“Apple still dominates in higher-margin consumer electronics, and its recent move to a 5.5-inch phablet should be gross margin neutral even after cannibalizing demand for the smaller iPad Mini,” Alex Cho writes for Seeking Alpha. “‘Apple will likely charge a $100 premium for the 5.5-inch version that media reports have suggested will be available a few months after the 4.7-inch version,’ Raymond James analyst, Tavis McCourt stated in a note.”
“The iPhone 5.5-inch version may slow the penetration of the iPad Mini. Phablet devices like the Galaxy Note 3 are sold for $700 (off contract). The incremental cost of a larger screen is low, and is covered by the higher retail price. When comparing the bill of materials for the Samsung Galaxy Note 3, and the Samsung Galaxy S4 (similar generational components), the differential is a whopping four dollars,” Cho writes. “What this indicates is that the iPhone 6 5.5-inch variation’s $100 price differential from the iPhone 6 4.7-inch variation will almost be pure profit. So even if customers decide not to buy a low-end iPad tablet, the company is able to make up for the cannibalization with a device that commands a much higher premium without hardly any incremental cost.”
“The low-end iPad Mini has an estimated bill of materials of $200, when you go with the model that has a Retina display, it’s estimated that costs would go up by 30% from the base model, indicating that the bill of material depending on the Mini model would be $200-$260,” Cho writes. “If that’s the case, even if the iPhone 6 5.5-inch version were to completely displace the demand for the iPad Mini, the impact is net income neutral. Furthermore, just because a consumer buys the larger 5.5-inch display device, doesn’t mean that the same consumer will not buy a tablet. In fact, it may encourage consumers to buy the larger tablet (iPad Air), therefore I believe that Apple’s upcoming product mix will have a positive impact on net income, and phablet cannibalization will positively impact gross margins.”
Read more in the full article here.