Why LCDs Make More Sense Than OLEDs for the Apple Inc. iPhone 7

Highly respected and generally reliable analyst Ming-Chi Kuo with KGI Securities recently argued that Apple will continue to use liquid crystal displays (LCDs) rather than active matrix organic light emitting diode (AMOLED) displays in its iPhones for the foreseeable future.

Forbes contributor Gordon Kelly, in a column that received nearly 126,000 views, argued that this is "bad news." He argues that a move to AMOLEDs could enable significant power-efficiency gains (citing an analysis published by AnandTech) relative to LCDs, allowing for Apple to increase display resolution while at the same time improving device battery life.

Although I can sympathize with this argument, I think it's important to understand why Apple would prefer to stick with LCDs rather than move to AMOLEDs if it can without sacrificing product quality/competitiveness.

Cost and manufacturability are keyMuch has been made about Apple's ability to capture the lion's share of the profit pool available in the smartphone market (one estimate puts it at 94%), and this is not by accident. Part of it is due to the fact that Apple has captured a very large portion of the market for expensive smartphones and seems to be continuing to gain share.

Another part of it, one that I think that many ignore, is that Apple does a very good job of keeping its cost structures in check, enabling a relatively high gross profit margin profile.

A significant part of maintaining good cost structures is to source components that can be manufactured at extremely high volumes at good yield rates in order to make sure that costs are as low as possible.

Now, keep in mind that the market for smartphones is quite competitive, so Apple faces the complex task of trying to balance features with cost/manufacturability, particularly since it manufactures and sells high-end phones at a scale that no other company comes close to matching.

Indeed, even though smartphone unit share leader Samsung sells more phones than Apple, Apple easily sells many more high-end phones and makesa lotmore money doing so.

So, if Apple doesn't deliver a competitive enough product, then this could result in market-share loss. At the same time, if the company recklessly includes every whiz-bang new technology, then Apple's product costs could go up substantially and/or the company could face product shortages (leading frustrated customers to buy competing devices).

What the does this have to do with LCDs and AMOLEDs?According to a relatively recent report from market research firm IHS, AMOLEDs are generally more difficult to manufacture than comparable LCDs, suggesting that the former are more expensive to manufacture (and thus procure) than the latter (with all else being equal).

Assuming that AMOLEDs are still more expensive to manufacture than LCDs, and assuming that Apple has a target iPhone cost structure/margin profile in mind (it almost certainly does), moving to AMOLEDs could mean that Apple would need to sacrifice features/quality in other, potentially higher-impact, areas of its next generation iPhones.

Given that the current iPhone displays are among the best in the market, and given that Apple and its display partners aren't sitting still with respect to trying to improve LCD image quality/efficiency (Apple pays a lot of smart people to work on next-generation display technologies), I wouldn't be so quick to say that it is "bad news" for Apple's competitiveness if it doesn't transition its iPhone displays to AMOLEDs anytime soon.

Indeed, it's always important to keep in mind that Apple is a company that has very little difficulty attracting some of the industry's best talent and is able to exert significant influence on its suppliers to get things done.

Investors need to trust that when the iPhone 7 launches, it will have a best-in-class display and, to be blunt, be a best-in-class device worthy of its price tag.

The article Why LCDs Make More Sense Than OLEDs for the Apple Inc. iPhone 7 originally appeared on Fool.com.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.