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Apple’s Cheap iPhone SE Might Be Cutting Into More Expensive Sales

July 20, 2016, 4:48 PM UTC

When Apple introduced its least expensive new model ever, the iPhone SE, in March, it sparked a debate over just how much the new device would boost sales—if at all.

Apple said the SE, which packed most of the company’s newest iPhone features and technological improvements into a smartphone with just a 4-inch screen, was intended to appeal to people who preferred smaller screen sizes.

The SE was “the most beautiful and powerful phone with a four-inch display in the world,” Phil Schiller, Apple’s senior vice president of Worldwide Marketing, said at the time.

But Apple also priced the phone well below the $650 typical entry-level of its newest phones, prompting some analysts to worry that the SE would steal sales away from the more expensive new models and hurt the bottom line.

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Now with Apple about to report on the results of its first full quarter that includes sales of the $400 iPhone, comes some early evidence that the lower price may in fact be cannibalizing sales of higher-priced models, at least in the United States.

Apple’s newest 6S and 6S Plus models, which start at $650, accounted for just 65% of all U.S. sales in the second quarter, according to a survey of buyers by Consumer Intelligence Research Partners, or CIRP. The quarter before, the two high-end phones accounted for 71% of sales. A year ago, the then-top two models, the 6 and 6 Plus, accounted for 82% of sales, CIRP said.

The iPhone SE captured 16% of sales in the most recent quarter, with most of the rest going to the mid-tier iPhone 6 and 6 Plus first introduced in 2014.

A deeper dive indicates that a large volume of iPhone SE sales are coming from buyers who own iPhones that are more than two years old.

“iPhone SE appears to have appealed to owners of much older iPhone, and less to switchers from Android and other operating systems,” Mike Levin, co-founder of CIRP, said in a statement. That may have prevented some buyers from jumping to cheap Android phones, but “with its much lower retail price, iPhone SE also may have diverted these customers from purchasing a more expensive iPhone 6/6S series phone,” Levin added.

About one-third of SE buyers owned an model 4S, which debuted in 2011, or older iPhone compared with 17% of buyers of the 6S and 6S Plus, CIRP said.

Also, SE buyers were less likely to be switching from an Android, other non-Apple operating system or dumb phone. About one-sixth of iPhone SE buyers switched from outside the iOS ecosystem versus about one-quarter of iPhone 6S and 6S Plus buyers, CIRP said.

Apple (AAPL) reports its next quarterly earnings on July 26, when it will reveal exactly how many iPhones it sold from April through June as well as the average selling price. Analysts expect a second consecutive quarter of declining sales, with estimates of about 40 million iPhone units sold compared to almost 48 million sold in the same quarter last year.

But the company doesn’t typically break down the exact sales volume by model. Analysts will instead be looking to the average selling price as a proxy for how many SE models. Last quarter, it was $642. A big dip could provide further fodder for the debate over the impact SE.

Even if the SE hurts Apple in the short-term, however, some analysts seeing as positive because it keeps more customers in the fold to buy more expensive iPhones in the future.

“The large increase could be a sign success in flushing out older phones with a cheaper and smaller model,” UBS analyst Steve Milunovich wrote. “SE demand may hurt (average selling prices) and margins, but it is a long-term positive as these users were unlikely to upgrade to a larger phone and thus some of the SE sales could be incremental.”

The next major upgrade cycle for iPhone owners isn’t expected until 2017, when Apple is rumored to be replacing its phone screens with a larger and brighter screen. That could make the SE debate all but irrelevant.