The Nikkei Asian Review dropped a bomb on iPhone lovers today when they predicted that Apple was going to move to a three-year product cycle versus the two-year cycle it’s on now. This is big news considering that not only did Apple critics not see this coming, a lot of them are calling for Apple to move to a yearly refresh. A move that I tried to take a look at a couple of weeks back. I would summarize that analysis with a big “Don’t hold your breath.”
If Apple assumes that the iPhone may actually be entering a period of slow growth and that moving to a three-year cycle won’t hurt sales, this would be a great move financially. But the impact to iPhone sales in the third year might be a big open-ended question at this point. It’s possible that sales in year three could take such a huge nose-dive that any gross margin savings that they gained in years one and two could be erased.
I’m guessing that whether or not the iPhone moves to a three-year cycle depends on how the yet-to-be-unveiled iPhone (September 2016 model) does next year. If unit sales remain stable in the third year, this could become the new norm.
Since I had already created a financial model to play around with spreading overhead, I decided to plug in the specs for a three-year model. Assuming that Apple’s iPhone volume stays fairly constant, they would pick up 2.7 percentage points in gross margin and make an additional $23 per iPhone. That is huge.
I’m guessing that whether or not the iPhone moves to a three-year cycle depends on how the yet-to-be-unveiled iPhone (September 2016 model) does next year. If unit sales remain stable in the third year, this could become the new norm.
Since I had already created a financial model to play around with spreading overhead, I decided to plug in the specs for a three-year model. Assuming that Apple’s iPhone volume stays fairly constant, they would pick up 2.7 percentage points in gross margin and make an additional $23 per iPhone. That is huge.
Apple wouldn’t be able to reduce by $23 from any single component through cost savings. They could possibly find $2 in ten different areas. Or what I think is more likely, they may add something new that is relatively expensive and keep material and gross margins about where they are now. They could justify adding this magical new component by spreading overhead over an extra year.
I should note that the favorable impact of going to three years doesn’t equal the negative impact of going to one year. That’s because the third year is only one-third more volume on a percentage basis. Apple would have to double their overhead absorption volume by going to four years to equal the 4.1 points down that going to one year resulted in. But I’m sure a four-year product cycle is never going to happen. I’m even a little skeptical that a three-year cycle will ever materialize.
Related
Refreshing the iPhone Annually - the Numbers
I should note that the favorable impact of going to three years doesn’t equal the negative impact of going to one year. That’s because the third year is only one-third more volume on a percentage basis. Apple would have to double their overhead absorption volume by going to four years to equal the 4.1 points down that going to one year resulted in. But I’m sure a four-year product cycle is never going to happen. I’m even a little skeptical that a three-year cycle will ever materialize.
Related
Refreshing the iPhone Annually - the Numbers
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