Apple Inc. (NASDAQ:AAPL) is all set to enter the phablet category with its upcoming iPhone 6, which is likely to reach the markets in September this year. The tech giant’s internal documents show that consumers are increasingly preferring devices that cost below $300 or have a screen size of more than 4-inch. Apple’s smartphones don’t fit into either category. And that’s the reason its market share has eroded in the past few quarters. The iPhone 6 will address this concern with 4.7-inch and 5.5-inch models.
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iPhone 6 may hurt Apple’s tablet sales
Apple Inc. (NASDAQ:AAPL) has reportedly asked its suppliers to produce 90 million iPhone 6 units this year, expecting huge demand. Analysts forecast that the big screen iPhone will have 20% more demand than the existing flagship, the iPhone 5S. However, the iPhone 6 could cannibalize into the iPad sales. There is evidence that rising demand for phablets has affected the tablet sales growth. That’s the reason Morgan Stanley analyst Katy Huberty has slashed her 2014 tablet market growth forecast from 26% to 12%.
It’s highly likely that strong demand for the iPhone 6 would eat into the iPad sales. Michael Blair of Seeking Alpha takes a look at what the massive success of the iPhone 6 coupled with a decline in the iPad sales mean to Apple Inc. (NASDAQ:AAPL). Blair assumes that Apple could realize the ASP of $749 for the iPhone 6, and the estimated bill of material for the upcoming device will be $300. Based on that, each iPhone 6 will produce a contributed value of $449.
Of course, there will also be other costs such as royalties to ARM Holdings and other direct costs. But these are likely to be similar across Apple Inc. (NASDAQ:AAPL)’s various devices, so Michael Blair ignored them for the purpose of analysis. The approximate bill of material (BOM) is $274 for the iPad Air, $198 for the iPad Mini and $199 for the iPhone 5S. But the iPhone 6’s BOM is likely to be slightly higher at about $300 due to the use of sapphire glass, larger screen, and a more costly A8 processor.
A large number of iPhone 6 smartphones will be sold as an upgrade to older models, and many devices will be sold to new users. So, based on the above image, those who buy an iPhone 6 in preference of an iPad Air and an iPhone 5S, Apple Inc. (NASDAQ:AAPL) will get $749 in sales and $449 in contributed value rather than $1098 (combined price of the 5S and iPad Air) in sales and $625 in contributed value.
Cannibalization of the iPad line by the iPhone 6
For consumers who prefer the iPhone 6 over the iPhone 5S and the iPad Mini, the tech giant will receive $749 in sales and $449 in contributed value rather than $1,048 in sales and $601 in contributed value, says Michael Blair. Apple Inc. (NASDAQ:AAPL) suppliers will reportedly ship 90 million iPhone 6 devices this year. Assuming that all the iPhone 6 units are sold, but 33% sales replace what would really have been the iPhone 5S and iPad Mini, the result will be relatively lower revenue and contributed value. A similar scenario can be seen due to the cannibalization of the iPad Air by the iPhone 6.
However, the differences aren’t huge, and can be offset if the iPhone 6 sales are higher than the 5S which didn’t cannibalize the iPad line.