THE $1,000 PHONE: This huge problem Apple must solve before it launches the new iPhone

Analysts are highly optimistic about the next iPhone, which is expected to be a radical reset of the entire line. It’s the tenth anniversary of the device, so there’s a huge amount riding on it. It might cost £1,000 ($1,000) – a sum that many shoppers will balk at. These are significant challenges Apple needs to overcome.

Apple is gearing up to launch what may well be the most hotly anticipated smartphone ever.

2017 year is the 10th anniversary of the unveiling of the original iPhone. Since then, smartphones and mobile apps have transformed apps, business, and the global economy – propelling Apple to become the world’s most valuable company.

But as the iPhone turns 10, the pressure is on Apple to deliver a genuinely new, innovative phone. People want to see Apple launch a significant new device after several years of merely incremental improvements to iPhone. Rumours are swirling that the California tech company plans to release a special, high-end iPhone alongside the expected “7s” refresh this year, with augmented reality features.

The prevailing mood among analysts is positive. Some are giddily expecting a “super-cycle” – a massive, record-breaking year for sales, driven by the ever-increasing numbers of older iPhones in the wild that need upgrading, and a particularly compelling product offering this time around.

So there’s a lot riding on this. And a lot that could go wrong. From pricing risks to hardware costs, Apple has to get several crucial calculations just right.

A radically new design will push up Apple’s costs, squeezing its margins. Apple could protect its margins by raising its prices. Some people think a new, high-end iPhone could retail for over $1,000. (Apple tends to sell its products at around the same number in both dollars and pounds, which would make the price tag £1,000 in the UK). That might restrict sales, and make the rest of Apple’s iPhones look like cheap deals by comparison.

The price of failure is steep. Apple Watch, for instance, was supposed to open up a whole new category of consumer wearables, but the devices have appealed only to a small niche.

No one wants the Apple Watch of phones.

Business Insider spoke to Gene Munster, a prominent Apple analyst-turned venture capital investor at Loup Ventures, to discuss the risks facing Apple this Autumn.

Note: There are numerous rumoured names for the rumoured high-end iPhone floating around, including “iPhone 8,” “iPhone 10,” and “iPhone Edition.” Munster refers to it as the iPhone 10, so we will use that name throughout.

The $1,000 phone.

To be clear: These are not predictions for what Munster, or Business Insider, thinks will happen.

Rather, they’re theoretical scenarios that Apple will no doubt be discussing internally, and which – if they come to pass – could have huge consequences for the most important company in the tech industry.

Munster says, realistically, that he expects to see “high-single digit growth … strong, but not a supercycle.” His concern is that the high price that the iPhone 10 is rumoured to be selling for – around $1,000 – will limit its appeal somewhat. But there should still be significant growth, he says, because of the sheer number of people out there looking to upgrade: “This large pool of people with phones three years old or older.”

Even if Apple’s 2017 product offering was lacklustre, there would still be huge numbers of people that need to upgrade.

One surprising risk: That the iPhone 10 is *too good*.

The big question facing Apple is a simple one: How expensive is too expensive?

$1,000 (or £1,000) is a lot to drop on a phone, and there’s a risk that some consumers will be put off. Counter intuitively, Munster suggests, Apple might be at particular risk if the phone is better than people expect.

“The simple downside case is that the the features around augmented reality end up being compelling, the number of developers they have at launch is something that really catches people’s attention, and then people end up holding off and waiting for that iPhone price to come down,” Munster said.

In other words: People might see the iPhone 10 and think it’s incredible – but the $1,000 price-point is out-of-reach, so they decide to wait for a year and see if it gets cheaper. (If the tech had been in-line with expectations, and the price was just as high, the consumers might opt for a regular upgrade with the 7s, rather than holding off entirely.) Apple has repeatedly taught its customers that a new launch means that all the previously existing models suddenly become a lot cheaper – often when they’re nearly as good as the new one.

He considers this too-good problem a “small risk … the reason why I say it’s a ‘small risk’ is that because the pool of older phones is getting so large, three-year-old and older, that for a lot of people it’s not about getting the greatest phone, the $1,000 version, it’s about getting one with a better battery and just a faster battery.”

So while there’s a chance that people will decide to hold off, many won’t be in the market for the highest-end model anyway. They’ll settle for one that’s simply good enough. (Munster estimates that realistically, around 25% of sales will be for the high-end iPhone 10 – so the majority of consumers won’t be getting one anyway.)

“I think the worst-case scenario is a couple percent growth, probably put it somewhere around 225 million units [sold over the year],” Munster said.

That’d be up on the 211 million sales in 2016 – but below the record-breaking 231 million in 2015.

The tech might be a flop.

Then there’s the flipside – that the augmented reality tech is lacklustre and disappointing.

“Having the first augmented reality phone is a big deal, and there are technical hurdles to it. Will the 3D mapping be accurate? … there have been some snafus before,” Munster said, pointing to “Antennagate,” when issues in antenna placement in the iPhone 4 caused signal to drop when held a certain way. (Then-CEO Steve Jobs’ unhelpful response was that users simply don’t hold it that way.) Apple Maps was also a fiasco at launch.

“If it doesn’t work … yeah that can damage them, would be in the worst-case scenario, just like Antennagate damaged them.”

The hardware doesn’t need to be faulty to cause problems; it might just fail to ignite the public’s imagination.

The iPhone 10 could hurt Apple’s profits.

For Munster, the real risk to Apple isn’t about number of shipments: It’s about profits.

Ambitious hardware projects don’t come cheap, and the iPhone 10 – even with the $1,000 pricetag – could eat into Apple’s margins. After all, it has happened before. “When [Apple] came out with their dual camera for the iPhone 7 … the margins declined … The bigger risk story is less about losing market share, and more about profitability.”

Its gross margins are already sliding downwards. According to Bernstein Research analysts, it had margins of 57.7% in 2009; by 2016, they hit 40.8%, with gross margins of 39% predicted for 2018.

More experimental tech is generally harder and costlier to build, and could even accelerate this trend.

And the iPhone 8 could do the same thing.

The other threat to Apple’s bottom line is that people upgrade – but not to the newest phone. If customers decide they need to upgrade, but for whatever reason decide to settle for something second-best, they could opt for the lower-end iPhones, or even last year’s model, lowering the average selling price (ASP) and cutting into Apple’s profits.

Apple is walking a tightrope.

If the iPhone 10 is too expensive, customers may be put off. Too cheap, and it’ll cut into its margins, infuriating shareholders. If the tech is disappointing, users will become disillusioned. If it’s too impressive, they might put off upgrading for another year as they wait for the price to come down.

None of these challenges are insurmountable – and most analysts expect a seriously impressive showing from Apple come September 2017.

But Apple is walking a tightrope as it develops the iPhone 10, and there has never been more at stake.