Will the Apple Inc. iPhone 8 Really Start at Just $870?

By Ashraf EassaMarketsFool.com

Analyst Steve Milunovich of UBS just put out a note in which he says that Apple's (NASDAQ: AAPL) upcoming iPhone 8 -- the premium model with an OLED display and other goodies not expected to be found on the standard models -- will begin at $870 for a variant with 64 gigabytes of storage capacity.

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An upgraded version, with 256 gigabytes of storage capacity, would be priced at $1070, he says -- a whopping $200 premium for the additional storage space.

Image source: Apple.

Let's look at what such a pricing scheme would mean for Apple's business and whether it ultimately makes sense.

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Low base price, high premium for additional storage

At $870 for the base model, Apple would be charging a $221 premium over what the current base iPhone 7 model with 32 gigabytes of storage sells for, and just a $101 premium over what the base iPhone 7 Plus model with 32 gigabytes of storage goes for.

That, to be blunt, seems rather low, considering that the iPhone 8 is probably going to be substantially more expensive to build than either of the more mainstream iPhone models, the iPhone 7s and iPhone 7s Plus.

To illustrate, compared to the iPhone 7s Plus (which, itself, is likely to be more expensive to build than the iPhone 7s): The iPhone 8 should have an OLED display rather than a cheaper LCD, a relatively pricey stainless steel frame (the iPhone 7s Plus could have an aluminum frame), more feature-packed camera subsystems, 3D sensing capability, and a substantially pricier 3D Touch implementation necessitated by the inclusion of an OLED display.

If we compare a hypothetical iPhone 8 with 64 gigabytes of storage to a hypothetical iPhone 7s Plus with 32 gigabytes of storage, I wouldn't be surprised if the bill-of-materials cost delta between the 64-gigabyte iPhone 8 and the 32-gigabyte iPhone 7s is quite close to the rumored pricing delta.

At $1070 for the 256-gigabyte model, Apple's margins should be quite a bit better, but customers might have less incentive to step up from the 64-gigabyte iPhone 8 to the 256-gigabyte iPhone 8 than they do for stepping up from the 32-gigabyte iPhone 7s/7s Plus model to the 128-gigabyte iPhone 7s/7s Plus.

I'm not buying it

I don't think it makes sense for Apple to price the base model of the iPhone 8 relatively low while charging a lot for an increase in storage capacity. Instead, it would make sense to charge more for the base model, and then offer customers a nice deal on models with higher storage capacity.

By having a relatively pricey base model (say, between $969 and $999), Apple doesn't have to worry as much about seeing a reduction in its gross profit margins if a customer opts to go for a 64-gigabyte iPhone 8 over, say, a 128-gigabyte iPhone 7s Plus. When a customer opts for Apple's most premium iPhone, Apple needs to be sure that it enjoys profitability commensurate with the level of innovation that it's delivering.

Additionally, with all the rumors that the iPhone 8 will be supply-constrained around launch, it makes sense for Apple to try to maximize its profit per unit, especially since it's likely to be able to sell every unit it can produce (for a while, anyway).

Then, if production bottlenecks ease and production costs go down, Apple could conceivably cut prices mid-cycle, if necessary, to stimulate demand.

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