Apple iPhone: Will the new 5C boost profits?
(MoneyWatch) Apple's (AAPL) newly announced iPhone 5C could give the technology giant a bigger financial boost than its low cost might suggest.
Apple's profits have fallen in recent months, largely because many people were choosing older and cheaper versions of the iPhone and the iPad mini, which costs less than the larger iPad. The company's margins on iPhone sales have declined steadily and significantly over the last six to nine months. Not only have there been alternatives on the high end, but the low end of the line -- two generations of older models made available for as little as no initial payment from consumers -- pulled down average sales prices and, with them, gross margins.
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But with the 5C, Apple has a new, cheaper device that can run the company's latest iOS 7 software and comes with the same size screen as the 5S. At $99 for the base model, the 5C is a low-end phone by Apple standards. Yet it could still lift the company's margins and, therefore, profit.
First, the iPhone 4S will still be available for no money down. However, there's a significant difference in screen size and capabilities between the 4S and the 5C. Apple may well see fewer people take the cheapest option and go for the 5C instead. That would effectively boost per-unit revenue.
Second, Apple's production costs for the 5C could be lower than for its pricier phones. The 5C shares the same screen size as the 5S. In semiconductor manufacturing, the longer displays and chips have been produced, the cheaper they generally are to make. That should let should help Apple drive down display costs, which are one of the most expensive components in a phone.
In addition, the 5C's plastic case will be cheaper than the 5S's aluminum housing. The new phone's A6 chip also has been in production for a while and could achieve greater cost efficiencies that were available for the 5.
The upshot? If Apple has worked the design and manufacturing right with the 5C, it could a significant dip in unit costs, which would also help boost margins. Will the company return to the margin levels it had a few years ago? Unlikely. But by raising the average price and lowering the average cost, it may be able to stop the slide and bolster profitability.
Erik ShermanErik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.
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