Life as I know it...

32GB Entry-Level iPhone? Keep Dreamin....

The public has been calling for AAPL to raise its entry-level iPhone models from 16GB to 32GB - a move the company recently made on the iPad Pro's (and added to the price to compensate). AAPL is all about squeezing margins out of its hardware.  This is no more true than looking at the way AAPL has historically adopted components for its products - if it doesn't think the latest version of a component is going to make a difference for the customer experience, they won't spend the extra money to include it.  Examples of this include:

  • Foregoing the latest QCOM RF transceiver on several iPhone models because they didn't feel like the networks would actually enable the faster wireless speeds 
  • Being one of the last handset OEMs to adopt an 802.11ac BT / WLAN Module to enable faster wi-fi speeds.  
  • Consistently undercutting other OEMs on RAM - others have been piling in 4GB of RAM in their smartphones for years now - AAPL went to 2GB in September-2014 with the new iPhone 6 and 6 Plus handsets
  • Moving the new 9.7" iPad Pro power wall adapter down to 10W, when the iPad Air 2 (an inferior product ships with a 12W plug).

The iPhone 6 and 6 Plus models were the first iPhones that included a 128GB storage configuration, and also the first in the product's history that eliminated the 32GB storage option.  The new storage configurations are 16GB / 64GB / 128GB, with each tier adding $100USD to the price. AAPL also eliminated the 128GB storage configuration on the legacy models (e.g., iPhone 6 and 6 Plus) and did not offer it on the new 4" iPhone SE.

Something very interesting happened to the iPhone's Average Selling Price (ASP) when AAPL changed the storage configurations and added the larger 5.5" Plus models (which started at $749 off-contract for 16GB) in September-2014 with the iPhone 6 and 6 Plus variants.  Even with currency headwinds, iPhone ASPs jumped significantly Y-O-Y:

  • FQ1-15: $687 (+8%)
  • FQ2-15: $687 (+15%)
  • FQ3-15: $660 (+18%)
  • FQ4-15: $670 (+11%)
  • FQ1-16: $691 / $740 Constant-Currency (0% / 8%)

What's Driving Record iPhone ASP?

FQ1-16 (Dec-15) produced the highest iPhone ASP in the history of the most profitable product franchise, both on an actual and constant-currency basis.  However, the trend of rising ASPs really started with the iPhone 6 / 6 Plus.  While one could argue that the iPhone 6 Plus (with its incremental $100 price-point) is driving ASPs higher, the fact remains that the iPhone 6 and 6S models are still the most popular handset within the installed base.  Mixpanelshows that as of April 15th, the iPhone 6 and 6S constitute over 52% of all iPhone usage,while the 6 Plus and 6S Plus represent a little over 14%.

So while it is true that the 5.5" models are helping overall ASPs, there is something going on with the 4.7" models (6 & 6S) that is a much bigger factor.  As AAPL continues to add better cameras with more functionality (e.g., 4K video), people are finding that 16GB just isn't enough storage as they still like their photos stored locally (on the handset). So, what they're doing is jumping from the entry-level 16GB to the mid-level 64GB and shelling out an additional $100. According to an analysis by IHS Technology below, NAND flash storage prices continue to fall and are now at ~$0.35 per GB.  So, 16GB of storage is costing AAPL $5.50 and 64GB is costing the company an incremental $17. Meanwhile, they're charging the customer $100, which equates to an incremental $83 of margin on each 64GB convert. Note that the data is for a 6S Plus model, but is used to show the effect of additional storage from a component cost and incremental margin standpoint with all else being equal:

Source: IHS Technology - Estimated Cost of Apple iPhone 6S Plus (A1634)

The Bigger Issue With Offering a 32GB Entry-Level Storage Configuration...

If you believe, as I do, that the iPhone's record ASP is being driven more by people migrating up to larger storage configurations than by adopters of the larger 5.5" models at the higher price-point, then the bigger issue is the amount of customers that have been willing to pay the extra $100 for the extra storage that would feel comfortable with 32GB being enough:

"AAPL would lose significant revenue (and associated margin) from the "tweeners" who have been moving up to 64GB storage configurations at a $100 premium that would be happy to settle with 32GB of storage." 

If AAPL was to start offering a 32GB entry-level configuration at the same $649 / $749 entry-point (for the latest flagship 4.7" and 5.5" models, respectively), not only would they be losing margin by having to add in the extra 16GB of storage, they would also find a lot less customers moving up to the 64GB model.  After all, a lot of people likely fall into the "16GB is not enough and 64GB is probably too much" category.  ASP trends indicate that those people are playing it safe and shelling out the extra $100 at the luxury of excess capacity, rather than the risk of falling short of storage just when they're about to leave on a vacation.  If they had the option of a 32GB model, those people would likely resort to practicality and settle for the additional 16GB rather than pay the $100 premium for the extra 48GB.

The Bottom Line...

Could AAPL begin offering 32GB as the standard entry-level storage on new iPhone models?  Absolutely.  Should they? Financially-speaking - Absolutely Not.  The ASP trends' data proves that by keeping the entry level at 16GB, people desire the additional storage so much that they're willing to spend the extra $100 for the additional 48GB to move to the next storage tier (64GB). And for every person that does that, IHS' data would suggest it's an additional $100 on the top-line and $83 of gross margin.  83% margin is never a bad thing in tech hardware, and AAPL knows this better than anyone.