iPhone 6 Price Increase Seems Necessary, “Sensible”

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More than one analyst has suggested that Apple Inc. (NASDAQ:AAPL) will raise the price of the iPhone 6. Indeed, a larger bill of materials could mean a higher price, especially if the company wants to avoid margin pressures. In a report dated May 5, 2014, Bernstein analysts Toni Sacconaghi, Jr., Jonathan Cofsky and Eric C. Garfunkel list a number of reasons they believe Apple will increase the price of the iPhone 6.

Cook hints at price increase

On Apple Inc. (NASDAQ:AAPL)’s last earnings call in April, CEO Tim Cook did suggest that the iPhone 6 might cost more than previous models, and there is a precedent for this. Cook said on the call, “…we’re certainly not stuck on certain price points. We price at values that are fair for the value that we’re delivering.”

Apple Inc. (NASDAQ:AAPL) does charge more for the iPad Mini with Retina display than it does for the standard iPad Mini. Also the company charges more for MacBook Airs and iMacs with bigger screens and raised the price of the iPhone when it raised the size of the handset’s screen.

The Bernstein team believes consumers will be the ones paying more for the iPhone 6 rather than carriers.

Two iPhone 6 models expected

Most seem to be expecting two iPhone 6 models, although the majority of the rumors focus on a 4.7-inch version and a 5.5-inch version. The Bernstein analysts, however, suggest that Apple Inc. (NASDAQ:AAPL) may release one version with a 4-inch screen at the current price point of about $650 for prepaid phones or $200 with a contract and also a larger one for an additional $100.

They say Apple Inc. (NASDAQ:AAPL) could then sell the iPhone 5S for around $550 and the 16-gigabyte iPhone 5C for $450 and the 8-gigabyte 5C for about $400 in emerging markets. They believe this would give Apple a wide array of handsets at numerous price points and screen sizes.

iphone 6

Why the iPhone 6 may cost more

The Bernstein analysts gave five reasons they believe Apple Inc. (NASDAQ:AAPL) will raise the price of the iPhone 6. First, they note the historical precedent, both at Apple and in the smartphone market in general. Second, they believe high-end customers will probably pay more for the larger handset, especially in post-paid contracts. Third, the analysts note that since the iPhone sells at such high prices even when used, they can offset the more expensive price of the iPhone 6 by simply trading or reselling their used handsets. Fourth, overall iPhone average selling prices would benefit, providing an important contribution to growth, both of the iPhone and Apple’s revenue.

Apple’s all-important gross margins

And finally, Apple Inc. (NASDAQ:AAPL) would also be able to offset the higher bill of materials while also keeping gross margins in the mid- to high-40s. They estimate that about 25% of the bill of materials could increase in relation to the size of the screen. In other words, if the iPhone 6 has a 4.8-inch screen, it’s 40% bigger than that of the iPhone 5, 5S and 5C. If the price doesn’t go up, then gross margins on the handset would fall below 40%.

However, if Apple Inc. (NASDAQ:AAPL) raises the price from $650 to $750, then it could add about 200 basis points to gross margins, increasing them from around 45% to about 47% or 48%.

iphone 6

The Bernstein team thinks a price of $750 would be the most Apple Inc. (NASDAQ:AAPL) could charge for the bigger iPhone 6, however. They see a greater risk of customers defecting to another brand.

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