Why the Next iPhone X Could Be More Affordable

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Apple's (NASDAQ: AAPL) iPhone X is expensive, mostly due to the elevated costs that the company itself faces with manufacturing the device. Not only are OLED panels significantly more expensive than traditional LCD displays, Apple had also initially faced difficulties in ramping production due to complexities in assembling TrueDepth camera systems. Generally speaking, low yields for any component drive up average costs.

The unfortunate consequence of slapping a $999 starting price on the device has been worse-than-expected demand, with a meaningful number of consumers believing the device is "too expensive," according to a recent survey conducted by Piper Jaffray. The good news is that Apple seems to be making progress with its cost structure.

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Costs are coming down

DIGITIMES reports that Apple has been able to reduce the manufacturing bill of materials (MBOM) for iPhone X recently, and the second-generation iPhone X's MBOM could be at least 10% less than the first-generation model. The first-generation iPhone X MBOM was approximately $400 at launch, according to the report. For reference, supply chain researcher IHS Markit had previously estimated that it cost about $370 to build iPhone X.

Apple is widely expected to release three new iPhone models this year: a 5.85-inch OLED model, a 6.45-inch OLED model, and a 6.1-inch LCD model. The 5.85-inch model would be a successor to the current iPhone X, and DIGITIMES believes that Apple will position that iPhone as the most affordable of the trio, taking advantage of those cost reductions. The company was reportedly exploring a 5.8-inch LCD iPhone due to cost concerns, but that project appears to have been scrapped now that Apple has been able to bring down costs.

The Mac maker has also reached a new supply agreement with Samsung for OLED panels, according to the report, after failing to meet its previous purchase commitments. The new agreement will insulate Apple from any potential surprises regarding cost increases.

What will Apple do with the savings?

It's worth pointing out that while DIGITIMES could very well be correct with its assessments of Apple's cost structures, the outlet really has no way to tell what Apple will do with those cost savings. Apple can either give those savings back to consumers in the form of a lower price, or keep them for itself and boost its gross margin. Supply-chain leaks are a fact of life for Apple, but pricing strategy is something that's decided in Cupertino, far from DIGITIMES' ears on the ground.

Still, it's becoming increasingly clear that fewer people are willing to pay $1,000 for a smartphone than Apple had initially hoped. The challenge for Apple will be how to justify a lower starting price in terms of marketing and messaging after charging so much last time around.

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Evan Niu, CFA owns shares of Apple. 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.