Here’s How Apple Is Ripping Off Customers With Its Newest iPhones

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Apple charges consumers $0.78 per gigabyte on new iPhones, more than three times what it pays suppliers. Justin Sullivan/Getty Images

Apple’s newest entry-level iPhone, the iPhone XR, reminds me of a budget smartphone Apple attempted years ago but quickly discontinued: the iPhone 5C of 2013.

As you might have already noticed, both phones were a notch cheaper than Apple’s flagship models in their respective seasons. Also, unlike iPhone’s classic monochromic color scheme, both models came in a set of vibrant color options, a clear characteristic meant to appeal to a young, low-budge audience.

But the iPhone XR is not a second attempt at the low-cost market. Far from it, setting the starting price for a “budget phone” at $749 says more about Apple’s intention to break away from the budget phone market altogether. If you look at the price increases for each generation of iPhone in recent years, it’s clear that Apple is actually moving rapidly into the high-end market.

The interesting thing, though, is that just because iPhones keep getting more expensive doesn’t mean they cost Apple more to make. In fact, the cost of making iPhones has gone down significantly, thanks to price drops of a few key components.

One example is the NAND flash memory chips used in all iPhones to store photos, videos and apps. In recent years, prices for these chips have dropped sharply due to a surplus in the semiconductor industry. Currently, the per-gigabyte price hovers around 30 cents.

Apple doesn’t disclose how much they pay suppliers. But according to Wayne Lam, a leading mobile industry analyst with IHS Market, storage on iPhones costs Apple about 25 cents per gigabyte. Then, in store, Apple charges customers roughly 78 cents per gigabyte to upgrade to a higher-storage phone. (For example, a 512GB iPhone XS costs $200 more than a 256GB model.)

For comparison, Samsung charges customers 65 cents per gigabyte to upgrade from a 128GB Note 9 phone to the 512GB option.

All of this means a higher profit margin for Apple, especially on high-storage models. According to data compiled by Bloomberg, Apple now makes an average of $134 in profit on every iPhone sold (excluding assembly and software costs), up from last year’s $107. And a 512GB iPhone XS Max can make Apple $214 more than the same phone with 64GB of storage.

Semiconductor industry analysts have predicted that the surplus of NAND memory is going to cause another “downward pricing correction,” if not a full-on collapse, next year, pushing prices as low as 8 cents per gigabyte for Apple.

During Apple’s fourth-quarter earnings call last week, an analyst asked Apple CFO Luca Maestri why the price drops of NAND memory chips didn’t flow through to the customer end. Maestri said it’s true that Apple had reaped some benefits from the cost savings, but then quickly changed the subject to talk about Apple’s new products and services.

Many of those products and services come with extra costs as well. Although the newest flagship iPhone, the iPhone XS, was marketed as a $1,000 phone, consumers will likely pay a lot more to get the full experience of Apple’s latest technology.

Here are a few standard accessories/subscriptions iPhone users typically buy:

  • AirPods: $159
  • iCloud plan to back up iPhone storage: from $0.99 (50 GB) to $9.99 (2,000 GB) a month
  • Apple Music subscription: from $9.99 to $14.99 a month
  • iTunes purchases: $14.99 to $19.99 per movie or TV show

Altogether, these add up to an upfront cost of $1,658 (for a 512GB iPhone XS Max), plus a monthly bill of around $40, assuming a person buys one movie or TV show on iTunes every month.

At such a high per-device price, Apple is no longer worried about the number of iPhones it sells like most smartphone makers.

In the most recent quarter, Apple reported a 30 percent jump in revenue from last year, although it sold just as many iPhones as a year ago. During the investor call, Maestri even suggested that Apple would stop disclosing unit sales for iPhones in the future, saying that unit sales aren’t representative of the strength of its business.

Here’s How Apple Is Ripping Off Customers With Its Newest iPhones