Analysis: Apple’s latest plan to get us to spend more on an iPhone

A year ago, Apple made a daring bet with the iPhone X: that customers would pay as much as $1,000 (€860) for a giant leap forward in smartphone technology.

The gambit paid off: iPhone revenues increased 15 per cent year on year in the nine months to June, despite unit sales being flat over the same period.

Now Apple is hoping that some of the iPhone’s most loyal fans will pay almost twice as much for a rather more incremental step up.

The new iPhone XS Max, unveiled on Wednesday, boasts a 6.5-inch display, Apple’s biggest, and a breakthrough processor, the A12 Bionic. Its design, however, is a larger version of last year’s iPhone X.

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The XS Max’s starting price is $1,099, $100 more than the X, for a model with 64GB of memory. However, the “power users” that will be first in line to buy a plus-sized smartphone are more likely to opt for greater storage, which raises the price to as much as $1,449 for 512GB. That compares with Samsung’s new Galaxy Note 9, which costs $1,250 for 512GB of storage.

On top of that premium, Apple offers an extended warranty with added theft and loss insurance for $299. Add in sales taxes for the likes of California or New York and the new high-end iPhone can easily max out above $1,800.

And that is just the US. The potential for sticker shock becomes even higher in parts of the world where Apple has raised prices to offset exchange rate fluctuations, such as the UK, Australia and Brazil. Prices for the XS Max in the Republic start at €1,279, rising to €1,679.

While some customers will be double-checking their credit limits, Wall Street is salivating at the potential for another giant leap forward in iPhone revenues.

Mastery of pricing

“Apple, once again, has shown their mastery of pricing tiers, which will extract more revenue per customer,” wrote Gene Munster, a former Apple analyst now investing at Loup Ventures, in a note. “Factoring in nine new phones with price points above the 2018 average selling price ($745) makes it highly likely that ASPs will trend up.”

Mr Munster now expects the iPhone’s average selling price, which had already jumped from $606 a year ago to $724 in Apple’s most recent quarter, will increase again to $791.

So far, Apple has dominated the market for high-end smartphones. According to researchers at IHS Markit, iPhones accounted for 86 per cent of smartphones costing more than $751 last year, with Samsung at just 12 per cent.

Alongside the iPhone XS Max, Apple also introduced a $999 updated version of the X - to be called the iPhone XS - and the $750 iPhone XR, as part of what Jonathan Ive, Apple's design chief, said was an effort to offer "more choice to more people".

The XR shares some characteristics with Apple’s last attempt to make a more accessible iPhone, 2013’s plastic 5c. Both come in a range of bright colours including blue, pink and yellow, rather than the gold, silver and grey of the more expensive version. Both employ lower-priced materials, though where the iPhone 5c was - as Sir Jonathan put it at the time - “unapologetically plastic”, the XR uses aluminium bezels and an LCD screen in place of the steel and OLED display in other models.

While the iPhone 5c did help Apple through a slow patch before the explosion in sales from the following year’s iPhone 6, the attempt to go even slightly downmarket was seen as backfiring on Apple.

This time, while the outward appearance differs slightly, Apple is including its latest technology in the iPhone XR, giving it the same A12 Bionic processor and face-scanning camera system as the more expensive XS. The main difference is in the rear camera, which lacks the XS’s second lens for zoom and imaging effects.

Buying a compromise

"With the 5c, you really felt like you were buying a compromise," said Carolina Milanesi, analyst at Creative Strategies. "I don't feel this sense of the compromise is here with the XR. You have everything the XS family of products has."

The inclusion of a processor with advanced artificial intelligence capabilities and the depth-sensing camera point to Apple’s ambitions in augmented reality, even if today’s applications are limited to games and camera tricks. The hardware could help to lay the foundation for smart glasses that would pair to the iPhone.

But for consumers who were later adopters of technology, the XR’s new colours alone would probably spur upgrades, said Ms Milanesi. “The colours makes it stand out more and makes it a little bit more fun,” she said.

Innovation in pricing and cosmetic improvements are more important to smartphone makers at a time when the broader mobile market is maturing. The analyst group Gartner estimates that mobile phone sales by volume will increase by just 1 per cent this year over last year, inching up from 1.84 billion units in 2017 to 1.90 billion by 2020.

Gartner, along with other researchers, also estimates that Apple ceded its number two position in the smartphone market to Huawei in the second quarter of 2018, a period in which smartphone sales increased by just 2 per cent.

As the holiday sales season approaches, Apple's new iPhones and Samsung's new Note 9 will soon be joined by more competition. Google is expected to launch its Pixel 3 smartphone at an event in New York on October 9, while Huawei is holding a product launch in London just days later when its flagship Mate 10 is expected to debut.

Apple's response to these looming challenges is not only to increase prices at the high end. The two-year-old iPhone 7 is still available for $449, alongside last year's iPhone 8 for $599, rounding out what Geoff Blaber of CCS Insight said was its "widest portfolio to date".

“Apple is doing what it does best: incrementally improving hardware and providing a carefully segmented portfolio that provides consumers options across a wide range of price points,” he said. “It is a daunting competitive line-up for its rivals.” – Copyright The Financial Times Limited 2018