple and only pay $25 more for the iPhone 6.  Now if Apple wants to open my wallet further, they need to introduce solar charging (while you are outside or inside under lights) as well as Wi-Fi wireless charging.   After my kids Facetime with “Mema” my battery life is at 50% after only 15 minutes, however wireless charging would charge my battery while we Facetime and could extend the length of our video calls by hours not just minutes.  The Wi-Fi charging works well in my house or at Starbucks but it won’t help me when I’m outside.  My parents don’t live nearby and it would be a game-changer if Apple introduced solar charging, which would allow me to Facetime with “Mema” and enable her to watch her grand children’s first tee-ball game or any other event without having to run back and forth to the car to charge my iPhone.

I would pay $100 for Game-Changing & Headline Worthy Technology if Apple includes: 

• Best in class chips (A8)
• Best in class DRAM (Micron – LPDDR4)
• Sapphire Cover Screens (GT Advanced Technologies – Pure Sapphire)
• Solar Charging
• Wi-Fi Charging
• Improved Battery Life
• Larger Device 4.7″ and 5.5″
• Thinner Device
• No more screen protectors (Sapphire Cover Screens cure this)

 

 

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings in the next 72 hours