Part 2/2: With iPad Pro 9.7 and iPhone SE, Apple Gets “9-10% of the Way There”*

*(For the year; in annual revenue terms; maybe. More on this later.)

Part 2 of 2 covers iPhone SE, and “adds it all up.”

Part 1 of 2, in all its TL;DR “glory”, is here.

How Apple Got to 900+ Million Sold: iPhone, 7 B.I.P. (Before iPhone Phablet) – Present

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Prior to Apple’s September 2014, “extremely late” move to up-size iPhone (for the second time), it sold quite a few smartphones that were (1) iPod nanos by comparison and (2) really quite popular, despite blogger/pundit complaints spanning no 3G, no LTE, accursed sealed-in battery, insufficient SoC RAM and no expandable memory, to say nothing of the closed OS.

iPhone’s signature 3.5″ diagonal display, albeit with a quadrupling of pixels for iPhone 4, persisted from June 2007 all the way through its flagship replacement in September 2012 and most-of-world discontinuation (in the form of the iPhone 4s) in September 2014. By the quarter before iPhone 5’s introduction (FQ3 2012), Apple had sold 244 million 3.5″-screened iPhones.

iPhone then underwent a “transitional” phase by adding “one row of icons” and taking on a 16:9 widescreen aspect ratio, resulting in – until recently – the iPhone 5/5C (on sale Sep. 2012 – Sep. 2015) and iPhone 5S (Sep. 2013 – Mar. 2016). By FQ3 2014, just prior to Apple’s gigantic iPhone 6 launch, Apple had managed to sell an additional 307 million iPhones.

However, not all of those 307 million iPhones possessed the newest, 1134×640, 4″ displays. Perhaps not even most. As Tim Cook and Luca Maestri would say on more than one conference call, iPhone 4 and 4s continued to find a substantial audience as they slowly faded from Apple’s lineup as the “n-1” (generation-old) and “n-2” (two-generations-old) iPhones. Indeed, iPhone GAAP-basis ASP trending (including four fiscal quarters under the $600 level) essentially proved this to be the case (since the newest base-model iPhone, pre-6 Plus, has typically retailed for $649US unsubsidized).

Apple Lets Go of Its Smaller-Screened Past…or So We Thought

“Smaller iPhones” finally, and precipitously, fell from iPhone consumer favor with the arrival of the 1334×750 4.7″ iPhone 6 and 1080p-screened, 5.5″ phablet-sized 6 Plus. Suddenly, ASP bounced strongly, exceeding $650 starting FQ1 2015, and hasn’t been below that level to date despite fierce ForEx headwinds. In the six fiscal quarters since FQ3 2014, Apple has sold 345 million additional iPhones, bringing the grand total to around 896.5 lifetime units sold – not counting any iPhones sold from late December to the present.

While consumer preference for smaller iPhones has dramatically waned, it hasn’t disappeared. About halfway through Apple’s March 2016 event, Greg Joswiak mentioned “this last year we sold over 30 million 4-inch iPhones”.

On the one hand, that’s just not very impressive in context. Apple sold approximately 230M iPhones in 2015 whether you use the fiscal or “three months later” calendar year, meaning 4-inch iPhone share was as low as 13% for the cited 12-month period. That’s an incredible mix-shift towards iPhone 6/Plus and the “s” versions of both.

On the other hand, per Tim Cook, approximately 60% of iPhone owners had yet to upgrade to an iPhone 6 and up as of the end of FQ1 2016. Some will eventually spring for an iPhone 6s or 7 generation – but some may not. For those unknown millions of “holdouts” along with entry-level and new-to-Apple consumers, Apple took the existing 5S design and, save for the screen and front camera and Touch ID authentication speed, overhauled most everything else within the casing to iPhone 6s-spec, most notably the A9 SoC and 12MP/4K-recording-capable rear camera (oh, and full in-store + in-app Apple Pay support). It’s the first true modernization of an “old” iPhone, with a $50US price reduction to boot.

iPhone SE is the antithesis of the iPad mini 3. It’s value-add with a vengeance, bringing one of the fastest smartphone SoCs in existence $200-250 down the price spectrum with very little notice to the competition.


iPhone SE Revenue Horseshoe Toss

So iPhone SE is pretty nice for a cheap iPhone and all. But will Apple’s interesting new product “experiment” have any meaningful revenue impact in its first year? I’m guessing…yes.

Rightly or wrongly, consumers and observers alike have long associated “cheaper” iPhones with “older” iPhones. I mean, this is has been going on since June 2009. The iPhone 5C, though a bit “new-looking”, did not meaningfully alter this formula, this “paradigm”. iPhone SE means to shatter it.

SE is targeted at multiple demographics, which often overlap. In no particular order:

1) New-to-iPhone users (Apple March Event, about 31:10 in). Looks like over a third lately. Seems like a lot.

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2) New-to-iPhone users in China. Around two-thirds of consumer share of, essentially, iPhone 5C and 5S sales in China? Seems like a good market to keep focusing on considering Apple’s overall Greater China market/opportunity, doesn’t it.

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3) Value-conscious consumers (as Joswiak alluded to). See also: China. Granted, it’s a much longer, tougher slog in other, lower-priced-smartphone-favoring markets, India being a very notable example. Then again, Apple’s been around quite long enough to know when major markets have a lower ceiling, and when patience can potentially pay off (example: Japan).

4) People who like being able to fully use their smartphone with one hand (as Joswiak alluded to). Remember those simpler, innocent days?

5) [Unknown] percent of 60% of the “iPhone 5s and older” installed base. Yes, smartphone/handset saturation was always going to be a thing eventually, but selling iPhones to the same people, and “more of the same people” (read: growing installed base) over and over again ain’t such a bad life. After all, repeat sales are the lifeblood of pretty such every megabillion corporation. (I would think.) Estimates as to the actual size of Apple’s “ready to upgrade to iPhone 6 and up” worldwide install base (a significant number of which already have) vary…but 300M or so (based on aforementioned iPhone unit sales from FQ4 2012 through FQ3 2014) certainly seems more than conservative enough. Launching iPhone SE and waiting to see how many of the 180M or so “smaller iPhone” owners decide that the SE is for them? Apple could do much worse.

Your opinion may vary, for good reason, but after throwin’ it all in my Mental Blender™, I’m thinking that the SE is good to grow this currently-30-million 4-inch iPhone market by at least 10% year-on-year, for this next 12-month interval anyway.

There will always be a market for Apple’s cheapest iPhones. When you take the smartphone equivalent of, say, a BMW 3-series, replace the nice-but-not-thrilling turbo 2.0L I-4 with the rip-snorting 4.4L twin-turbo V8 from the M5 (with better fuel economy – I mean, battery life – than before!), throw in a bunch of options, and cut the price by a neat 11% (based on US pricing), you’re going to attract buyers from all of the above demographics.

New-to-iPhone buyers are presented with a handset that is superior to the 5s in every tangible way besides basic packaging, display resolution and a selfie camera. A handset that in raw performance terms, may be the fastest iPhone ever made (same horsepower as the 6s-series, less pixels to drive).

For the price-sensitive, iPhone’s unsubsidized price cuts just below the $400 psychological barrier.

The 180M or so on-the-fence owners of iPhone 5S and older units suddenly see a clear upgrade path forward within the same form factor – and really, what the heck is aesthetically wrong with the current form factor, which lacks the dreaded iPhone 6/s “camera bump”?

Not convinced by potential consumer interest? Apple has a potential ace up its sleeve. See, some of the 430+ or so carriers Apple works with (and takes iPhone orders from), and the over 210,000 points of sale for iPhone, should have healthy interest in the fairly-easy-to-market SE as well.

Given all of its captive markets (read: carriers), the nicer price should make it quite easy to improve channel fill YOY to get SE off to the best possible unit sales start. But there’s no reason to be “that cynical” – as it so happens, iPhone SE is still backordered as of the time of this post.

All in all, I think the only reasonable conclusion is that Apple’s betting on growth in the smaller iPhone segment, and early returns are providing validation.

Two Products, One Very Important Fraction of Apple’s Business

So, 33 million iPhone SE units. Assume 75% are for the base model to be on the safe side, resulting in an average ASP of around $425. That computes to a total of $14B in revenue.

Add the iPad Pro 9.7 revenue wild guess from Part 1 ($10B)…

…and iPad and iPhone SE – not counting AppleCare, accessories, app/media sales, etc. – could generate something in the neighborhood of $24B in revenue.

Around 10% of $230B doesn’t seem like a lot to Apple. But it’s very, very far from nothing.

In fact, I’d argue that a “niche”, more affordable smaller iPhone (read: a new smaller iPhone flagship) and a seemingly “less accessible” upmarket medium-sized iPad (read: a new smaller iPad Pro flagship) represent key, if understated, hardware growth pillars for Apple to expand upon for the next few years, at the very least.

Considering that it took iPod around three years before getting to a 10M+ unit/yr sales run rate

…and that iPad Pro and iPhone SE could conceivably combine for nearly 50M units sold in their first full year…

…there are worse ways to send off Apple’s humble Town Hall.

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2 thoughts on “Part 2/2: With iPad Pro 9.7 and iPhone SE, Apple Gets “9-10% of the Way There”*

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