Why Apple Created The iPhone SE

Apple recently released their much anticipated second generation iPhone SE and so far its definitely lived up to the hype. The budget device’s starting price is just $400 but has features like wireless charging, a True Tone display, stereo recording, and portrait mode. Features that, just a couple years ago, were only available on flagship iPhone models. But the new SE doesn’t only have features from older iPhones, it also shares the same A13 Bionic chipset as the current flagship iPhone 11 Pro which sells for $1,000. And the reason why that’s so important is because budget smartphones almost always compromise on graphics and processing performance since they typically have cheaper, slower chipsets. But that’s changed with the iPhone SE, and it’s not only causing a huge disruption in the smartphone industry, but it’s also leading people to wonder why Apple would even create this device in the first place. Why, after increasing the flagship iPhone’s starting price from $650 to $1,000 over four years, would they then introduce a $400 iPhone that performs just as well as the $1,000 model? At first glance it may appear counterintuitive, but the iPhone SE is likely the last phase of a clever business strategy Apple has been working on for years. And today, we’re going to find out exactly what that strategy is.

Now, some people may think this second generation iPhone SE really isn’t a big deal, since the first generation model was also $400 and shared the same A9 chipset as the flagship iPhone 6s. And while that’s true, you have to consider the climate of the smartphone market today compared to four years ago when the original SE was released. In 2016, the iPhone 6s wasn’t selling for $1,000 like flagship models do today. Instead, it was just $650. So a $400 iPhone, while more affordable, wasn’t an unusual price point for smartphones back then, especially when it came to Android devices. Let’s just take a look at the prices of some popular smartphones from 2016. The Galaxy S7 retailed for $700, the Google Pixel was $650, the iPhone 7 was $650, and the OnePlus 3 was the years most affordable flagship at just $400. And keep in mind there were dozens of ultra-budget Android phones in 2016 like the Moto G4 that sold for just $200. So you can see why the $400 iPhone SE in 2016 wasn’t as much of an impressive release.

But a lot has changed in the last four years, and it‘s almost entirely because of Apple implementing a new smartphone business strategy. You see, Apple used to only release one iPhone per year. The first year was the original iPhone, the following year was the iPhone 3G, the next year the iPhone 3GS, etc. It actually took Apple six years to begin releasing two iPhone models per year. And it started with the iPhone 5s and 5c in 2013. The 5s sold for $650 off-contract, while the 5c was $550. And when you considered what you got with the iPhone 5c, the $100 savings wasn’t really worth it. The 5c was essentially an iPhone 5 inside a colorful plastic shell. So for most people, spending $100 more for a premium 5s with new technology was definitely the better choice. But Apple expected higher demand for the 5c, which resulted in supply chain cuts just one month after it went on sale, and Tim Cook eventually admitted that they’d overstocked the iPhone 5c while having shortages of the 5s. Now since the 5c ended up being the most unsuccessful iPhone release, Apple wouldn’t create another budget iPhone model until the first generation iPhone SE four years later. But despite Apple not releasing a budget iPhone a year after the 5c, their business strategy at the time didn’t change.

Apple still released two new iPhones in 2014, they were simply both flagship models, the iPhone 6 and 6 Plus. And this strategy continued in 2015 with the 6s and 6s Plus, and in 2016 with the 7 and 7 Plus, but in 2017, Apple began implementing a new long-term strategy to combat the issues the company was facing at the time.

And it’s really important to recognize what those issues were in order to understand why Apple had to change their business strategy. First was the problem with emerging markets. Tim Cook invested heavily in China and India back in 2015 to try and combat smartphone market saturation that would eventually lead to slowing hardware sales. Cook figured that if Apple could capitalize on the untapped market potential of China and India, then growing iPhone sales in those countries could offset or even exceed slowing sales elsewhere. But that strategy didn’t pan out the way Cook expected, even after visiting both countries to 2016, mainly due to their devices simply being too expensive.

So that brings us to the second problem, slowing revenue growth. Since hardware sales were expect to decline, Apple had to act quickly and find ways to make up for lost revenue. One of which was increasing the price of their products. If Apple could make more money from each iPhone sale, then they could still achieve revenue growth even if sales began to decline. Another promising way to make money was by introducing services that users pay to access. For example, Apple Music, Apple Arcade, Apple News Plus, and Apple TV Plus.

So considering those problems and potential solutions, Apple crafted a new business strategy to not only continue generating strong revenue, but to force their competition into a corner. The company recognized that their users were already accustomed to paying a premium for products, and were unlikely to switch to competing platforms like Android since they were already so deep in Apple’s ecosystem. So with this unique advantage, Apple made the decision to raise the iPhone’s price to $1,000 in 2017 with the release of the iPhone X. That was a $350 increase over the previous year’s iPhone 7. But that wasn’t all, Apple also introduced the 8 and 8 Plus priced at $700 and $800, which were still more expensive than the $650 iPhone 7. But what’s even more interesting is how this strategy effected the competition.

Remember earlier when I covered the prices of popular Android phones in 2016? Well, when Apple raised the price of their phones, that essentially gave the competition permission to do exactly the same thing. And in just a couple years the OnePlus went from $400 in 2016 to $700 in 2020. The Google Pixel went from $650 in 2016 to $800 in 2019. And the Samsung Galaxy S went from $710 in 2016 to $1,000 in 2020. Not to mention the new Galaxy S20 Ultra which costs $1,400, a higher starting price than any iPhone ever made. And while those companies are enjoying increased profit margins, they walked right into the trap Apple set back in 2017. Because just like having the unique advantage of sharply increasing the price of their phones, Apple now has the unique advantage of sharply decreasing the price of their phones. And it has everything to do with their custom chipset which is created in-house and is specially designed to power iOS devices. It all started with the iPhone 4, and Apple’s been enjoying the benefits ever since.

It’s the reason why iPhones have been outperforming Android devices for years despite having half the RAM and half the processing cores. The chipset is so well optimize and efficient because it only has to run on Apple’s own devices. Whereas companies like Samsung, Google, Huawei, OnePlus, and others, have to source their chipsets from third parties like Qualcomm who’s forced to design a one-size-fits-all solution that’s capable of powering thousands of different Android devices. Which makes it impossible to optimize the chipset for each individual device. But that’s not the only benefit, Apple is also saving money since they don’t have to pay a middleman like Qualcomm, and they can take advantage of economies of scale in the manufacturing process. And that’s exactly why Apple was able to cause a huge disruption in the smartphone market with the $400 iPhone SE that outperforms the $1,400 S20 Ultra.

And that marks the last phase of Apple’s three year smartphone strategy. Force the competition to raise their prices, and then undercut even the most expensive Android device with an iPhone that costs a fraction of the price. This will not only cut into Androids market share, but it will be one of the most popular phones to buy in emerging markets like India. Especially if they’re manufactured in the country and are exempt from tariffs and import taxes.

But there’s another way Apple wins with this strategy, as the company continues to focus on growing their services business, they’ll need new users to sign up and pay for those services. And what better way to do that than to create a low cost, high value iPhone that appeals specifically to Android users, budget smartphone shoppers, or customers in emerging markets that couldn’t afford an iPhone in the past. Because I think most people buying the iPhone SE won’t be existing iPhone owners, but rather new customers who either switched to Android years ago, or never gave the iPhone a try to begin with.

It’s impossible to say with certainty that this strategy will end up playing out the way Apple expects, but I think it’s the best chance they’ve had in years to finally steal market share away from Android, and to aggressively compete in price sensitive markets like China and India.