Apple Inc. Endangered By Cannibalization From iPhone SE

iphone 8 apple stockElisaRiva / Pixabay

Apple appears to be planning for a massive iPhone 7 cycle, but will the hopes of a better cycle this year be short-lived? Apparently the iPhone SE is selling better than the company expected, which is a double-edged sword because while it might mean better unit numbers, it could also mean a lower average selling price and potentially less profitability.

iPhone SE doing better than expected

When Apple unveiled the iPhone SE earlier this year, analysts said their checks of suppliers seemed to indicate that the company hadn’t ordered a lot of the handsets. However, wait times for the phone are still quite long, particularly in certain markets, as the number of orders keeps rising. In a report dated May 23, Nomura analyst Jeffrey Kvaal noted that by the end of last month, lead times in both the U.S. and China climbed to two or three weeks, and they remain at about the same length. He adds that this holds true looking across mobile carriers and all memory options. Together, the two nations make up about half of sales.

At first, the analyst had been expecting Apple to sell between 10 million and 20 million iPhone SE models this year, but now he is anticipating 30 million. He also reports that his checks indicate that the company has upped its production forecast for the phone.

Demand remains soft overall

Kvaal warns investors that overall demand remains soft, however, which implies that the iPhone SE is cannibalizing Apple’s more expensive iPhones in developed markets. He notes that U.S. operators’ handset upgrade rate plunged to 6% of their subscriber bases, a record low, in the first quarter. The average upgrade rate is about 8%, he added.

He notes that some of this decline is simply structural because of the increased use of installment and leasing plans, some of it is cyclical because of the “dearth of ‘iconic’ phones,” meaning weak sales of the iPhone 6s. The Nomura analyst adds that the strength in the iPhone SE, overall weakness in demand, and anecdotal evidence all support his view that the SE is cannibalizing the iPhone 6s in developed markets, although he also says that the SE is also hitting home with its “intended” market, which is first time-buyers, especially in China.

Kvaal warns also that Apple’s recovery might be delayed by the cannibalization.

Conservative production numbers for the iPhone 7?

Kvaal also opines that Apple will “take a conservative view on production” for the iPhone 7 because it has been dealing with inventory issues for the 6s. The company plans to cut its channel inventory by about 3 million phones or $2 billion, which he believes is mostly iPhone 6s models. However, the Taiwanese newspaper Economic Daily reported that Apple told its Asian suppliers that it will need 72 million to 78 million iPhones before the end of this year, compared to the Wall Street estimate of 65 million.

BMO analysts are predicting a massive upgrade cycle this year, even if the iPhone 7 doesn’t have any particularly exciting new features, and if the Taiwanese report is true, it seems Apple is too. We’ve heard multiple reports that the iPhone 7 won’t be the huge upgrade consumers have come to expect of the numbered years’ or non-S iPhones. Today Bloomberg reported that next year’s iPhone will likely have an OLED screen, which would be a significant upgrade. Applied Materials reported last week that it saw almost a fourfold increase in orders for the equipment that’s used to make displays, which suggests that Apple’s suppliers are preparing for a model with an OLED display.

Apple shares closed up 1.27% at $96.43 on Monday.

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About the Author

Michelle Jones
Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now our editor-in-chief. Email her at [email protected]

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