Apple's (AAPL -2.41%) flagship iPhone XS and iPhone XS Max smartphones as well as its lower-cost iPhone XR are similar in a lot of ways. They use the same screaming-fast A12 Bionic applications processors, incorporate identical TrueDepth camera systems for Face ID and features like Animoji, and share the same rear-facing wide angle cameras.
Teardown reports from iFixit also reveal that all three devices use the same Intel (INTC -3.67%) XMM 7560 LTE modem. Despite this fact, though, Apple markets the higher-end devices as capable of gigabit LTE while the iPhone XR can only deliver "LTE Advanced" speeds.
Image source: Apple.
PC Magazine tested the devices and said that "[the] iPhone XS and XS Max speed past the XR in our most recent signal test results, showing that XR downloads may stall while their more expensive siblings zip along in the fast lane."
Here's PC Magazine's explanation for part of the performance disparity:
Both the XS/Max and the XR use the same modem, the new Intel XMM7560. But the XR is missing two of the XS/Max's antenna branches, making it a 2x2 MIMO phone versus the XS/Max's 4x4 MIMO.
The difference doesn't just come down to 2x2 MIMO vs 4x4 MIMO, however. Here's more from PC Magazine:
How about where the cellular networks can't handle 4x4 MIMO? Some cell sites around the country still run on 2x2 MIMO, and you'd think that in those conditions, the phones would perform equally well. You'd be wrong. It turns out that the iPhone XS/Max get stronger performance than the XR, even when the network itself is 2x2 MIMO.
I'd like to explain what seems to be going on here and how this could benefit Apple supplier Broadcom (AVGO -2.18%).
Apple tried to save money
Ahead of the launch of Apple's latest devices, analyst Romit Shah claimed that for the device that we now know as the iPhone XR, Apple would substitute out a PAD filter chip from Broadcom in favor of a cheaper alternative from Qorvo (QRVO -2.16%). That move, Shah said, "represents approximately $100 [million] in [bill of materials] cost savings for Apple and roughly $400 [million] revenue headwind for Broadcom in 2H18."
Broadcom CEO Hock Tan admitted on the company's Sept. 6 earnings call that because Apple reused the same RF platform in the iPhone XR as in the iPhone 8-series and iPhone X devices (in fact, PC Magazine said that "[the] iPhone XR, on the other hand, looks a lot more like our results from last year's test of the iPhone X, which is also a 2x2 MIMO phone"), this "[creates] an opportunity for a customer to temporarily use lower performance alternatives in selected SKUs."
However, Tan did say that "every indication we have is that the cadence of annual platform upgrades will resume in the upcoming 2019 smartphone generation" and that "we believe we're very well-positioned to win back the platform."
Looking even further ahead, Tan claimed that "with 5G on the horizon, we expect this cadence of annual upgrades to sustain." (Fast Company recently reported that Apple is planning to launch 5G iPhones in 2020.)
"And accordingly, we expect to see our wireless revenue returning to double-digit growth in fiscal 2020, following a temporary dip in fiscal 2019," Tan said.
Why that could make sense for Apple
For Apple to hit the price points that it wanted to with the iPhone XR and deliver an acceptable gross margin percentage, it needed to make some choices around where it'd make most sense to cut costs relative to the higher-end iPhone XS and iPhone XS Max devices (which start at $999 and $1099, respectively). Clearly, the company thought that saving money on radio frequency chips was the way to go with this generation.
Apple is rumored to be keeping form factors unchanged for its 2019 iPhones -- something that makes sense considering how long it kept the same basic iPhone 6 and iPhone 6 Plus form factors around. I'd imagine that the iPhone XR's casing will become cheaper to produce over the next year, as will the display (I expect Apple to recycle both in the next iPhone XR). On top of that, I expect Apple to discount this year's iPhone XR, replacing the iPhone 8 and iPhone 8 Plus, as the mid-range option.
So, a combination of cost structure optimizations in several areas coupled with the need to distance next year's iPhone XR from the current model to encourage customers who can afford to pay more to do so, could mean that it'd make sense for Apple to give the next iPhone XR the same cellular capabilities as its higher-end counterparts -- especially if the difference is, per Shah's estimate, only about $100 million in bill of materials cost.
Now, a potential downside in this case would be that Apple would eliminate a point of differentiation between the next iPhone XR and the successors to the iPhone XS and iPhone XS Max. With that being said, the successors to the iPhone XS and iPhone XS Max should still have OLED screens, stainless steel casings, and dual rear-facing camera systems as key points of differentiation. I also wouldn't be surprised if Apple were to differentiate those higher-end models in additional ways to further encourage up-sell.
