Continued from the April 13's posting

Apple is perhaps spending more time on new iPhone design, or re-aligning of its suppliers due to the earthquake’s impact. These are all contributing factors to the delay of iPhone 5, but not the main driver. In our view, the lengthening of iPhone’s product cycle has the following additional benefits besides what was discussed in the April 13 blog:

1. Mobile carriers are amenable to a longer product cycle: annual refresh of the iPhone is not helpful for carriers who bank on contract customers and compete in a non-exclusive environment. Many mobile carriers around the world lock down contract customers with iPhone through an 18-month or longer contract. New iPhones would incent Apple cohorts to upgrade early without driving significant new customer gains for carriers, and carriers will have to subsidize more on the new model. As an example, in AT&T’s latest quarter 1Q2011, only 23% of the iPhone activations were from non-AT&T customers. That’s why many carriers are now discouraging smartphone users’ upgrade through higher fees and limited handset choices if their contracts haven’t expired.

Moreover, in a multi-carrier environment, since new iPhones are available from multiple carriers, the benefit of incenting more subscriber switches is not significant, either. Older versions of iPhones offered at a lower price point, on the other hand, can help carriers gain more first-time smartphone users (hence more data customers) or invite users of other smartphone models to switch (some smartphone users who couldn’t afford iPhone previously now can). On top of that, carriers might incur lower subsidy on older versions of iPhones or have more flexibility in marketing older versions. In a nutshell, carriers can reap more benefit from older iPhone models (just not too old) than from brand-new iPhones.

2. Apple’s profit margin might improve in the short term: each new iPhone version requires substantial R&D efforts and faces new component sourcing challenges. Manufacturing/assembly is more expensive for new iPhone than older versions. That’s why Apple’s gross margin on the 3G S model is higher than iPhone 4’s. By keeping older iPhones on the market longer, Apple will have a high profitability overall. But Apple must pay attention to the sell-in price to carriers since substantial price erosion will negatively affect profit margin. No one learned this lesson more painfully than Research In Motion. The Blackberry maker was quite successful with its older CURVE models during 2008-2009 from both margin and volume perspectives. In 2010, although volume was still good, margin erosion on the CURVE line, due to lowered sell-in value, has contributed to negative impact on RIM’s overall device margin. For Apple, by keeping older models on the market six months longer would help its margin overall based on our assessment.

3. No annual refreshment is perhaps a psychological break for Apple’s management: no iPhone 5 at WWDC is a break of past pattern and Apple loves keeping people guessing. The delayed launch perhaps also gives the Apple team a breathing room for more bold ideas and breakthrough designs.

So, what if Steve Jobs surprises everybody again with a new iPhone 5 in hand at the upcoming WWDC? We speculate that chance of a white iPhone 4 on sales on that day is higher than that for iPhone 5.