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Apple Updates: Why iPhone Margins May Improve Despite Higher Costs; iPhone 6S Sales

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Apple had an interesting week, reporting record sales of 13 million units of its new iPhone 6S over the opening weekend, while launching Apple Music and its broader content ecosystem in China, its second biggest market. In other news, IHS analysts published their tear-down analysis for the new iPhone, estimating that it was slightly more expensive to build compared to its predecessor. Apple’s stock remained relatively volatile, falling by about 4% through the last week. Below, we take a look at the news that mattered for Apple and how it could impact the company going forward.

Trefis has a $140 price estimate for Apple, which is about 30% ahead of the current market price.

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New iPhone Sees Higher Costs, May Not Impact Margins

The bill of materials for Apple's new iPhone 6S Plus 16 GB comes in at about $231.50, according to a preliminary estimate from IHS. This marks an increase of about $16 over last year's iPhone 6 Plus. While Apple has generally dismissed cost breakdowns of its products as being imprecise, these numbers do provide a sense of a devices key costs drivers and how margins could trend. This time around, the cost increase is attributable to more durable casing materials and the 3D-touch system with the Taptic Engine. However, despite the higher expenses, we believe that Apple could see iPhone margins remain the same or potentially grow for two reasons. Firstly, Apple has maintained its storage mix strategy (16 GB, 64 GB, 128 GB) in a move that will steer customers toward the much higher-margin 64 GB models (the incremental costs of 64 GB model are estimated at just $17, although it is $100 more expensive for customers). The shift to the higher tier models is likely to be more evident this time around, given the higher-resolution cameras and video recording capabilities of the new devices. Secondly, Apple has introduced a new installment scheme dubbed the iPhone Upgrade program, which effectively allows Apple to shorten the upgrade cycle for iPhone, while also selling its high-margin Apple Care protection plan. (related:Apple's iPhone Installment Plans: Good For Customers, Great For Apple)

Record 13 Million iPhone 6S Units Sold During Opening Weekend

Apple announced that its latest iPhone 6S and 6S Plus devices sold about 13 million units during the first weekend of availability, surpassing the 10 million units sold during the launch of the iPhone 6 series. A bulk of the increase is likely to have come from China, which figured in Apple's initial launch schedule this time around, unlike the last year when it hit the Chinese stores about a month after the U.S. launch. China is now the single largest market for the iPhone. To be sure, opening weekend sales may not be representative of the devices longer-term sales trajectory, since initial sales are a function of manufacturing capacity, the initial supply that Apple has available at launch as well as the number of initial launch countries. With that said, Apple does seem to have maintained a high level of excitement around the product’s roll out and it should be interesting to see the impact it has when Apple reports Q4 FY’15 earnings later this month.

Apple Music Launches In China

Apple recently launched Apple Music in China, its most important market outside the United States. Apple’s strategy with its content business is typically two-fold. Content helps to keep customers hooked on to their Apple devices, effectively increasing switching costs, while also providing an incremental earnings upside from the share of content revenues that Apple gets to keep. While Apple has priced Apple Music at a rate of just RMB 10 a month (roughly $1.57 vs. $10 in the U.S.), the service could face challenges in ramping up, since Chinese customers often tend to prefer local services, given that content is often better curated to their tastes.

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