A customer views an Apple Inc. iPhone XS during a sales launch at a store in New York, U.S. (Photographer: Jeenah Moon/Bloomberg)

Apple’s Most Lucrative New iPhone Feature Isn’t Its Fanciest

(Bloomberg Businessweek) -- In the latest iPhones that went on sale on Sept. 21, the biggest upsell isn’t the wide-stereo speakers, the dual-lens camera, or the stainless steel accents. It’s the tiny Nand storage chip that lets you save all those photos in Portrait Mode.

The high-end XS and XS Max models unveiled earlier in September come with a 512-gigabyte storage option, twice as much as the previous maximum and enough to hold a couple hundred thousand photos or dozens of high-definition movies. That’s up from a maximum 256GB on last year’s flagship iPhone X, and 64 times as much as what the original iPhone had a decade ago. Apple Inc. charges customers a lot more for this storage than it pays suppliers, and it hasn’t reduced the markups for higher-capacity options or provided a way for customers to add storage later, even though component prices are falling sharply.

Apple is tackling a global smartphone industry slowdown by raising iPhone prices, offering new digital services, and wringing more profit from parts that are becoming more commoditized. Selling more storage with iPhones is a powerful example of the latter strategy. “Storage is one of their levers to create more revenue and is absolutely the most profitable iPhone feature,” says Wayne Lam, an analyst at researcher IHS Markit Ltd. Adding more isn’t much work for Apple, because it just means swapping a chip, he adds, “whereas when you increase the screen size, you have to completely re-engineer the phone.”

Here’s Lam’s rule of thumb: Storage costs Apple about 25¢ per gigabyte, while the company charges customers roughly 78¢. By doubling the maximum available amount, it’s digging deeper into this earnings gold mine. Apple charges an extra $350 to jump from the 64GB minimum to the new 512GB option. Data compiled by Bloomberg show that, excluding assembly and related software work, the largest storage option could make the company about $134 more per phone than the storage tier below, up from $107 in last year’s models. The 512GB option could make Apple $241 more per phone than the 64GB model.

Apple’s Most Lucrative New iPhone Feature Isn’t Its Fanciest

The iPhone uses Nand flash memory to store photos, video clips, and most of its software. The market price of this component is about half what it was a year ago, according to InSpectrum Tech data. But Apple isn’t passing the savings on to consumers: The 78¢-per-gig charge hasn’t budged since last year. Of course, Apple uses contracts to lock in the price of such components as Nand flash, so it may not be benefiting yet from recent price declines. So far, though, storage costs customers more on an iPhone than on, say, a Samsung Note 9. Samsung Electronics Co. charges 65¢ a gig to move from the 128GB Note 9 phone to the 512GB model.

Ponying up for extra storage could lead iPhone users to spend more in other ways, too. People who’ve become accustomed to having what seems like a bottomless pit in their phones are likelier to cram the devices with more music, apps, movies, and subscriptions, boosting Apple’s services revenue. And Apple is charging anyone who wants an iCloud plan to back up their entire 512GB phone an extra $9.99 a month for 2 terabytes (2,000GB) of remote storage.

This all starts to add up. A customer who pays $1,449 upfront for a 512GB iPhone XS Max could potentially pay at least $40 a month more to Apple if they subscribe to iCloud and Apple Music and buy one movie on iTunes each month. That’s all before buying or subscribing to any apps. So as long as users are willing to pay a hefty premium for the privilege, Apple seems likely to keep upping its storage options.

©2018 Bloomberg L.P.