Come the Fall season, Apple is all geared up to roll out its latest innovations and offerings for more than a billion of its user base globally. Once again the new offerings were announced at its newest iconic “Steve Jobs” theater architected within its beautiful spaceship-shaped Apple Park. The latest announcements from the event are nicely summarized here.

While Apple exhibited its shiny new hardware, the services and astute pricing strategy are what caught our eye and we believe this is a highly effective move by Apple strategically. To understand the how, we need to understand the why behind this move.

Apple’s iPhone Struggles

It’s no secret that Apple has been raking in billions of dollars in revenue, cash and profit due the to growing ASPs of its iPhones. However, at the same time, Apple has seen a significant drop in iPhone volume demand since the 2015-16 iPhone 6 series ‘super-cycle’. The key reasons for the drop in demand:

• Firstly, the last-gen iPhones XR & Xs series got quite expensive–even up from the iPhone X pricing.  This seriously tested consumer elasticity and it definitely hurt the demand in key markets such as India and China.
• The US market was slightly immune in terms of the total volumes of iPhones sold since Q4 2018 and has seen just a 3% annual decline in volumes in H1 2019.
• Apple’s second-largest market, China, has seen a concerning drop in demand.  H1 2019 iPhone volumes in China fell an astonishing 54% annually.
• Key reasons for the drop have been the lack of localization of the Apple ecosystem of services and the US-China trade war. The trade war has spurned nationalist buying tendencies helping home-grown brand Huawei and hurting the iconic US brand, Apple.
• Another reason for the slow-down is the premium market of smartphones, especially iPhone users, are holding onto their devices longer and are slow to replace.
• Further, the refurbished or second-life smartphone market growth has been also affecting Apple’s new iPhone sales. The refurbished market has helped Apple grow its iOS user base but Apple’s newest line-up sales are challenged.

According to Counterpoint’s smartphone models sales tracker research, the sales demand for  US$999+ innovative flagship iPhones has decelerated over the last five iPhone generations. The iPhone XR is the best-selling model over the last twelve months out of the current portfolio for Apple to acquire new and/or for upgrades from the existing user base.

The sales of iPhone XR for the first twelve months  will be more than the sales of  iPhone Xs series combined for the same period.

Source: Counterpoint Research, Monthly Model Sales Tracker Database

Key here is Apple’s newest pricing announcements which include pricing the new LCD version iPhone 11 US$50 less at US$699 vs the US$749 price at what the LCD version iPhone XR was launched last year. Also, the iPhone XR which got a price cut to US$599 (a 20% drop one of the highest ever for an iPhone in just one year) is also noteworthy even though iPhone XR did undergo pricing corrections in H1 2019 starting with Chinese New Year season in January. So, technically, the iPhone XR pricing has come to some normality after seriously testing the iPhone user base’s propensity to pay $750+taxes or in some markets even priced close to US$1,000. With growing momentum for iPhone XR as the volume driver, this makes the new pricing announcements for the LCD iPhone models both for XR & 11 very important for Apple going into the next financial year.

Apple LCD iPhone Pricing: A Strategic & Marketing Masterstroke

While Apple’s iPhone volume demand has been softening due to the reasons we discussed above, Apple is seeing a stronger ecosystem and customer-lock in benefits as it has begun to clock more than US$10 billion per quarter in revenues from its software and services segment. Apple’s services strategy is growing in importance as the company looks to monetize its over one billion devices user base and create more stickiness. This year’s roll-out of actual meaningful revenue-generating content-centric services building on Apple Music‘s success is pivotal for Apple. This currently includes the subscription gaming service Apple Arcade with more than 100 games at launch and Apple TV+ priced at US$4.99 per month and sports 4K HDR original content video streaming services.

• • Since Apple has now learned from testing its price elasticity that a US$50 price cut for iPhone 11 and US$150 cut of the eleven months old iPhone XR will rope in at least 20% more users with more recent powerful hardware within the iPhone user-base compared to if the models were priced as high as last year.
  • With two identical LCD displays in high volume 11 and XR models, due to scale and lower component costs, Apple will be able to absorb the US$50 price cut more easily.
  • It is super-beneficial for Apple to upgrade its user base with a greater mix of newer models, which has more powerful hardware, sooner rather than later.
  • The newer hardware makes the overall user-experience of Apple’s new services better and stickier.

According to our analysis, Apple can potentially generate a Customer Lifetime Value (CLV) of US$2,400 over a period of 30 months from a “power” iPhone user with the latest hardware subscribing to its existing and new Apple services.

• • This is a significant range of non-hardware revenues Apple can potentially generate (from US$0 to US$2,400+) in terms of CLV of an iPhone user. Apple is in a great position.
  • By sacrificing US$50 and US$100 for the hot-selling relatively cheaper LCD models can thus offer an even larger revenue-generating opportunity for Apple — a strategic masterstroke.
  • Hardware-as-a-Distribution (HaaD) model will take further shape once the Apple services mature with respect to its partners/rivals Netflix, Spotify, Dropbox, and others. This may prompt Apple to subsidize a little bit more on the latest hardware and drive overall hardware+software+services revenues.
  • Further, the entry US$4.99 price-points and bundling it in for the first year with newest iPhones while Apple builds its catalog of content is also a brilliant strategy to give users the opportunity to get hooked on the high-quality content experience. It may also push fence-sitters choosing between an older iPhone model and the latest family onto the latest family of iPhones.
  • Apple is best in the business when it comes to positioning and anchoring the price vs value proposition offered.

Source: Counterpoint Research, Ecosystem Analysis

• The next twelve months will be more fruitful for Apple as the Apple Watch 3 US$199 pricing is another hook for users to enter/upgrade with newer hardware into the Apple ecosystem.
• Apple Watch is definitely a huge opportunity for Apple.
• Firstly, from stickiness perspective, the number of experiences and use-cases which Apple has carved out for users for the wrist is impressive.
• Secondly, Apple is able to leverage the gold mine of user data it can use to build not only newer health and fitness centric-services but also contribute towards medical research which makes a strong statement from CSR perspective and entry into the high-barrier medical equipment market.

Overall, we are quite positive on the growth of Apple for the near-to mid-term future even though iPhone volume demand has waned from its peak in 2015/16. The decline has been nicely offset by the higher iPhone ASP growth and from smartwatch, hearables, and upcoming content-centric services.