Apple Defends iPhone Pricing, Again

Last year, Apple (NASDAQ:AAPL) made the then-unprecedented move of pricing the iPhone X at $1,000, inevitably sparking an ongoing debate about whether a smartphone should cost that much. CEO Tim Cook went on Good Morning America shortly after last year's unveiling in order to justify the price, arguing that most people buy phones on installment plans, spreading out the cost over time, and that smartphones have become "so essential" in people's daily lives that the devices provide more than enough value to justify the cost.

This article originally appeared in the Motley Fool.

Cook returned to the talk show this morning, in part to defend iPhone pricing again.

Playing defense

Pricing was the only real surprise this year, as many analysts expected Apple to reduce the flagship price in order to sell more units. Instead, Apple kept the iPhone X at the same $1,000 starting point while reaching even higher with the iPhone XS Max, which starts at $1,100. Furthermore, when you include the new 512 GB storage configuration, the most expensive iPhone now costs $1,449, up from $1,149 for a 256 GB iPhone X last year.

Responding to the inevitable question on pricing, Cook again pointed to installment plans where many people pay $30 per month, or "about $1 a day." Note that an installment plan for a fully loaded iPhone XS Max that has a $30 monthly payment still requires a $730 payment up front -- or about the full cost of another, less expensive iPhone. The chief executive also noted how iPhones have replaced a broad range of other product categories, from cameras to music players, among others. But that's been true for years, and that argument still applies to any modern iPhone.

The real reason why iPhone prices are going up

iPhone unit volumes have plateaued, and iPhone price increases have driven essentially all iPhone revenue growth over the past year. Additionally, phone upgrade cycles have been getting steadily longer for years, as most years' improvements are increasingly incremental. Much like what investors are seeing play out in other sectors like movie theaters and restaurants, when unit volumes are stagnant, companies often turn to price increases to compensate.

While adopting OLED displays did come with some significant cost increases, those costs come down over time. Apple is just keeping the cost savings instead of passing them along to consumers. In other words, keeping iPhone pricing high is just one of the ways that Apple is coping with slowing upgrades while also trying to maintain margins.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.