Apple Inc.'s Brilliant Low-Cost iPhone Strategy

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Although Apple (NASDAQ: AAPL) unveiled a new, premium iPhone (called the iPhone X) starting at $999 (significantly more expensive than previous flagship iPhones), one thing that people don't seem to be talking about is how Apple's new iPhone lineup very aggressively addresses lower-end portions of the market that the company had, in previous years, left underserved.

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Let's take a closer look at the strategy and what it could mean for Apple's iPhone business.

Cheaper SE, keeping 6s in the lineup

When Apple introduces a new iPhone generation, it typically discounts the prior generation models and stops selling the generation before that. So, for example, when Apple introduced the iPhone 7-series smartphones last year, it discounted the iPhone 6s lineup and completely stopped selling the iPhone 6-series smartphones altogether.

That wasn't the case this time around.

After introducing the iPhone 8 and iPhone 8 Plus (the direct successors to last year's iPhone 7 and iPhone 7 Plus), Apple discounted the iPhone 7-series as expected and then further discounted the iPhone 6s-series smartphones as well.

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Indeed, the iPhone 6s now starts at $449 and its larger sibling, the iPhone 6s Plus, can be had for $549.

Apple also discounted the iPhone SE, a product introduced midway through the iPhone 6s cycle, to just $349 for the entry-level model. This should help Apple improve its performance in price-sensitive emerging markets. 

Apple now has a product stack that runs the gamut of price points from a modest $349 all the way to a pricey $1,149.

Apple can grow its share at lower price points

Although the iPhone 6s-series proved to be relatively underwhelming as flagship successors to the hugely popular iPhone 6-series, the family makes for great lower-cost iPhones.

Indeed, the iPhone 6s-series is still thoroughly modern, with a blazing-fast A9 processor, respectable cameras, and reasonably high-quality 3D Touch-enabled displays. For individuals who want iPhones but don't want to spend too much, I think the 6s-series will be compelling.

Keeping the iPhone 6s around at even lower price points should help Apple do two things. Firstly, it should help Apple grow its share at these lower price points. Apple is showing up to the fight at these price points this year when it hadn't previously, so I do expect some level of market share growth (the magnitude of which is impossible to predict ahead of time) here.

That means additional revenue and profits for Apple's iPhone business, which is good. The only downside is that growing share at these lower price points will naturally dilute Apple's reported iPhone average selling prices, though if cannibalization of higher-priced products by lower-priced products is minimized -- and I think it will be as the higher-priced products are much more compelling than the lower priced products -- this isn't a problem.

Further, since Apple is aggressively trying to grow its services business, there is value in being more aggressive in expanding the iPhone installed base. Bringing more users into the ecosystem with lower-cost devices potentially means more apps sold, movies and songs purchased, subscriptions to services like Apple Music purchased, and so on.

Once users have experienced the Apple ecosystem and feel "locked in" (since they've invested so much in the platform), those users are more likely to keep buying Apple iPhones (and possibly other products, like iPads).

I can't wait to see how Apple's iPhone business performs in the quarters ahead.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.