With launch of three new iPhones, Apple eyes all corners of the smartphone market

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A year after introducing the most expensive iPhone ever, Apple Inc. is set to reveal three new devices this week aimed at all corners of the smartphone market. Once again, all eyes will be fixed on the proposed price tags.

Leaning on reports from tech-rumour websites and news outlets, Wall Street is looking for the first American trillion-dollar company to deliver three new iPhone variations – at three varying price points.

While refreshed Apple Watches, iPad Pros and wireless chargers are also expected to be on deck this week, it's the iPhone line – which accounted for 62 per cent of Apple's revenue last year – that analysts will be watching most closely during the company's "Gather Round" event on Wednesday at the company's new campus in Cupertino, Calif.

The company usually reveals new generations of the iPhone in September, but the anticipated reveal of three phones this week at tiered pricing levels would mark a shift in Apple's strategy. The move, analysts say, could open up more consumer segments even as the company continues to steadily raise prices in a bid to drive revenue growth. The launch comes after the company warned in a letter to U.S. trade officials last week that proposed tariffs on Chinese goods would affect prices on a "wide range" of Apple gadgets. The iPhone was not specifically mentioned in the letter.

Last year's launch of the full-screen iPhone X was followed by months of speculation that it was being met with underwhelming demand. But chief executive officer Tim Cook said in a conference call in May that it was the first phone roll-out since the iPhone 6 Plus in 2014 in which “the top of the line iPhone model has also been the most popular.” The popularity of its most expensive device helped lift Apple's average selling price (ASP) for the iPhone 20 per cent to US$724 in the quarter that ended June 30.

Apple is aiming to maintain that momentum. The three phones expected this week include a lower-end 6.1-inch LCD-screen iPhone, and more advanced models at both 5.8 inches and 6.5 inches. Analyst T. Michael Walkley of Canaccord Genuity said in a recent research note that the three-pronged approach could help the company "drive a continued strong upgrade cycle to higher margin and higher ASP iPhones."

When it launched last year, the iPhone X had a baseline price of US$999. A Morgan Stanley analysis suggests that if a new lower-tier iPhone were priced between US$699 and US$799, and a large-screen, higher-tier model were priced slightly more than US$999, the product line's ASP could rise between 2 and 7 per cent.

Research from Morgan Stanley suggests that over the past year or two, consumers have been holding onto their phones longer, replacing them closer to every three years rather than every two. This is thanks to higher-quality devices and a shift among wireless carriers away from phone subsidies and two-year contracts, the firm says. But Katy Huberty, an analyst with Morgan Stanley, said on Friday that there is still plenty of reason to believe that Apple would want to raise prices.

Given the high demand for the iPhone X, she said, "we believe Apple understands consumers are willing to pay for a superior device and user experience." Ms. Huberty has a price target of US$245 for the stock, which closed at US$221.30 on Friday.

"Big picture, Apple's not growing market share," Loup Ventures' Gene Munster, a long-time Apple analyst, said in an interview. "The smartphone market's not growing, but ... they're growing share fractionally, about 18 per cent globally. But they can continue to grow the business by raising ASP, and I think the strategy of three phones is representative of that goal."

But if Apple chooses a lower-priced strategy on some models, it could also benefit the company by boosting its phone replacement rate. Canaccord Genuity has forecast a replacement rate for calendar year 2019 of 26.5 per cent, but Mr. Walkley said that the rate could easily rise if Apple lowered prices for some phones.

"With a mature smartphone market, we believe Apple has locked up a strong share of the premium tier market and will continue to dominate high-end smartphones' sales and capture the vast majority of smartphone profits for the next several years," Mr. Walkley said.

Analyst Tim Long of BMO Capital Markets, however, warned at the end of July that once iPhones' average selling prices normalize, "we believe unit growth will need to return."

Other analysts say that, as a stock, Apple might be able to suffice with low iPhone revenue growth so long as income from its services business – which includes Apple Music, the App Store and Apple Pay – continues to grow. Morgan Stanley, for instance, forecasts that services will account for more than 60 per cent of company revenue growth over the next five years.

Mr. Munster said that "as long as the [iPhone] business is stable, which is 0 to 5 per cent growth in revenue ... that's the sign of a healthy base. And I think investors are more interested in what can happen with services and other bets including content and [augmented reality] and mobility, wearables, and then also how much cash they're getting back."

As for the threat of the U.S. trade battle with China, U.S. President Donald Trump tweeted his preferred solution on Saturday: “Apple prices may increase because of the massive Tariffs we may be imposing on China – but there is an easy solution where there would be ZERO tax, and indeed a tax incentive. Make your products in the United States instead of China. Start building new plants now.”

With a report from Reuters