Why iPhone Prices Are Such a Big Deal for Apple

For all of the company's prominence, tech giant Apple Inc. (AAPL) faces an unusual setback now at the end of 2018: fewer people are buying iPhones. The new generation of iPhones, including the XR, XS, and XS Max, was available for pre-order in mid-October, with an official release date of Oct. 26. But in the two months since then, customer hype has repeatedly turned into hesitation. The company doesn't release exact sales figures for its products, making it difficult for those outside of the company to assess its sales. But there are numerous signs that there has been less customer interest in the XR, XS and XS Max models than in previous model releases.

Apple reported $229.2 billion in revenue during fiscal year 2017, roughly a 6.3% increase from $215.6 billion in fiscal 2016. That all sounds great, except for one problem: the iPhone now makes up approximately 60% of Apple's total revenue. In this article, we look at why the newest generation of iPhone isn't performing as expected, and we explore what this might mean for Apple's main business segment going forward.

Discounts, Promotions, Supplier Information

Apple CFO Luca Maestri announced on Nov. 1 that the company would no longer report iPhone sales figures in quarterly earnings. That means the company is unlikely to provide official comment on sales numbers going forward. Despite this surprising shift in policy, market analysts have been able to piece together clues about how newer iPhone models are performing.

First, and perhaps most significantly, there is a discount of up to $300 made via trade-in for online purchases of the iPhone XR and iPhone XS. This is not an all-out sale on the newest phones, but rather a bolstered discount included for customers who trade in older iPhones at the time of purchase. Many analysts have taken this to mean that the tech giant is making a concerted effort to boost XR sales in particular. Apple has increased its efforts to promote these trade-in offers and that the company is also supporting XR discounts offered by Japanese carriers through subsidies.

There are other reasons to be concerned about sales figures for the new iPhone models. As a recent report by Forbes indicates, screen supplier Japan Display has likely cut its production of XR displays as well as its forecast growth for the second time since the phones were released. Certainly, production levels change over the course of the lifetime of a particular model of iPhone, but it seems unusual for production to be cut in the first couple of months after the release of the XR model, particularly during the holiday season. This may be an indicator that sales are slower than expected.

Is There More Market Left for High-End Gadgets?

With the iPhone XR priced at around $749, a discount of up to $300 represents about 40% off the original price. The higher-end iPhone XS and iPhone XS Max models are priced at about $999 and $1,099, respectively. Even at a price difference of $500, the Forbes report suggests that sales of the iPhone XS and iPhone XS Max may be stronger than those of the iPhone XR as of mid-December. Here's why.

First, the iPhone XS and iPhone XS Max became available to the public ahead of the iPhone XR, which likely gave the models an important boost in sales. Beyond that, though, there is reason to believe that the iPhone remains a status symbol for many customers. Buying a new model may have less appeal to many customers if it's not top-of-the-line, even if that means spending a few hundred extra dollars.

For Apple, the question is likely one of margins. If the margins on the new phone models are sufficiently high, it's likely that the company will continue to benefit from its iPhone sales in spite of reduced sales figures. For the time being, though, Apple's stock has taken a beating: the company has shed more than $200 billion from the historic $1 trillion market capitalization that it maintained from August to November of 2018. 

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