Can iPhone ASP Recover?

Yesterday Apple announces its fiscal Q4 2016 earnings report. As expected iPhone revenues continue to dominate total revenue. And there is one number that every analyst has been tracking, that is derived from reported iPhone revenue and unit sales, the Average Selling Price (ASP).

Why is this important number?

While the volume of iPhones sold gives an indication to adoption the ASP number tells specifically about the demand for the newly announced iPhone 7 and iPhone 7 Plus models.

Take a look at this chart on the history of iPhone ASP over past three years (with the line added to visualize ups and downs). I updated this from my last article to show Q4 numbers and projected 2017 Q1 numbers.

As I pointed out last time, the ASP was expected to move up this quarter and next. But did it go up enough past quarter when iPhone7 was available for sale for only a short time and will it go up high enough the current quarter that includes Holiday buying season.

Most analyst predictions for the Q1-2017 ASP (issued before the earnings came out) expect $674 to $679 in Q1. Last time Apple had a full version upgrade was from iPhone 5S to iPhone 6 in Q4-2014.  Then ASP jumped from a low of $564 in Q2 to $687 in Q1, a 22% jump.

An expectation of $679 from $595 is a more modest 14% jump. But the reported ASP shows challenges to hitting the $674 to $679 target. This is because of one primary reason

The storage capacity of lowest priced iPhone 7 model is 32GB vs. 16GB in iPhone 6 and 6s. This tempted more customers to pick that version even though they could afford to pay for higher capacity. That is more customers see 128GB is too much for their needs to pay $100 more, unlike last time when they saw far more value from 64GB.

Apple is trying to mitigate that by allowing Jet Black models only in 128GB and 256GB capacity points. They also increased the price of iPhone 7 Plus by $130 vs. $100 in iPhone 6 Plus. While these two mitigating factors helped, it is a lot more likely that most models sold in Q1 will be the 32GB models, suppressing ASP.

Apple set a record $691 ASP in same Q1 last year. This time it is going to come in closer to $640  to $650.  It turns out there is such thing as diminishing marginal utility when it comes to iPhone storage capacity.