Thanks To Apple's Financial Geniuses, The iPhone 6 Isn't Just A Smartphone -- It's A Magic Profit Machine

Apple iphone tim cookApple PayThe magic profit machines.

A realisation is gradually setting in for Apple investors, customers, and devotees:

Apple has basically, quietly, raised the price of the new iPhone.

How?

By shipping the basic model iPhone 6 and 6 Plus with such limited memory that buying one would be like buying a Porsche with a VW Beetle engine.

As Apple guru John Gruber pointed out last week, Apple is selling the basic $US199 iPhone 6 and $US299 iPhone 6 Plus with only 16 gigabytes of memory. That amount of base memory first shipped with the iPhone 3GS, a now discontinued phone from the smartphone Triassic age.

In the 4 years since Apple launched the 3GS, smartphones have become much bigger storage hogs. With the latest Apple mobile operating system (iOS 8), many-mega-pixel video and still cameras, HD movies and TV shows, and ever-more-complex apps, 16 gigs is now an annoyingly small amount of storage.

Unless you aggressively and fanatically manage what’s on your iPhone — moving photos and movies to the cloud (where you have to pay for additional storage), deleting little-used apps, etc. — you’re constantly going to run out of room. And that will create endless headaches and frustrations, which is not what you want and expect from a new iPhone.

The answer for most people will be to spring for more storage.

And here, too, Apple has cleverly created an even bigger incentive to pony up.

The new iPhones come with bigger supplemental tiers of storage than the earlier iPhones. Specifically, iPhone 6s come with 16 GB, 64 GB, and 128 GB of storage, instead of the 16 GB, 32 GB, and 64 GB of prior models.

So, the decision logic for most iPhone buyers will probably go like this:

* I can get my new iPhone for $US199 or $US299 (depending on screen size), enjoy the bigger screen for 5 minutes, and then spend the next two years tearing my hair out about the tiny storage, OR

* I can shell out an extra $US100 to buy 4-times as much storage

When you amortize that $US100 investment over the life of the phone, it’s a small expense relative to the improved satisfaction. So many, many customers will likely opt for option two.

Here’s where more of the hidden genius comes in.

According to Wall Street analyst Gene Munster and BI Tech Editors Jay Yarow and Dave Smith, the cost to Apple of 64 GB of memory vs. 16 GB of memory is small.

Specifically, it’s about $US20.

That means that, for every customer persuaded to spend an extra $US100 to buy the 64GB iPhone 6 (or 6 Plus), Apple will make an extra $US80 in profit.

That’s a lot of extra profit.

And because 16 GB phone is so little storage for customers who take a lot of pictures/movies, use a lot of apps, and/or watch a lot of movies/TV shows, they basically have no choice but to buy the 64 GB version. And that means that Apple has basically, quietly, jacked up the price and profit margin of their new iPhones.

This in a market in which smartphone prices are dropping fast and most manufacturers are fighting to survive.

Piper Jaffray’s Gene Munster did a survey of iPhone buyers over the weekend and found that only 1 in 5 customers were buying the 16 GB version of the iPhone 6, about half as many as bought the entry-level phone in the last cycle.

That bodes very well for the average selling price of this device. And it bodes even better for the amount of cash that Apple is going to drop to the bottom line over the next year as most of their customers upgrade to the iPhone 6.

And in case you’re not impressed by that quiet pricing/profit magic, consider this:

Apple is already collecting another extra $US100 from every customer who wants the bigger-screened iPhone 6 Plus. Those start at $US299, not $US199. And it’s unlikely that the bigger-screened iPhone 6 costs anything close to another $US100 to make. So Apple is likely picking up another chunk of incremental profit there, too.

Now, selling the iPhone 6 and 6 Plus with such limited storage is not the most customer-friendly move that Apple could have made. Apple could have put 32 GBs of storage into the basic phone, vastly improved the phone, and saved many of its customers $US100. Apple’s decision to only put 16 GBs of memory in the 6s, in fact, so disappointed Apple guru John Gruber that he called this decision “the most disappointing aspect” of the new iPhone.

But Apple has always been as focused on its own bottom line as it is on making its customers happy. And Apple, probably correctly, is betting that almost all of its customers and potential customers will get over their annoyance, pony up, and help fatten Apple’s bottom line.

All this bodes very well for Apple’s bottom line for the next few quarters.

Disclosure: I am overweight Apple stock, and I am looking forward to getting my new iPhone (though I’m not looking forward to paying an extra $US100 for it). I think this will be the last huge iPhone upgrade cycle, however, and Apple is highly dependent on the iPhone for its profit, so at some point soon I will probably trim my “overweight” position and go back to “equal weight.” This is to say, I will soon own Apple the way I own most stocks — via index funds.

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