How Apple's 'inadequate' storage strategy makes $3.8 billion a year

The iPhone 6 and iPhone 6 Plus. The 16GB versions are pitched as entry level iPhones. Photo / Supplied

Despite claims Apple's 16GB phones barely have enough storage for all the pre-installed software and apps, let alone a user's files, the company continues to sell it as an entry-level model.

But, rather than being a short-sighted move, one analyst believes it is a calculated strategy designed to get people to buy larger devices as soon as possible.

In fact, Neil Cybart claims Apple makes an extra US$3 billion ($3.89 billion) each year by not doubling the amount of minimum storage every time a new model is released.

"Apple's decision to keep the entry-level storage tier at 16GB for the iPhone 6 and 6 Plus, despite doubling the other capacities to 64GB and 128GB, continues to raise eyebrows," explained analyst Neil Cybart on his Above Avalon site.

"Apple's near-term motive behind keeping the 16GB capacity option is pretty clear: get people to buy the 64GB option."

But, as Mr Cybart explained, Apple's strategy is more complex, and forward-thinking than that.

He believes that by limiting the amount of storage on entry-level phones, in what he calls the "lower tier", customers will eventually upgrade to a larger device, in the middle tier, the following year.

These customers are then more likely to then stay in the middle tier, or in some cases move to the upper tier, but are unlikely to downgrade to less storage.

This trend is even more common if Apple keeps the entry-level the same, but boosts the storage by three times or more in the middle tier, the following year.

However, if Apple doubles the amount of storage on the entry-level model each year, people upgrade but will always stay in the lower tier.

For example, in year one, Apple offers a 16GB, 32GB and 64GB model and the customer buys the 16GB version.

The following year, Apple offers 16GB, 64GB and 128GB models. This prompts the user to either stay the same, or upgrade to 64GB in year two at a higher premium than the 32GB cost the previous year.

By the third year, Apple can offer 32GB as an entry-level model, but the customer won't downgrade storage and stays with the 64GB as a minimum.

Alternatively, if Apple offers an entry-level 16GB one year, but then increases this lower tier storage the year after to 32GB, the customer may upgrade to a phone with larger storage, but they're still technically buying the entry-level model.

And so on into year three, if Apple offers 64GB as a minimum.

Mr Cybart also worked out how much revenue Apple makes by keeping the 16GB model as a minimum, and using the middle tier strategy.

According to his calculations, the middle tier strategy makes Apple $47 billion (£30 billion) a year.

But the lower tier strategy makes US$44 billion - a difference of US$3 billion, simply by charging an average US$20 for the handsets.

"By doubling the middle tier storage capacity to 64GB, while maintaining the price, and keeping the 16GB storage capacity at the bottom tier, I estimate that approximately 30 per cent of previous 16GB iPhone owners will upgrade to 64GB to take advantage of the better deal," continued Mr Cybart.

"While some may say this discussion profitability is anti-consumer, observers need to look at this process as a bit more than just greed.

"A case can be made that Apple is looking to get users dependent on higher storage, by carefully guiding customers into a particular iPhone model each year."

In January, Which? magazine tested the eight most popular 16GB handsets from Samsung, Apple, BlackBerry, LG, HTC and Google, pictured. Samsung's Galaxy S4 was the worst performing handset, with only 54 per cent (8.56GB) of available storage, while Apple's iPhone 5C was the best, with 79 per cent (12.6GB).

The iPhone 6 16GB has a similar amount of storage as the iPhone 5S, at 12.2GB, which has been dubbed "inadequate" by users.

Apple storage strategy explained

By limiting the amount of storage on entry-level phones, in the 'lower tier', customers will eventually upgrade to a larger device, in the middle tier, the following year.

These customers are more likely to then stay in the middle tier, or in some cases move to the upper tier, but are unlikely to downgrade to less storage.

This trend is even more common if Apple keeps the entry-level the same, but boosts the storage by three times or more in the following year.

However, if Apple doubles the amount of storage on the entry-level model each year, people upgrade but stay in the lower tier.

All of these figures are taken from Neil Cybart's Above Avalon site.

Example 1

In year one, Apple offers a 16GB, 32GB and 64GB model and the customer buys the 16GB version.

The following year, Apple offers 16GB, 64GB and 128GB models. The current iPhone 6 and 6 Plus are available in these sizes, for example.

This prompts the user to either stay the same, or upgrade to 64GB in year two. This 64GB costs more than the 32GB version did the previous year.

By the third year, Apple can offer 32GB as an entry-level model, but the customer won't downgrade storage and stays with the 64GB as a minimum.

Example 2

Alternatively, if Apple offers an entry-level 16GB one year, but then increases this lower tier storage the year after to 32GB, the customer may upgrade to a phone with larger storage, but they're still technically buying the entry-level model.

And so on into year three, if Apple offers 64GB as a minimum.

This means they spend less money each year, and Apple can't move customers from the lower to the middle or higher tiers.