Why iPhones will only get more expensive

If you had to guess which direction Apple would be headed in 2019, what might you say? The company's iPhone business and bottom line has been pummeled thanks to an economic slowdown in China, a maturing smartphone market, and longer-lasting hardware. It's clear Apple needs to adapt to face new realities.

Some might say the obvious answer is to lower the prices on the iPhone. Others suggest the company ramp up marketing. And still others want it to expand its services beyond Apple devices to Android and Windows.

But what's more likely to happen is this: iPhones will get even more expensive. The evidence for this is already starting to trickle out. A new report from The Wall Street Journal suggests Apple is going to give its entire 2020 iPhone line OLED screens — the same very expensive tech currently only found in the iPhone X and XS.

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This may seem surprising, but it's all of a piece with Apple's strategy: Make high margin, desirable tech, and reap the rewards of creating a closed ecosystem.

First, some context. Apple claims its current woes are almost exclusively the result of a slowing Chinese economy. That perhaps overextends the case, as it's not clear why Apple would only become aware of the effect of China on its Q1 revenue in December when CEO Tim Cook released revised earnings projections, and not earlier. What's more likely is that Apple got caught in its own hubris a bit — both in its capacity to continue to game Wall Street analysts, and in the presumed success of the 2018 iPhone lineup.

But things are comparative with Apple. Even during a "bad" quarter, the company still generates more money than many countries' entire economies. And the company is still in great shape. All it needs to do is adapt to a world in which nearly everyone who can afford a smartphone already has one.

How does it do that? First, I predict there will be a re-emphasis on the high-end. Last year, the lower-priced iPhone XR was widely hailed by reviewers as the iPhone to get for most people. I also assumed it would sell well. Instead, it seems to have disappointed. I think this comes down to psychology: iPhone users often buy the devices precisely because they want to feel they have gotten the best. Though the XR was great value, buyers knew there was something better. Apple made the same mistake with the 5C, a lower-priced iPhone that was also excellent value — and also underperformed.

So Apple wants to focus on the high-end in order to satisfy choosy customers, while also recognizing that in a mature market, people will replace smartphones less often. This means high-margin devices will be key to maintaining a healthy profit, which helps explain the shift to an all-OLED lineup. That shift also allows for more radical design updates, like curved screens or edges. And a renewed aesthetic flair will likely make up for the "same-y" feel of the XS and XS Max, which looked just like the X before them.

If this strategy is a success, and Apple's hardware sales continue to rise, we'll also see additional recurring revenue coming from built-in services — iCloud for storage, iMessage for communication, and Apple Music — as more Apple users sign on. That side of the business, already the size of a Fortune 100 company on its own, will only continue to grow.

It is important to note, too, that even though iPhone sales are down, sales for the Apple Watch and iPad are up. For the future, Apple will continue to put more emphasis on those categories in an effort to expand computing on both hybrid devices and standalone wearables. And looking even further out, it is almost certain that Apple will enter new sectors, whether that means automotives, augmented reality, or perhaps even foldable devices. The company already appears to be creeping into video and perhaps a streaming service.

Apple has made some missteps in recent years. Even now, it appears the reliability and build problems with the MacBook line haven't been solved. But the company is not down and out. Far from it: By focusing on high-end, high-margin tech, plus services, all while keeping an eye to the future, Apple will likely retain its dominant position for many years to come.