Morgan Stanley: Low-cost iPhone raises, not lowers, Apple’s gross margins

According to Morgan Stanley analyst Katy Huberty’s note to clients Monday, “a lower-priced iPhone should — paradoxically — raise [Apple’s] margins.,” Philip Elmer-DeWitt reports for Fortune.

“The way she sees it, if Apple lowers the cost of owning an iPhone, more people will buy them,” P.E.D. reports. “And because the profit margins on even a lower-cost iPhone are so much higher than the margins on Apple’s other products, the net effect will be to lift the company’s gross margin.”

P.E.D. reports, “Profit margins for the current quarter could show a similar effect, she writes, as Apple experiments with lower regional price points on the old iPhone 4.”

Read more in the full article here.

[Thanks to MacDailyNews Reader “Dan K.” for the heads up.]

41 Comments

  1. Personally, I don’t want to see Apple go down that old road like Samsung – Apple’s products have always been at the upper level price point. Cheap products have a stigma attached to them, something that Apple has never had. Why change now?

    1. Jeff, it’s called not leaving an umbrella below you. It’s why the original iPod got a sister, then two more. If apples smart and they’ve collected themselves after the big first push of innovation they should be able to come in under the flagship phone with a sister that’ll work just fine for everyone.

      1. Fair enough. Still, that’s not the Apple I’ve come to love.
        Apple already sell the old models at low or no cost. I think that is enough to please most users.

        1. Good point about the previous models. That seems to be the choice so far, and a wise one on many fronts. Now that you mention it, I’d like someone to explain how a “low cost iPhone” would be better than iPhone 4…

          1. The low cost iPhone is not for the U.S., it’s for India, Chona, Brazil, etc. The older iPhone models are not “low cost”; those are still subsidized by mobile carriers for hundreds of dollars. Apple needs a true low cost iPhone which can be sold in expensively in these huge markets without having to rely upon subsidies.

        2. Not quite – you have to remember Apple’s competition. Offering a phone (4) which is 2 years old looks pretty shabby when compared to the current low cost Android offerings. The point is to compete with these new low cost phones…

          1. Completely disagree. Even the iPhone 3 still looks good against the competition, AND is still a better phone, has Apple quality and cache. There is a world of people who are quite happy (me, for instance) to have an iPhone 4. No, it hasn’t the latest features, but I can afford it and it isn’t some watered down version with cheaper components. That I can access virtually all of what the iOS upgrades offer fully satisfies me. I can’t understand why people don’t get this.

        3. It might be good enough to please consumers, but definitely not good enough for Wall Street. Just remember, Wall Street already sees the latest iPhone as well behind the Android smartphone curve, so you can imagine how they consumer 2-year old iPhones. NO BIG DISPLAYS! Wall Street links innovation to screen size. I’d really like to see some hard numbers proving that large display smartphones are what consumers desire the most. Or is it that carriers are pushing large display smartphones to customers because that’s what gives them higher commissions or that’s all that’s available. I’m really curious.

          I still say that even a 2-year old iPhone is more than good enough as a smartphone for the average consumer as long as the build quality is good and runs the latest OS upgrades. An older product would be well-refined enough for new users so most problems if any would be easily tackled. Most consumers are not rocket scientists and shouldn’t require the latest smartphone features unless they really need something specific.

          Wall Street just wants Apple to sell 60 million iPhones a quarter because the more iPhones Apple sells, the more the hedge funds can make. They want Apple to do it anyway they can. Apple can easily sell far less iPhones per quarter and still remain very profitable. I’m absolutely certain the need for high iPhone sales are being Wall Street driven and not out of necessity for Apple’s survival.

          1. Whether you like it or not, size matters.
            Remember the useful screen size on your first dumb cell phone. At the time, the wall-to-wall screen size of the iPhone was a vast improvement indeed.
            What makes look the iPhone 5 small today, is its new aspect ratio. It really looks narrow now.

            Something that would blow the socks off Samsung et al. is if they just gave the iPad Mini cell phone features — not necessarily voice capability in the old sense, but transparent use of VoIP/FaceTime without the hassle (of finding a compatible device ((made by Apple, of all things!!!!)) to communicate with!)

    2. Selling a product at a low price does not mean that the profit margin is going to be low as well.
      It may sound and look counter intuitive but if the initial cost of production is lower than the existing product, then it is possible to sell then new product at a lower price point than the old one and still attain a higher profit margin.
      The profit margin in pure raw numbers is not going to be as much as in the old product, but in percentage terms can be a lot higher.
      That is what the author of the article is articulating.
      Now, Dell, HP et al got this aspect wrong, they priced their products as low to the production price point as they could so that there was no head room for a high percentage margin on the profit side, leading to a collapse in the level of revenue to sustain their business’s.
      Samsung on the other hand copying Apple inc. used the vast profits they gained from supplying Apple inc. to offset the production costs of the Android based products and so were able to achieve a decent level of margin on those products, thus sucking up the low price point market that Apple inc. had no desire to chase at that time.
      If Apple does go after that low price point and still retains a decent profit margin, then we will see whether Samsung does really have a set of balls or if they have just been blowing wind up their customers arses all this time.

      1. “Selling a product at a low price does not mean that the profit margin is going to be low as well.”

        Spoken like a true business man anal…yst….You are right, cause we all know that parts and labor are free. Just like innovation, its listed is some secret book that all the companies have. Just open to page 3 and there you go.

        Don’t mean to crap on you but there are so many posters here that have no idea about how business works, price, cost, profit, loss, overhead, etc. Pointing out how Apple should just…”xxxxxxx” and get on with it shows how much lacking there is in real knowledge.

        Dell had a great business model in the beginning cause NO ONE else did it well. But they never moved on. Dell had a one trick pony and rode it until everyone copied it and it died.

        Just a thought for a monday.

        1. Actually, Crabapple’s point is dead on, since he flat out states that the parts and labor costs are figured in to his thinking, but that the parts costs, if they are substantially lower than what’s used in current flagship models, can allow the low-price alternative to be sold at a much lower price point and still achieve profit in each unit sold. How is that not knowing how business works? Seems to me that it makes perfect sense. No one is assuming that parts or labor are free, or claiming anything of the kind. LTR…

        2. Mr Norm, I think the Elder is getting the better of the Norm so I suggest you take a nap on Monday’s so as to have the stamina to read posts through properly before handing in your 2 cents.
          You will be surprised to know that some of the lowest costing products carry the largest profit margins percentage wise compared to the most expensive similar product.
          Take a bottle of water, a branded bottle of water may yield a 15% profit margin because part of the cost is incurred by the brands name. An unknown brand of bottled water may yield a profit margin of up to 200% depending on the outlet it is sold in because whilst the production cost could be the same or lower than the branded item, it does not carry the tax incurred by an established brand for the use of the brand name.
          I mentioned the outlet because if the brand of the outlet is synonymous with quality, then you can increase the cost of the unknown brand to reflect that you are selling a quality product that your customers expect. If you don’t, your customers will question the quality of the water and may even refuse to buy it claiming that the shops quality has gone down. Anyone remember Woolworths?
          So if Apple inc. were to sell a low cost iPhone, all that that may mean is that compared to other Apple products, the new iPhone is cheaper, but compared to other smart phones from rival competitors, could still be more expensive.
          A low cost Rolls Royce does not equate to Rolls Royce cars being built with poor quality materials or worksmanship!
          The Brand name says it all.
          Apple incs. brand name says it all.

    3. Then don’t buy cheap products. And for sure don’t buy Apple’s cheaper iPhone. Leave that for the millions who will buy it. Margins matter and so does market share. So get ready for that cheaper iPhone and also get ready for the larger iPhone because they both are coming. Market share. Market share matters. There’s no sense selling something if you don’t make a good profit on it. And likewise, there’s no sense selling something if you don’t sell enough of them to make it worthwhile. Get off your high horse. Quit with the haughty arrogant fucking attitude. Maybe Apple will make a solid gold iPhone just for you.

      1. Wow! I’ll wait for my solid gold iPhone while you wait for yours in pine…

        Amazing how many on this forum take the comments so seriously! We all have different opinions and by all means, feel free to disagree with mine.

        Nice use of the English language too! By the way, I’m joking on that too!

      1. There is only one point on which to question my veracity — that you are a rude little jerk. Obviously, I am 100% correct. You illustrate it over and over – and over — and over.

        1. Seamus
          Friday, May 31, 2013 – 6:24 pm · Reply

          You claimed, recently, that you never called people names.

          Seamus
          Friday, May 31, 2013 – 6:58 pm · Reply

          I’ll see if I can dig it up.
          Meantime, you should stop, jerk.

        2. hypocrisy |hiˈpäkrisē|
          noun ( pl. hypocrisies )
          the practice of claiming to have moral standards or beliefs to which one’s own behavior does not conform; pretense.
          ORIGIN Middle English: from Old French ypocrisie, via ecclesiastical Latin, from Greek hupokrisis ‘acting of a theatrical part,’ from hupokrinesthai ‘play a part, pretend,’ from hupo ‘under’ + krinein ‘decide, judge.’

        3. lie 2 |lī|
          noun
          an intentionally false statement: Seamus felt a pang of shame at telling Botvinnik a lie | the whole thing is a pack of lies .
          • used with reference to a situation involving deception or founded on a mistaken impression: all of Seamus’s online life had been living a lie .

    1. AS far as I know, the iPhone 4 is only “free” on a 2-year contract plan. If you want to buy one for a prepaid plan with no contract, you are talking hundreds of dollars (U.S.). The last time that I priced one, a discounted iPhone 4S was $449.

      With all of your talk on this forum, one would think that you would understand that nothing is free.

  2. Apple should bring out a cheaper iPhone which is 4″ in size and a more expensive iPhone which is 4.5″ in size (4.5″-4.8″).

    The 4.5″ iPhone should be retailed at the same price as the 4″ iPhone 5 is now currently selling at ($650) but with upgraded storage of 32GB.

    The smaller 4″ iPhone should retail at $150 cheaper ($500) for 32GB.

    That should cover all bases.

  3. So basically what we’ve learned is that if a company releases a new product that sells well and has higher margins that existing products then their profit margins overall will increase. Wow, will wonders never cease.

    The argument has always been that Apple make more profit because they don’t target the cheap (not the same as low cost) end of the market which can’t support high margins, now releasing a low cost iPhone will somehow magically reverse that. I thought the iPad mini had lower margins than the iPad?

    1. It does. Because it’s so much cheaper and the cost to manufacture is apparently still pretty steep (you’re getting a good size touch screen computer for $300 after all). The margins on the iPad too are lower than we’re used to from Apple (remember when the iPad came out we were stunned at $500, industry estimates had assumed around $1000).

      If Apple can sell an iPod touch with a retina display for $229 these days, I believe it when they say a “low cost iPhone” could be offered at a profit margin higher than that of the iPad & Mac lines.

    2. Today you have no lower-priced iPhone to sell. Tomorrow you’re selling millions of lower-priced iPhones with good margins. The lower-priced iPhone will bring in revenue/profit that is not there today. It’s pretty simple. It really is.

  4. Paradoxically, the people with the least clue about why Apple has been so successful have the most to say about how they should run their business.

  5. Morgan Stanley has Penis Envy(tm) and believes that their opinion actually carries some weight.

    Apple products are doing just fine, thank you. There is no need to “go cheap” in cost or product.

    See the recent sales effects in India and China.

    Morgan Stanley’s glass house needs to have its broken windows fixed before it gives out any more free advice.

    1. Morgan Stanley has a market cap of $51 billion and a P/E ratio of 47. How can Morgan Stanley even have the gall to tell Apple how to run its business? Apple could theoretically buy overpriced Morgan Stanley with half of Apple’s overseas reserve cash. Seriously. And Morgan Stanley just had a huge share price run-up in 2013 but had been sucking for a number of years.

  6. Inexpensive (low cost) does not mean cheap. Free does not mean low cost. The cost of everything is exactly equal to labor and taxes; the dirt (ie material) is free. The price of something is whatever the market will pay. The profit is the difference between price and cost.

    Apple’s ecosystem is complex and makes it difficult to see the gains from the losses. I think the music and apps Apple sells via their iTunes store carries a lot of weight in their final decision about a lower price point.

  7. Given that Wall Street lives on uninformed speculation, please allow ad hominem speculation on Huberty: likely to have an MBA, likely to be under 30 (probably 25ish), has never worked in industry, has no understanding of manufacturing or product diversification costs, has no insight into a company’s reputation being built on quality, gets paid way too much for way too little, did “really, really well” analysing business cases at biz school.

    The best non-street advice I ever received was, “make a quality product and maintain a margin sufficient to afford; support and service your competitors cannot match, continuous product improvement, continuous product innovation, and capital reserves so that you never have to listen to Wall Street Bankers.”

    Having known Wall Street analysts, I know that it’s not about the company, it’s about the money they can wring out of it, however they do it — for themselves and for the select group who pays for their information.

    For all the bellyaching about Apple, did you notice how quickly the bonds got snapped up by Wall Street? They know a great deal when they see it.

    The Stock Market was historically intended to create capital pools to fund the industry that powered the economy. Now, the speculation, arbitrage and stock manipulations of Wall Street creates a ‘tax’ on the economy that is so onerous that it is strangling it.

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