How Apple's 6.1-Inch iPhone Can Solve This Key Issue

Analyst Jun Zhang with Rosenblatt Securities (via Barron's), citing proprietary research, claims that Apple (NASDAQ: AAPL) recently boosted production of its iPhone 7 and iPhone 7 Plus by 3 million-4 million units ahead of the holiday selling season while simultaneously cutting iPhone 8 (and presumably iPhone 8 Plus) production by that same amount.

"In our view the average, mid-end consumer is choosing an iPhone 7 over the iPhone 8, whereas high end customers are more likely to choose an iPhone X," Zhang wrote.

This isn't the first time this phenomenon was reported to be taking place.

From a business perspective, it's not hard to see why this, if accurate, is an issue for Apple. The iPhone 7 and iPhone 7 Plus are cheaper than their higher-end counterparts, meaning that every time a potential customer decides to opt for an iPhone 7 series device instead of an iPhone 8 series device, Apple generates lower revenue and ultimately profits.

It's not too hard to see why the so-called "average mid-end consumer" may opt for an iPhone 7 series model over an iPhone 8 series model: The iPhone 7 phones look very similar to the iPhone 8 phones.

Here's how Zhang thinks Apple can solve this issue next year.

The rumored 6.1-inch LCD iPhone

Zhang and his team think that "Apple might bring down the cost of an iPhone X by using an LCD screen next year making the iPhone 8S a more differentiated product from the iPhone 7 and iPhone 8."

This reasoning makes sense, but Zhang is seemingly way late to this party.

Credible rumors have been circulating for quite some time that Apple intends to introduce an iPhone next year with a 6.1-inch liquid crystal display (LCD). LCDs are cheaper than the organic light-emitting diode (OLED) displays that Apple uses in this year's iPhone X.

In fact, in a recent article, I explained just how Apple would be able to keep the manufacturing costs of such a device low so that Apple can profitably sell it at more mainstream iPhone price points and why an LCD would be much cheaper than a comparable OLED display.

Indeed, an iPhone with a full-face 6.1-inch LCD and a TrueDepth camera would represent a substantial and obvious improvement compared to this year's iPhone 8-series as well as last year's iPhone 7-series.

The purpose of this device, as Zhang alludes to, would be to get the midrange iPhone buyers -- that is, the individuals who aren't going to pay extra for a device priced as today's iPhone X is (it starts at $999) -- to buy more expensive iPhones.

If Apple can convince those so-called "mid-end" consumers to go with, say, a $649-$749 iPhone with a 6.1-inch LCD (respected KGI Securities analyst Ming-Chi Kuo cited this price range when reporting on this phone ) instead of either a discounted iPhone 7 or iPhone 8 next year, then that would have a positive impact on Apple's iPhone average selling prices.

The importance of iPhone average selling prices

Apple ultimately has two ways that it can grow iPhone revenue. It can either get customers to buy, on average, more expensive iPhones, which means increased revenue for a fixed number of iPhones sold, or it can take actions to drive up iPhone unit shipments.

Ideally, Apple wants to achieve both by bringing compelling products to an increasingly wide range of price points. The company seems to have succeeded in getting customers to buy the iPhone X, which starts at $999 and goes all the way up to $1,149, which is sure to help the iPhone average selling price story in the current product cycle.

The fresh new design of the iPhone X could also encourage significant iPhone upgrade activity as well as for increased Android-to-iPhone switching activity.

However, Apple shouldn't miss opportunities to encourage its "mid-end" customers to buy higher-priced midrange iPhones as well, since there is substantial demand for such products -- we're talking tens of millions of units annually -- among iPhone buyers.

When one considers the potential impact that a mere $20 increase in average selling prices across, say, 100 million iPhone units sold annually can have to revenue (that's a $2 billion increase), it's not hard to understand why iPhone average selling price increases can have a huge impact on Apple's business.

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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 the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.