Gavin Baker+ Your Authors @GavinSBaker Husband, Becky Painter. CIO, Atreides Management. Former PM, Fidelity OTC fund. No investment advice, views all my own. Oct. 20, 2019 4 min read + Your Authors

1) The price premium for used iPhones vs. comparable Androids is the most important driver for Apple. The used iPhone price premium lets them sell new iPhones at a higher price than competitors, but at a lower effective cost to consumers via trade-ins. 

2) The premium prices that new iPhones can command while still being effectively cheaper to existing IOS users than competing Android phones is an enormous competitive advantage/lock-in and is entirely a factor of the high residual values on used iPhones.

3) As seen in this article, Android OEMs can also benefit by offering higher trade-in values for iPhones, but on balance an IOS user is likely to stay in the IOS ecosystem and vice versa for Android. i.e. Apple benefits the most from the high prices of used iPhones via trade-ins.

4) And regardless, a consumer knows they can sell their iPhone in a year at a good price vs. uncertainty about the future value of a used Android phone so until this used iPhone price premium dissipates, Apple will have more pricing power than any other smartphone OEM.

5) The higher prices for new iPhones drive higher revenue and higher gross margins which let Apple spend more on R&D, more on marketing and still have higher per unit EBIT margins than any other smartphone company.

6) Interesting that despite all of these advantages, the iPhone isn’t a significantly better product than the comparable Galaxy and Pixel models. In many ways I prefer my Pixel but can’t give up iMessage. Of course, BBM was once seen as unassailable…

7) And if the iPhone isn’t a significantly better product, why the premium for used iPhones? Super interesting. One answer might be that Android phones only recently caught up to the iPhone, so will see the used iPhone price premium dissipate over time.

8) Another answer might be brand. *If* this is the case then Buffett and the Berkshire PMs will be right. Brand is generally the second most sustainable competitive advantage after scale, IMHO.

9) Another answer might be that iPhones are more durable and last longer, but I’ve never seen data on this. The new “optimized battery charging” default that stops charging the battery at 80% to reduce battery aging is interesting in this light.

10) I don’t believe that superior IOS services/apps are the answer to the used iPhone price premium as I think all the services/core apps are superior on my Pixel (Assistant 10x better than Siri, Maps is better, voice UI is better, search is better).

11) The entire Apple ecosystem is the last potential answer I can come up with – i.e. Airpods, Apple Watch, iPads, all the chargers everyone has, perhaps the credit card over time – and this does seem to be strengthening even before Apple's AR glasses come out.

12) On the ecosystem, I got a Garmin Marq as was curious to track nighttime SPO2 given a diagnosis of mild sleep apnea, but had to switch back to my Applewatch as the Marq chargers are super expensive and took forever to ship (need more than one charger given travel, etc.)

13) All other dynamics – the shift to services where they now have a chance given the hiring of John Giannandrea, the replacement cycle – are less important to the future of Apple than maintaining the premium price of used iPhones to comparable Android phones.

14) So understanding the reasons for the existence and potential persistence of this used iPhone price premium is critical, both for Apple and the larger technology ecosystem. And as noted, I don’t have a good explanation.

15) Important in so many ways though. i.e. Apple with its current revenue/margins is likely the only company that might be able to effectively compete in search/assistants (Alexa is also inferior to the Assistant) & they are obviously trying; Apple search is slowly improving.

16) Sidenote – it is so strange to me that Pixel’s are not sold at cost given that $10-$12b of TAC goes straight to Apple, which is likely the majority of their services profit and funding their buildout of a competing search engine (even if still vastly inferior to Bing).

17) Also – on the topic of the lengthening replacement cycle – I wonder if the main driver is actually the pain associated with getting a new phone in a world of 2FA. Basically took me a full day which is the first time I’ve thought about not getting a new iPhone every year.

18) Look forward to the thoughts of Twitter on why there is a price premium for used iPhones given I think it's the most important factor for Apple.

You can follow @GavinSBaker.


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