The Next iPhone: Speculating on SKUs and Pricing

It's fast approaching the manic time of the year again; the next iPhone is going to be announced soon! This, the 10th anniversary of the original iPhone's launch, is supposed to be a blockbuster year for the groundbreaking device, and rumor sites and technology blogs, twitter feeds, podcasts, etc. have been abuzz with iPhone chatter.

@gruber started a controversy this past week (he opined that the iPhone "Pro" will start at $1500), which he then retracted with a long post this weekend. His take, complete with his opinions on pricing (the need for differentiation between premium and standard offerings) and potential insider info, is colored by his personal preferences (he has a huge following and a particular slant on issues), but his perspective is very US-centric. Having traveled all over the World, and extensively in Asia, I know that iPhone pricing is the biggest sticking point for prospective buyers in developing markets. @gruber doesn't seem to extend his analysis to other geographies. The reality is that India is Apple's next growth engine, and given its dire situation in China, Apple cannot afford to ignore India and its burgeoning middle class (of equal parts budget and non-budget customers).

Apple needs to prioritize profit margin vs. price competitiveness in all markets, and I believe it has the right slate of products to make a strong play in 2017. Let's use the 4P framework to determine the right product and marketing mix to maximize returns (i.e. one that favors Apple vs. the customer):

1. Product: iPhone (SKUs up for consideration)
2. Price: Up for consideration (by SKU)
3. Place: Apple has cracked the retail nut in India, and is quickly building a sizable footprint in the metros (no further analysis needed here).
4. Promotion: Apple doesn't believe in promotions, and carriers don't discount iPhones. A discount is perceived as dilution of the Apple brand, and this isn't something I recommend.

Before we dive into the SKUs, I want to head off three questions that might arise when you see the prices I am suggesting:

1. Will Apple be able to maintain a high profit margin across all SKUs?

My research on the Bill of Materials (BOM) for SKUs already in circulation indicates that Apple will net > 35% profit per device even at the original component prices (which are at least 12-months old). No additional R&D costs need to be factored into the equation; i.e. the BOM is the COGS ex- packaging, warehousing, shipping and display.

2. Will the lowering of the ASP of the iPhone send ripples through the stock market?

It is my firm belief that increased revenues will calm any jitters in the stock market.

3. Can Apple break into "developing" markets?

Apple needs to decide "who" it wants to be for customers in all markets, not just the USA. It can be the "King of the Hill" in markets like India, it needs a phone in the $399-449 price point (a budget offering) all the way up to the premium category.

Without further ado, here are the Product SKUs and associated Prices:

#	Product SKU (chip)	USD Price	Storage (GB)
1	6S-Plus (A8X)	$399	64
2	7 (A9)	$449	64
3	7 (A9)	$499	128
4	7-Plus (A9)	$549	64
5	7-Plus (A9)	$599	128
6	7S (A9X)	$649	64
7	7S (A9X)	$749	128
8	7S-Plus (A10)	$769	64
9	7S-Plus (A10)	$869	256
10	iPhone Pro (ARidik)	$999	64
11	iPhone Pro (ARidik)	$1099	256

Notes:

1. SKU-1, or what I call "the obliterator", is for developing markets only. This makes Apple *THE* go to option for budget shoppers. My moniker, "the obliterator", is based on how this SKU will decimate the likes of Samsung, Xiaomi, OnePlus, and every other iPhone pretender peddling its wares in the market today. All these manufacturers, bar none, cuts corners to cater to the budget/entry-level market. Apple makes no such compromises, and I am living proof of that fact: I love my iPhone 6S-Plus. It takes great pictures, is plenty fast, and with the A9 chip upgrade, I know that I am set for iOS upgrades for at least the next 3-years. This last point is key; budget conscious consumers want a device that lasts at a good price. An analyst could argue that the Xiaomi's of the world price their phones around $349 (or equivalent) but let me tell you this from 100s of conversations: the iPhone is the device that all these consumers "aspire" to own. They pick the cheaper knockoffs solely because they cannot, repeat CANNOT, afford an iPhone.
2. SKUs 2-5 are this year's model being sold at $100 less than today's prices. This aligns with Apple's strategy with the N-1 release. These come in only 2-storage configurations (64, 128) to streamline offerings.
3. SKUs 6-11 are based on multiple rumor sites and the report of one very authoritative analyst -- Min-Chi Kuo of KGI Securities.
4. Specifically, SKU 10-11 are the new coming of the Jesus iPhone Pro. It will ostensibly feature an edge-to-edge OLED screen; touch-ID built in to the display; vertically oriented, dual cameras; mind-reading powers (kidding!).

Where I particularly disagree with @gruber is with his speculation on the price for the iPhone Pro, starting at a whopping $1200. The primary reason he cites is component availability (Samsung, etc.) and associated yield issues. He doesn't say this, but in the subtext one might read that were Apple to do this, they would have the option of dropping the price to something like $999 within 6-months, a la the original iPhone pricing strategy.

I think this is a mistake. If the iPhone Pro (or whatever the official moniker) starts at $1200, they will hand the "premium" market to Samsung. The equivalently kitted Samsung Galaxy S8 starts at $799 (or thereabouts based on Place and Promotion), and the Galaxy S8 Note will come in around the same price. It would be foolhardy for Apple to expect folks to fork over $1200 for an iPhone. I don't buy the notion that they will price the phone so high just to quell demand. That Samsung, the key supplier for OLED screens for the forthcoming iPhone, can only make 10-million OLED screens for the device by the end of 2017 isn't reason enough to artificially jack up the price to a sky high amount. Case in point: the AirPods.

The AirPods were released at a reasonable price of $159. Reasonable when you compare what good quality, bluetooth headphones were sold for when the AirPods were announced. The AirPods were revolutionary, and it was obvious to everyone who watched Apple that these would be in very short supply for the first few weeks. Weeks turned into months; my AirPods were delivered 6-months after they were ordered!!

Knowing that there would be yield issues, Apple could have released the AirPods at $199, even $249, to control demand. This move could have bought Apple time to work out logistics and yield issues with new components and overall design. Once fixed, they could have reduced the price to $159 like they did with the original iPhone. They didn't; the AirPods started out at a competitive price and people have waited patiently for supply to catch up with pent up demand.

What's your take?