The new 5G device exemplifies Apple’s hardware approach
Since its launch in 2016, the iPhone SE line has been a way for Apple to offer a more affordable smartphone — and after six years, these devices have proven successful in achieving that goal, attracting millions of new users who wouldn’t normally be able to afford an iPhone. So, it came as little surprise on 8 March that Apple announced an upgrade to its iPhone SE design, featuring 5G connectivity and its latest A series processor (see Instant Insight: Apple Debuts New iPhone SE, iPad Air and M1 Ultra Chip).
The new, third-generation iPhone SE retains much of the industrial design of its predecessor, which itself borrowed the design of the iPhone 8 introduced in autumn 2017. It enters the iPhone line-up with a slight bump in starting price, at $429 — $30 more than the previous model. How did Apple end up with this design and cost configuration? Why did the cost go up by $30 rather than sticking to the familiar $399? Let’s explore how each component and design choice makes up the cost of this new iPhone.
All new phones are the result of design choices balanced against component costs and features. For the 2022 iPhone SE, this started with the decision to retain the older design carried over from the iPhone 8. This choice is very consequential — it determines several characteristics of the device, such as the size of the display, antenna structures and space need to house core electronics. Additionally, the decision to reuse the enclosure is crucial in lessening the cost of development, because most of the research and development cost has already been amortized, resulting in a lower cost of goods sold.
But there are penalties in using an existing design developed based on 4G technology. For example, the new 5G iPhone SE is limited to two physical radio antennas — most 5G smartphone designs support four. The device can therefore only support 2 x 2 multiple-input multiple-output (MIMO) antennas, a clear disadvantage when many other 5G phones on the market support two additional spatial layers of 4 x 4 MIMO antenna configuration.
Although the omission of additional antennas appears to hamper the potential 5G performance of the iPhone SE, we must realize that overall radio performance depends on the quality of the network connection, and sustaining a four-spatial-layer connection is only possible in ideal conditions — for example, in close proximity to the signal, with little network congestion. So the actual difference in performance for users may be harder to discern.
Using an older enclosure design yields cost savings; but there are upgrades to the latest iPhone SE that clearly carry additional costs. The most prominent is the inclusion of Apple’s latest A15 Bionic processor. This is also featured in the current flagship iPhone 13, and represents the most advanced and expensive silicon Apple has placed in an iPhone. The addition of the A15 Bionic processor is likely to create a need for more memory — we estimate an increase to 4GB from the previous 3GB.
From a bill of materials perspective, the A15 Bionic is estimated to have a silicon cost of about $33, whereas the A13 Bionic in the 2020 model cost $29. This represents a $4 increase in this major component slot, and along with the additional memory, the total may be closer to $8. Further, the upgrade from LTE to 5G has an enormous impact on the radio construction. We estimate that the modem and radio frequency system rose from $30 to $39, adding to the overall cost burden.
Considering the balance of component cost savings and penalties, we estimate that the overall materials cost of the 2022 iPhone SE actually increased relative to the materials cost of its predecessor. Our initial cost analysis, shown below, suggests that in total, the bill of materials cost rose by about $20 on aggregate. The $30 rise in the new device’s starting price therefore appears justified, given the cost increases resulting from the design and the decrease in implied profit margin to below 25%.
Now, if we plot the cost structure of the 2022 and 2020 iPhone SE models alongside their evolutionary predecessor, the iPhone 8, we come to an interesting facet of how Apple delineates its mainstream iPhone products to those of its SE line. Here, the famously successful Apple hardware business model comes into full view: flagship products with their novel designs command a healthy product margin at launch, whereas the affordable SE product line relies on existing hardware that’s updated incrementally to reinvigorate the iPhone product range.
The iPhone franchise is a 15-year-old success story that hasn’t yet been replicated. That success has a lot to do with the fundamentals of Apple’s hardware business. With careful planning and execution, Apple has filled its product pipeline to address a range of segments — from the most premium to the more affordable — while keeping its profit margins healthy. Its newest iPhone SE continues a predictable pattern of proven cost and design trade-offs, which reveal themselves in our bill of materials analysis to follow a familiar and successful playbook.
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