A little more than a year after Apple (AAPL) discontinued the 4-inch iPhone SE, it’s reportedly prepping a larger successor.
In his latest scoop, Apple analyst Ming-Chi Kuo reports that an iPhone SE 2 featuring a 4.7-inch display will launch in Q1 2020 with a $399 starting price.
Kuo, who reported earlier this month that a new iPhone SE is in development, adds that the SE 2 will be powered by the same A13 Bionic system-on-chip found in the iPhone 11 and 11 Pro. But it will also reportedly contain 3GB of RAM — 1GB less than the iPhone 11/11 Pro; will feature a Touch ID fingerprint sensor rather than Face ID, and will have just a single rear camera.
And though actual production could end up being higher or lower depending on how demand trends, Kuo says, Apple has told suppliers to produce 2 million to 4 million iPhone SE 2 units per month, and that he expects Apple to sell 30 million to 40 million SE 2 units in 2020. For comparison, Apple reported shipping a total of 218 million iPhones in fiscal 2018, before it stopped breaking out iPhone unit sales.
It’s worth noting that Apple already sells a relatively cheap 4.7-inch iPhone: Following $150 price cuts announced during its September iPhone event, the 4.7-inch iPhone 8 starts at $449, while the 5.5-inch iPhone 8 Plus starts at $549.
But in addition to featuring a starting price $50 higher than what the SE 2 will reportedly sport, the iPhone 8 is powered by the A12 Bionic system-on-chip rather than the A13, and it has only 2GB of RAM. Should a $399 iPhone SE 2 launch, one has to think the iPhone 8 will be discontinued afterward.
Replacing the iPhone 8 with a cheaper and more powerful 4.7-inch iPhone would likely pressure Apple’s average iPhone selling price and gross margin a bit. But it could also provide a sales boost in cost-sensitive emerging markets, places in which Android typically has a very high market share and where Chinese OEMs such as Huawei, Xiaomi and Oppo have often been competing aggressively. And in time, some meaningful percentage of the first-time iPhone buyers who purchase an SE 2 could upgrade to a costlier iPhone model.
Perhaps just as importantly, while Apple continues to register strong services and wearables revenue growth, the company has more of an incentive to use cheaper iPhones to grow the installed base of iPhone users to whom it can cross-sell wearables and services.
During its June quarter, Apple’s Wearables, Home and Accessories reporting segment saw revenue grow 48% to $5.53 billion, thanks in large part to strong Apple Watch and AirPods demand. Services revenue, meanwhile, totaled $11.46 billion — up 15% excluding a year-ago gain related to lawsuit settlements. Both subscription services such as Apple Music and iCloud Storage, and transactional services such as App Store purchases, Apple Pay purchases and Alphabet/Google (GOOGL) search ad revenue payments, contributed to the growth.
This wearables and services growth, together with higher Mac and iPad sales, boosted Apple’s revenue 1% despite a 12% drop in iPhone revenue to $25.99 billion, as lengthening smartphone upgrade cycles continued to take a toll. But in spite of the revenue drop, Apple once more reported that its iPhone installed base — reported to be above 900 million in January — hit a new high.
It’s certainly no secret that Apple is looking to better monetize its still-growing iPhone user base via wearables and services sales. This year has seen Apple unveil four new services: the News+ news/magazine service, the Arcade gaming service, the TV+ video service and the Apple Card. And from the looks of things, Apple is exploring the idea of bundling at least a couple of its services.
On the wearables front, this year has seen Apple refresh the Apple Watch and AirPods, while cutting the starting price for the older Apple Watch Series 3 by $80 to $199. In addition, Apple is believed to be prepping new AirPods that support noise cancellation, and reportedly plans to unveil its first augmented reality glasses during the first half of 2020.
Persuading a brand-new iPhone user who just bought a low-cost model to also buy a Watch or AirPods, or to sign up for a subscription service or two, often won’t happen overnight. But Apple’s track record to date for cross-selling such offerings bodes well for its chances to get a lot of them to eventually do so.
Get an email alert each time I write an article for Real Money. Click the “+Follow” next to my byline to this article.