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Apple Inc. Might Be Making a Mistake With Its 2018 iPhone Lineup

KGI Securities analyst Ming-Chi Kuo, whose track record of predicting the capabilities of future Apple (NASDAQ: AAPL) iPhones is quite strong, recently made a somewhat troubling prediction about the company's 2018 iPhone models.

Kuo reportedly said that Apple will focus on "reducing costs and selling prices" of its next-generation iPhone X line while also working to deliver "more product lines to attract more customers."

Although the second part of Kuo's claim is good news -- a broader portfolio of iPhone X products could help boost shipments -- I'm a little uneasy about Kuo's claim that Apple will also work to cut production costs and selling prices.

Image source: Apple.

Allow me to explain.

The magic of iPhone X

Perhaps the single biggest reason that this year's iPhone X is such a phenomenal product is that Apple boldly decided to target a higher selling price for it. This meant the economic constraints Apple traditionally faced in trying to build phones that can be sold for between $649 and $769 while also generating acceptable profits had been, to a large extent, lifted.

The higher selling price allowed Apple to use more advanced organic light-emitting diode displays, higher-quality stainless steel frames, and improved camera subsystems compared with what it could deliver in the cheaper iPhone 8 and 8 Plus.

If Apple continues to build phones targeting the iPhone X's price point, as well as potentially even higher price points, then it can deliver bigger, more interesting innovations at a faster clip.

The risk of cost-cutting

The risk that Apple would face if it were to focus on cost reductions for next year's iPhones rather than on significantly beefing up the user experience is that it may simply bring out a less than ideal successor to this year's iPhone X.

Considering Apple will almost certainly enjoy a strong product cycle over the next year or so, the company is going to need to pull out all the stops for the 2018 iPhones to continue that growth momentum. Cost-cutting hinders product innovation.

In addition, considering that the smartphone market is seeing relatively anemic unit growth, it makes sense for Apple to focus on delivering more value per smartphone sold, meaning Apple can charge more for each phone.

Here's what Apple should do

I get it. Apple can't come to market with phones that start at $999 and only go up from there. Many smartphone buyers are already stretching their budgets to buy something like the iPhone 8, and Apple can't hang those buyers out to dry.

Here's what Apple should do, then. The iPhone X line should remain a premium line. Next year's 5.8-inch iPhone X should still start at $999, and the rumored 6.46-inch iPhone X should start somewhere north of that.

For more cost-sensitive buyers, Apple should sell another product line, known simply as iPhone. Apple is rumored to be planning an iPhone with a 6-inch liquid crystal display next year, which I suspect will serve as Apple's lower-cost flagship.

Apple may want to consider offering two models in this line next year to cover even more of the market, but Apple could use price-reduced versions of this year's iPhone 8 and 8 Plus to handle those price points instead.

In essence, Apple should continue to deliver great iPhones at familiar price points, but it should continue relentlessly innovating at higher price points as well.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.