Apple’s Next iPhone Shows How It’s Perfected the Game of Inches

(Bloomberg Businessweek) -- There are three things you can safely predict about each new generation of iPhone: It will have a better camera than its predecessor, a faster processor, and Tim Cook, Apple Inc.’s chief executive officer, will call it the “best iPhone we’ve ever made.”

For all the technological wizardry, camera and chip improvements can seem a little uninspiring. The real magic is their effect on Apple’s earnings. Because unlike innovations such as Face ID—the facial recognition system used to unlock iPhones—the chip and camera improvements bring a dual benefit to the Cupertino-based company: Not only do consumers pay a premium for the new features, they also usually end up needing more storage to make the most of those features. And storage, it turns out, is an unbelievable money-printing machine. In fact, it might even be Apple’s secret weapon.

The next iPhone lineup looks set to turbocharge that approach. Alongside other camera upgrades, the handsets will include a higher-quality video format called ProRes when they’re released in the next few weeks, Bloomberg News reported on Tuesday, as well as more chip updates.

With every improvement in image quality comes a commensurate increase in storage requirements. The new photo format that Apple added to the iPhone last year, branded ProRaw, is as much as 12 times larger than the standard JPEG. Bigger video files will exacerbate the trend. (That’s especially bad news for those of us whose casual snaps already take up a slightly embarrassing 36 gigabytes.)

Consumers’ need for more storage is enormously profitable. Where it costs the consumer $100 to add 128 gigabytes of storage, Apple is unlikely to pay more than $20 for the same chip. If you’d prefer to store the data remotely, Apple’s iCloud offering enjoys similar profit margins. Besides, those who have already made the choice to opt for a $1,099 iPhone 12 Pro Max may be less concerned about ponying up more cash for extra capacity.

Faster download speeds and greater processing power have the same effect. 5G lets you download more data more quickly, but you need the capacity on your device to store it, as do the whiz-bang games enabled by faster chips.

Apple is reaping the rewards. Its revenue is expected to jump 33%, to an amazing $365 billion, this year, though of course only a slice of that comes from additional memory options. But it shows how canny investment in improving the right technologies can have a multiplicative effect on profit even in the absence of blockbuster new features or flagship products—the average selling price of an iPhone jumped from $748 at the end of 2019 to $938 this March.

So while we wait for Apple to eventually reveal its Next Big Thing, whether in autonomous cars, smart glasses, or something else entirely, in the meantime the world’s most valuable company is showing just how profitable its game of inches has become.
 
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