Why iPhones Will Probably Get Even More Expensive

0:05Ryan Knutson:The other day, our colleague Rolfe Winkler got on the phone with Tim Cook, the outgoing CEO of Apple. Cook had a message he wanted to get out. What was the bombshell that he dropped in your conversation? They're going to raise prices. He told me they're going to raise prices. When I asked, which devices? When? How much? Ah, we're still working through those details. is what he told me. But look, I would suspect soon and plenty. When the new iPhone drops in September, one analyst estimates that it could cost an extra$200 or even more. The two words no Apple fan wants to hear, price increase. Since Rolf broke the news last week, customers have heard Tim Cook's message loud and clear.

0:55Ryan Knutson:If you're thinking about buying a new Apple product, I would do that right now. Oh, your next iPhone could cost you a lot more. Apple just announced they are doubling down on keeping people from buying iPhones in the future. What? The prices were already pretty raised.

1:12Ryan Knutson:Did Tim Cook seem worried about sharing this update? He's always a smooth operator. He's always kind of in command and on message, right? He had a couple key points he wanted to make. And he made those points. Price increases unavoidable. How big of a deal is it for Apple to do something like this? They raise prices all the time, sort of in subtle ways. But I think the reason they're doing this interview is because it's not going to be subtle this time. Ouch. Yeah, ouch indeed.

1:50Ryan Knutson:Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Monday, June 22nd.

2:03Ryan Knutson:Coming up on the show, why Apple products are about to get even more expensive.

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3:27Ryan Knutson:What is the thing inside the iPhone that's causing it to get so much more expensive? Two components, memory and storage. So if you want to analogize this to... Love a good analogy. Yes, please. Did I use that verb correctly? Analogize? Sure. Why not? Rolf's analogy is that of an old office, like one from the 1960s. In that office, there was no computer. There was a desk and there was a filing cabinet behind it, right? The desk space is analogous to memory on your phone. It's all of the papers you need right now to complete whatever task you're working on, right? Got it. The DRAM or RAM is the memory.

4:14It'll say 8 gigabytes or 12 gigabytes. That's the size of the desk. And it's what the phone needs to run the apps you're using right now. The filing cabinet behind you is storage, right, for everything else. So when you buy an iPhone, if they're marketing 256 gigabytes to you, that's the filing cabinet. That's the storage. That's the photos in the video locker, right? Desks are more expensive than filing cabinets. And the cost of both of those quadrupled.

4:48Ryan Knutson:For last year's iPhone 17 Pro, it cost Apple about$50 to buy those desks and filing cabinets, or memory and storage chips. But according to the research from Tech Insights, for the upcoming iPhone 18 Pro, the chips will cost Apple four times that. That's a huge increase. Huge increase. It's spectacular. So what's causing this price increase in chips? One force, AI. Add it again, AI.

5:19Ryan Knutson:AI companies use basically the same kind of chips that Apple does to do things like train and run large language models and coding agents. And those companies are asking for a lot of chips to build out their AI dreams. Google, Microsoft, Amazon, Meta, plus NVIDIA. These guys are buying, you know, to torture our analogy, desks and filing cabinets, memory and storage. They're buying huge amounts to go into those AI servers. They put it in the AI servers so that the AI can work its magic. Before these AI companies came onto the scene, Apple was one of the biggest buyers of these kinds of chips and had lots of influence over the chip factories.

6:00Right now, there's three main makers of memory chips, two South Korean, one American. Apple is the kind of company that in the past had so much leverage over these three players playing them off each other, it was leaving them next to no profit at all, right? They were so powerful, they bought so much.

6:18Ryan Knutson:But AI companies, who were locked in an arms race to build the best chatbots and AI tools, have been devouring these chips. And they're willing to pay the chip makers a lot more money. You know, now suddenly AI's in there, Apple has to wait in line.

6:34What AI hath wrought is amazing. It's so big that even a company as large as Apple is forced to wait in line for commodity components that forever it was able to dictate terms for. That's what AI has done. These companies, whether it's NVIDIA or the hyperscalers that are deploying NVIDIA chips, are spending such gargantuan sums of money into the hundreds of billions, it will be trillions. they're spending so much money and they're just going fast, right? That they're just gobbling up all of the supply of these key components that's in everything we as consumers buy. Did Tim Cook say anything about all this new competition for these chips?

7:16He said, you know, in his 40 years in the electronic supply chain, he's never seen anything like this. You know, he called it a 100-year flood.

7:25Ryan Knutson:For now, the companies that make memory chips aren't significantly increasing their supply. Instead, they're just raising prices through the roof and making money hand over fist. To give you a sense of just how much more powerful they've become, the stock prices for some of these memory chip makers have risen more than 800 % just in the past year. And they're not building capacity super fast because this is a boom-bust cycle. And if they build a lot of capacity for memory or desk space, the price of desks is going to collapse. And they'll, you know, be in trouble having built these massive factories.

8:03So they're going slowly.

8:06Ryan Knutson:According to chip makers, it would take a few years to build new factories and get production up and running. You can't just spin up a fab, a chip fab. That's not how memory and storage chips works. Bottom line is it takes years. There are other memory chip factories that over time could potentially help fill Apple's orders. The hitch is they're in China, and some U.S. policymakers don't want to give China a leg up. The American companies face restrictions working with those companies, sharing technology so that they can use those chips in their own products for national security reasons. These are really important components, and policymakers in the U.S.

8:46don't want China to have open access to this market.

8:50Ryan Knutson:Due to national security rules, American companies would likely need to get federally approved licenses to work with Chinese factories. I asked Tim Cook about China. Do they want that supply in China? Do they want restrictions loosened? And he said, all options need to be on the table. We need to look at all supply. So yeah, you can imagine that behind the scenes, that's what they're asking policymakers. I know that Cook and President Trump have a close relationship. So has Cook reached out to Trump about this? Great question. I asked him. He said, you know what? I don't want to talk about private conversations.

9:27This is not a no. I don't know if he's talking to Trump directly, but probably they do speak. And you can imagine, you know, a headline hits that Apple is raising the price of iPhones, and that sounds like inflation. It's not something that Trump wants. So who knows? Maybe he tries to badger the memory guys into holding back more supply for consumer technologies.

9:54Ryan Knutson:But to be clear, there is at least one other option. Is there any way that Apple could just absorb this and lower their profits a bit so it doesn't hurt consumers so bad? Absolutely. I mean, one of the greatest profit machines in the history of American business is how much Apple makes upselling storage to you.

10:18Ryan Knutson:We'll be right back.

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11:00Ryan Knutson:Why do we need so much storage? I was just looking this up and I saw that the first iPhone that came out in 2007 only had four gigabytes of storage. And now new models start with 256 gigabytes of storage. I mean, it's a huge increase in over 20 years. The cameras are getting bigger, so the files get bigger, so the storage needs to get bigger. Your photos keep getting bigger, Ryan, and how many of them do you go back and throw away? Hardly any. Hardly any. So you end up carrying them all with you. Now, Apple lets you dump a lot of that into iCloud, but guess what? You pay for that storage too. We keep growing this filing cabinet, whether it's in our hand or it's in the cloud, keeps getting bigger.

11:43Ryan Knutson:The irony of these factories forcing Apple to pay more for storage is that Apple has been asking iPhone customers to do that for years. Apple has been, you know, upselling storage at huge rates since the iPod. Hmm. Right? You wanted to carry more music in your pocket? We could sell you more storage. We're going to make a large margin on that. Just as an example, when you buy a base-level iPhone 17, You get 256 gigs of storage. If you want to go to the next level up, 512 gigs, that costs you an extra$200. How much do you think Apple pays for those extra 256 gigabytes, as of last year anyway? I don't know, probably like$20 or something like that.

12:27Good guess. $15. This is according to Tech Insights. That's a 90 % profit margin on that upsell.

12:35Ryan Knutson:And then also, I mean, once your phone is full, then they're also, you know, you're paying 10 bucks a month or whatever it is for iCloud. Yep. It's an incredible business model.

12:48Ryan Knutson:One way that the memory shortage could actually be good for Apple is that this problem is also affecting its competitors. And Apple's competitors might have an even tougher time dealing with it. there are a ton of low and mid-range Android smartphone makers who can't make phones economically because there's not enough profit margin in a device that costs$300 to absorb the extra cost of these components, right? So those guys are getting hammered. In many cases, they're having to raise their price a lot or just not make these phones. And so Apple, which actually went on offense. It offered the 17e, that's their base level model iPhone at a cheaper price.

13:30All of a sudden the gap between those low end Android phones that have had to jump in price and the lowest level iPhone, that gap is smaller. All of a sudden those Android, many of those Android buyers might say, wait a minute, this gap is smaller. Maybe I should just go ahead and upgrade to the iPhone. I've been buying this cheap Android phone because it's cheap. It's not cheap anymore. So what's happening is Apple's gaining market share.

13:53Ryan Knutson:So this is like a problem for Apple, but it might hurt its competitors even more. Correct. These chip shortages and rising memory costs aren't just impacting Apple or other phone providers. Rolf says it's a problem that's coming for basically all consumer technology products. This affects every company because there's no escaping these higher costs. Xboxes will go up. The Nintendo Switch is going up. Microsoft Surface price just is now$15.99. Two years ago, it was$9.99. There's a lot of memory and storage in cars. Anything that has onboard computers, which is cars too, they need especially memory, right?

14:33And so that's going to be a meaningful hit to the cost structures of all those companies, and they're going to pass that on to you.

14:40Ryan Knutson:One of the things that's so crazy about all this is that historically, prices for these kinds of chips have only gone down. Technology is supposed to get cheaper over time, not more expensive. Chips, since they were invented, every year they get faster and cheaper, basically. It's Moore's Law. It's famous. It's what's powered all of these amazing technical revolutions to get us from a Macintosh computer in the 80s that could do a fraction of what a phone can do now. And that's why consumer electronics are deflationary, right? The TV that cost you$1 ,000 20 years ago was not nearly as cool as the TV that cost you$1 ,000 today.

15:20And that's because all these technologies get better and cheaper over time. But all of a sudden, that magic formula has reversed. For these two components, the price of those chips is not going down anymore. It's spiked. And it's not coming back soon.

15:33Ryan Knutson:What it all comes down to is AI demand is upending how consumer technology is supposed to work and making it so that customers are left paying more for the same thing.

15:47Ryan Knutson:So Tim Cook described this as like a 100-year flood. But do you know where we are on the arc of that flood? Like, are the waters just starting to rise? Or are we at the point where they're rushing over us? They're still rising because the price of these components is still going up and it's going to go up into 2027. and AI demand is insatiable. It's insane. I guess we just need to start taking fewer photos and videos. Dude, every time you get on a plane, if you're not watching your kids, use those two hours to just go through photos and all that stuff and delete. Delete, delete, delete.

16:38Ryan Knutson:That's all for today. Monday, June 22nd. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Robbie Whelan.

16:52Ryan Knutson:Thanks for listening. See you tomorrow.