Analysis suggests Apple makes lower margin on iPhone X than earlier models despite high price

An estimate of component costs for the iPhone X suggests that, despite the high price, Apple may actually make a smaller profit margin on the new flagship device than it does on the rest of the range.

The total cost to Apple of the components in the iPhone X is said to be more than twice that of last year’s iPhone 7 …

The WSJ cites the comparison almost in passing in a piece on the economics of the new flagship iPhone.

The starting price of the new flagship iPhone X is about 50% more than the $650 starting price of last year’s iPhone 7 [but] the components cost an estimated $581, up from $248 for components in the iPhone 7, according to Susquehanna International Group. The gap suggests Apple’s profit margins on the new device are slimmer than on existing lines.

The numbers should probably be taken with a large pinch of salt, for a couple of reasons. There’s the usual one: that even after a teardown analysis identifies all the components, nobody outside Apple and the suppliers knows the price negotiated by the Cupertino company. Plus this time the company is using supply-chain sources, rather than a teardown, to identify the components.

But the claim that Apple’s margins are tighter than usual on this model may be accurate. In addition to the estimate of far higher component costs, it’s likely that the more complex design also increases assembly costs. Plus any radically new design incurs higher R&D costs than iterative models.

Apple itself said that the iPhone X represents the future of the iPhone, and it may well view this model as an investment in a few direction, willing to make some sacrifice to margins now for the longer-term benefit.

That said, Apple guards its margins pretty fiercely. While I can believe it would be willing to accept a modest dip, I doubt that it amounts to much of one. But with no iPhone X sales in the current quarter, we’ll have to wait to hear the company’s guidance for revenue and gross margin for the holiday quarter to get some insight into the actual numbers.

The focus of the WSJ piece, incidentally, is on a 19th Century economic theory that says that, for certain high-status products, a higher price can actually generate greater demand than a lower one. One product management company is suggesting that this will apply to the iPhone X, and that far from people being deterred by the high purchase price, that may stimulate sales.

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