Apple’s Other iPhone Launch – Seeking Alpha

Rethink Technology business briefs for September 8, 2017.

iPhone 7s signals a subtle shift in marketing strategy

Source: Slashleaks

With all the excitement about iPhone X (or whatever it is to be called), the expected launch of Apple’s (NASDAQ:AAPL) iPhone 7s has been largely ignored. Unlike past “s” years, the iPhone 7s will not be the highest end offering in Apple’s iPhone lineup.

Apple has created in the X a sort of new “superpremium” class while iPhone 7s slips to … something less. In effect, Apple has segmented the market further with four separate lines of iPhone: X, 7s, and probably the previous generation 7 and SE.

I wouldn’t call the 7s a mid-tier phone. It isn’t, but Apple may be setting up the 7s to be the “value iPhone” as a new, still premium, but value priced model. I would not be surprised to see the 7s and 7s Plus introduced at price points below last year’s iPhone 7 models.

While the iPhone 6s contained some subtle redesign in the form of the strengthened aluminum unibody, I expect we’ll see no physical changes to the design. The emphasis on the 7s will be in reducing cost by refining manufacturing processes and minimizing changes.

I believe that Apple needs to do this in order to avoid cannibalization of 7s sales by the X. The way to do that is to have them address clearly defined market segments. Given the expected limited availability of X (for whatever raison du jour suits you), it would be a disaster for Apple to have X and 7s priced comparably.

Pulling the pricing of the two lines apart probably has to proceed from both ends. Apple’s pricing of X will almost certainly push over the $1,000 mark, but it can’t push much higher. Therefore the 7s price tier needs to come down.

Even after the 7s is replaced next year with a presumptive iPhone 8, Apple will likely continue the market segmentation strategy. This is part of the reason I don’t expect the superpremium iPhone to be called iPhone 8.

The 7s and 7s Plus will get the latest A series processor

Although the outward semblance of iPhone 7s will be unchanged, I expect significant upgrades under the hood. iPhone 6s was the first iPhone to adopt a processor fabricated using the new 14-16 nm FinFET technologies of Samsung (OTC:SSNLF) and TSMC (NYSE:TSM).

This year, fabrication on 10 nm is a must have for premium phones, and I expect Apple to introduce an A11 system on chip (SOC) fabricated on TSMC’s 10 nm process. Because of the desirability of economy of scale, both the X and 7s models will receive the same A11 chip. Thus, the 7s models will have completely redesigned logic boards.

With each new generation of A series SOC, Apple has produced processors faster than anyone else in the mobile device industry. And we already know that the A10X processor in the new iPad Pros is fabricated on TSMC’s 10 nm node and is extremely fast. I don’t doubt that the A11 will uphold this tradition.

Other 7s goodies

In May there were credible reports that Apple was developing an AI accelerator known internally as the Apple Neural Engine. The maturity of this project is unknown, but it might have been far enough along to incorporate into the A11.

This technology is already finding its way into mobile SOCs. At IFA 2017 in Berlin this year, Huawei revealed the Kirin 970 SOC. Huawei, like Apple, designs its own ARM based SOCs. Huawei disclosed that the 970 has a dedicated Neural Processing Unit for AI acceleration.

The A11 may also incorporate some hardware processing augmentation to support Apple’s new 3D sensing technology. However, I don’t expect to see that technology appear in the 7s. To do so would be inconsistent with minimizing changes and reducing cost. Also, the 3D sensor(s) in iPhone X will probably be an important discriminator not only versus the 7s but other smartphones.

New cellular modems may be in the offing for 7s as well. iPhone 7 used modems from Qualcomm (QCOM) and Intel (INTC) with maximum download rates of 600 and 400 Mbits/sec respectively. This year, most high-end smartphones will feature modems capable of 1 Gbits/sec downloads, even if network support is spotty. Apple will probably go to a new generation of modems both for increased data rates and lower power consumption.

7s investor takeaways

While iPhone X grabs the spotlight and all the attention, the 7s will likely be the real breadwinner, bringing home the lion’s share of revenue, and profit. The unit sales volume of the 7s is likely to be some large integer multiple of the X. Gross margins for 7s are likely to be higher than X as well. Apple has created X as a showpiece of advanced technology, a true superpremium device. If X is an exotic sports car, 7s is a premium family sedan.

Not everyone will be drawn to X. If Apple’s pricing strategy for the new iPhones is on target, that will be exactly as intended. Apple will be able to meet demand this holiday season with its own “good enough” value-priced smartphone. I remain long Apple and recommend it as a buy.

Apple is part of the Rethink Technology Portfolio.

Disclosure: I am/we are long AAPL, TSM, QCOM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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