New Apple iPhone Line-up Will Test the Value of OLED
Unless you’ve been under a rock for the last week, you’ve heard about Apple’s new iPhone line-up, announced in an enthusiastic product launch this week. The Apple events these days seem to rival the “Everything is Awesome” scene in the Lego movie for over-the-top fandom, with an abundance of “amazing” and “incredible” features listed. The main iPhone products were just as expected, but the prices will push the limit of what consumers are willing to pay, especially considering the price premium for the models with OLED displays.The main display features of the iPhone are shown in the table below, ranging from the three-year old iPhone 7 at $449 to the flagship iPhone XS Max with 512GB at $1449 in the USA. Prices in most other countries are even higher.
Looking at the prices for the range of iPhone products, it’s clear that Apple is asking consumers to pay a big premium for the OLED displays in the XS and XS Max. The biggest gap in pricing between models in the lineup is the $250 gap between the XR and the XS, and the XS Max is the highest priced iPhone ever.
Compare the iPhone XS with the XR. Aside from the display and features directly related to the display, both phones have nearly identical features: the Apple A12 Bionic chip, Face ID, etc. The XS has a dual 12MP main camera, one for wide-angle and one for telephoto, while the XR has only a single wide-angle 12MP camera. That’s a difference that photo buffs will pay for, but the average phone user will hardly notice. As noted above, the XR beats the XS for battery life by 2-3 hours, a feature that the average phone user will surely notice.
Apple iPhone Product Line for Fall 2018
So is the OLED display on the XS worth $250? It does provide better resolution, with 2.7 million pixels vs. 1.5M, and has a slightly better screen to body ratio, which allows the XS to be slimmer and lighter than the XR. The relatively low resolution of the XR (lower than the 7+ and 8+) may be a factor in allowing better battery life, as the display’s aperture ratio is higher, and the computation load for video processing is easier.
We think that most consumers will decide that a smaller OLED display with less battery life is not worth the extra $250, and among those who do go for the higher prices, most of those will go all the way to the XS Max. The XS Max has an additional benefit of a dual SIM, which may be particularly popular in China, and the biggest model also can be a status symbol (much less expensive than a sports car). However, for the 64GB $1099 model, you can also buy a 65” 4K LCD TV ($599) from TCL, a 55” 4K LCD TV ($379) from TCL both at Best Buy and have a lobster dinner for 2 delivered ($109). It is true.
Our outlook for the new iPhone models is a split of 60% / 16% / 24% for the iPhone XR, XS, and XS Max. Such a split for the ~85M iPhone sales in the 2nd half of 2018 should allow Apple to increase its iPhone Average Selling Price (ASP) by $40. As shown in the figure below, Apple’s ASP increased by more than $100 with the launch of the iPhone X, and we expect that trend to continue in Q3. The iPhone price increase accounted for more than half of Apple’s Y/Y revenue gain in Q2 2018, so Apple needs to continue to increase ASP to drive revenue growth. The extra $40 of ASP will bring about $3.2 billion of revenue (and profit) to Apple in the fourth quarter of this year.
Apple does not issue any detailed information about its margins for individual products, but it should be clear that the XS and XS Max will carry higher margins than the XR. DSCC estimates that display panel costs for the XR/XS/XS Max will be $61, $90, and $100, respectively, and since the display panel will be the biggest component cost increase, the incremental margins on the XS (over the XR) and the XS Max (over the XS) will exceed 80%.
With the iPhone X launch a year ago, we (and most in the industry) predicted a rapid changeover by Apple from LCD to OLED models, but the configuration of the 2018 product line and other intelligence we’ve gathered from the industry suggest a slower timeline. We now expect Apple to continue to include one LCD model in its premium lineup in the 2019 product launch, and only to change to a full-OLED lineup in the 2020 launch. We expect Apple to add a third OLED supplier, BOE, in 2021 although there will be lots of talk about that before then.
The product launch event included many other topics, including a demonstration of several Augmented Reality (AR) apps. While some AR fans think that this is a prelude to an upcoming Apple AR device like glasses or a headset, I think it’s more likely that AR for Apple continues to be an extension of the iPhone. The installed base of the iPhone makes it an attractive platform for app developers, and iPhone users outspend Android users, despite being outnumbered by 4 or 5 to 1, as shown below.
Share of App Download and Spend, iOS vs Android
Rather than another new device, AR can help drive additional apps, which can enhance revenue in Apple’s Services sector. Services revenue is increasing at more than 30% Y/Y in the first half of 2018, and now represents the second-largest driver of revenue growth for Apple (after the iPhone ASP).
Beside the iPhone launches, Apple released a new Series 4 version of the Apple Watch with a larger display and enhanced features. The displays are more than 30% larger than the series 3, and now come in 40mm and 44mm sizes. DSCC sources have told us that the OLED displays in the Series 4 Watch are made by LGD using Low Temperature Polysilicon Oxide (LTPO) back planes. LTPO is an excellent choice to introduce on the Watch, because the oxide TFTs reduce the leakage current, allowing for reduced energy consumption on static images through reduced refresh rates.
In describing the Apple Watch Series 4, Apple COO Tim Williams brought in the President of the American Heart Association to highlight the new watch feature, and app that takes the users Electrocardiogram (ECG) when the user holds the contact wheel for 30 seconds. The app is approved by the US Food and Drug Administration (FDA), who issued a “de novo” approval, the first of its kind for an electronic wearable device.