Why 16 GB iPhones exist

Apple's new iPhone 6s lineup stays at $199/$650 for 16 GB, goes up to $299/$750 for 64GB, and tops out at $399/$850 for 128 GB, on- and off-contract. That's how Apple segments for low, middle, and high-end. It has nothing really to do with storage size or price though—Apple can and has done the same thing with screen sizes, processor speeds, or even product colors—it's just something most people look at in a store and understand. More costs more.

The segmentation game

Segmenting by low, middle, and high-end is standard business practice for consumer goods. Low end or budget pricing get people in the door and make products more accessible to those who truly can't afford anything more. Middle pricing is what most people end up buying. High end, or premium pricing exist for people who either aren't concerned about money or who need a premium feature enough that they're willing to pay for it no matter what it costs. Appliances, cars, food— almost everything—has examples of low, middle, and high pricing segmentation.

"Starting at $199" is also psychologically important. Just like having $199 instead of $200 is important, the lower the number we see, the less panic we feel. It's not the model that makes Apple or any manufacturer the most margin, nor is it the model that offers any consumer the most value, but it lowers stress and gets the buying process begun. From there, both the up-sell and the bargain hunting begin.

It's tempting to think those who buy the highest end subsidize those who buy the lowest end, or that capacity-based segmentation subsidizes all the rest of the technology that's consistent throughout the platform, or even that it subsidizes the operating system and software like iLife, iWork, etc., all of which are now given away "for free". (Apple currently chooses not to monetize customer attention or data to subsidize prices.)

Perhaps a better way to look at it is that Apple, as a vertically integrated provider, has the luxury of thinking in terms of the overall device, including hardware, software, and services. The goal for a company like Apple is then, when you combine all models together, to get to a certain average sale price (ASP). Some pay more, some pay less, some pay in the middle, and depending on how the product mix works out, Apple either hits or misses that target. And then Wall Street rewards or punishes them for it accordingly.

Capacity—how many gigabytes of data storage an iPhone, iPad, or iPod has—is just an easy way for Apple to market low, middle, and high-end versions of their iOS devices. It's easy because everyone understands 128 is bigger than 64 is way bigger than 16. More money for more capacity is easy for Apple to do and for us to buy. Check out refrigerators, microwaves, television sets, cars, pasta—almost any consumer product. You'll quickly see similar patterns.

Apple could segment based on screen size instead, and theoretically charge $100 more for every additional inch. They're essentially doing that with the iPhone 6 Plus right now. They could segment based on processor speed, down clock the low end and ratchet it up $100 for every upwards bump. The PC industry traditionally does that with laptops and desktops. They could segment based on color and make gold or rose gold $100 model. Remember the Black MacBook? They could segment based on design and materials. The iPhone 5c did that. Most of us, I imagine, would really prefer they never differentiate based on build quality.

The component cost for the atoms of the differentiator is meaningless. It's the price we're willing to pay for it that matters.

But, 16 GB?

So, why make the low-end start at 16 GB instead of 32 GB? First, the MLC (multi level cell) NAND Flash RAM that Apple uses for the lower capacity devices is more expensive than the TLC (triple level cell) NAND Flash RAM that Apple uses for the middle and higher capacity devices, at least historically. Doubling its density to 32 GB would be even more expensive, relatively speaking, and that affects margin.

Second, the appeal of 64 GB compared to 16GB is considerable. Compared to 32 GB, not so much. If too many people go for the lower priced model it changes the ASP of the iPhone, and pushes Wall Street back into DOOMED mode.

Third, in enterprise, education, emerging markets, and first-time buyers price of entry is still critically important. For some organizations and use-cases, storage size isn't as important as the lower price possible. So, instead of skimping on things like build quality or materials for those markets, Apple skimps on storage. Since they're primarily used for B2B apps, web portals, streaming, IM, and other lightweight tasks, higher capacity isn't an issue.

Fourth, by leaving 16 GB at $199 and lowering 64 GB and 128 GB by $100 each, it makes the middle and high end more affordable and even more attractive as up-sells, and that raises ASP.

The future of segmentation

To make lower capacity devices more livable, Apple introduced iCloud Photo Library and iCloud Music Library so they could store less locally, and will soon be introducing even more technologies like asset slicing, on-demand resources, and a new type of compression to thin the operating system and apps alike, and to take up less space to begin with. They're an interesting investment in time and resources just to maintain lower capacity product segmentation.

Note, this isn't a defense of the 16 GB strategy, it's simply an explanation of it. Apple is a business and decades of being in business has shown that $100 increments based on storage capacity is a model the market not only understands but rewards with astronomical amounts of money. That doesn't make it right or wrong, comforting or maddening. It just makes it what it is.

And Apple likely won't change it unless and until they can find something better.

This article was originally published in June of 2014 but has been updated to reflect iPhone 6 and potential iPhone 6s marketing segmentation strategies.

Rene Ritchie
Contributor

Rene Ritchie is one of the most respected Apple analysts in the business, reaching a combined audience of over 40 million readers a month. His YouTube channel, Vector, has over 90 thousand subscribers and 14 million views and his podcasts, including Debug, have been downloaded over 20 million times. He also regularly co-hosts MacBreak Weekly for the TWiT network and co-hosted CES Live! and Talk Mobile. Based in Montreal, Rene is a former director of product marketing, web developer, and graphic designer. He's authored several books and appeared on numerous television and radio segments to discuss Apple and the technology industry. When not working, he likes to cook, grapple, and spend time with his friends and family.

176 Comments
  • I really want 32GB to become the minimum storage option in the future. Then add 64GB and 128GB as the other two. 16GB for a flagship phone is downright embarrassing when you don't have SD card support.
  • 8GB on any modern phone is even worse. SD cards are the floppy disks of the mobile age. Cloud is the future. How capacity evolves when online is almost indistinguishable from local will be interesting to see. Fusion iCloud drive :)
  • Even though I want to agree with you about cloud storage, as someone that uses OneDrive a lot, I just can't justify my music collection in the cloud until att brings back unlimited data. I have a 32 GB and I have about 8GBs left, I can send my pics to the cloud, and I do, so technically I could delete them all, but then I can't access them to text them, email them etc. not like you could on android, or WP. I'd want 32GB the minimum as well. Sent from the iMore App
  • That's why I phrased in terms of hopes and dreams for the future :)
  • Cloud storage is nice and all, until you have no access to your cloud storage due to lack of carrier coverage or poor signal. Or maybe you've hit your mobile data cap for the month. I do use Dropbox, mostly for photos and documents, but that's why generally I still prefer local storage on my device (especially my music). It doesn't necessarily have to be an SD card (tho those are still handy in certain cases), just enough internal storage to where I don't really worry about whether or not I have room for everything. That's why I splurged and bought a 32 GB iPhone 5S instead of the 16 GB (64 GB is way more than I'd personally ever need). And I totally agree with PureView; I think 32 GB should be the new minimum capacity too.
  • If that was a subtle dig at Android, it failed. Any phone with 8GB is probably $200 unsubsidized and so you can't expect much for that price. Also, SD cards are fine for storing music and videos. Apps take barely any space, save the nav apps, so SD cards work fine for most users who need 80GB+ with an outlay of about $50. Cloud storage? Please. Most data plans are terrible.
  • I think Rene referred to the 8GB iPhone 5C and iPhone 4 (sold till last winter) models. No, they are/were not priced at USD 200, but rather at the top end of the market. No, I do not get either why people buy these things. Either these folk are a little bit dumb, or they simply do not do anything with their phones -- in which case they might as well buy a USD 100 feature phone with a superior battery life and reliability, and use the saved money to buy a tablet or something. Or they might buy for the price of a 5C a top-end Nokia WP with a superior screen (not to say also larger, of course, and thus amenable to modern smartphone usage scenarios), superior camera, longer battery life and a build quality that withstands accidental dropping. Oh, they would also get twice the warranty (24 months) and location services that actually work. They might even get a good HTC with sufficient storage for that same money. But no, they get the crippled down 8GB iPhone or, dear God, some silly Samsung. I do not get this stuff any more. I do not understand the rationale people use to make these buying decisions. Good products no longer sell. Smartphoneas have become the new desktop PC: The better product you make, the worse off you aref... and, in coverse, the more you dare to rip off and screw up the customer, the more you are rewarded.
  • They buy the phone because it looks nice. There are a lot of people who are very slow to adopt new habits and can spend years just getting used to using basic features of their new phone. If all you do is check email and browse the web, 8Gb is fine.
    For those coming from a random candy-bar phone an 8Gb iPhone is a major upgrade
  • Exactly, cloud is the future but what if you're in a congested city or in a isolated area with bad cell coverage and no WIFI? Well, you're SOL for the most part. This isn't just an Apple thing but most device makers charge a premium on memory. But a class 10 card is just fine for storing music, picture or other media.
  • Apps take a lot of space. When I used android phones with 16GB of internal storage I was always running out of storage space for my apps and getting low memory warnings, this was even when using a micro SD card to store all of my music and videos and some apps which could be stored on the SD card. At least with the iPhone you get the option to pay for more storage, on android it's difficult to get anything more than the base model from your carrier and even if you get a higher capacity model it will not be available at launch. My 6 plus is 128 GB and I was happy to pay for the extra space. I will be getting the 128GB 6S plus. Sent from the iMore App
  • That's because most Android devices had an SD card slot in the past, so the carriers wouldn't stock different storage size models, most consumers would always buy the smaller size so it was just wasted money to stock the others.
    But now that most Android phones are moving away from SD cards because they are, as Rene said, the floppy disks of the smartphone world these days, many manufacturers and carriers are making and stocking different storage size models. The Note 5, S6, etc by Samsung are made in 32, 64, and 128GB and all are carried by each carrier. The 128GB may have to be ordered due to them not stocking as many, but the exact same happens with the 128GB iPhones. Trust me.
  • Cloud will never be the future. It will remain as an option, but the majority will always prefer local storage over cloud. There are just too many risk and hassles involved with cloud storage.
  • 640k who could ever need more...
  • For mobile devices cloud storage of anything large is a problem because of expensive and limited data plans that many have to deal with.
  • Agree Sent from the iMore App
  • Finally someone had the guts to say it.
  • What??? cloud will never be the future? You like to keep everything locally? Good luck with that!
  • As long as we are limited by data caps, the cloud can't truly be a solution by itself. Hell, even wifi is slow at work. Too many people sharing the bandwidth. Sent from the iMore App
  • As Analog Sprit said above, Cloud storage of all your media, music, videos, etc, is great IF one has access to LTE for retrieval of all that material. Unfortunately, not everywhere has that fast data access available, so that cloud storage is useless to those of us in those non-LTE areas, at least when we are using our devices out in the wild, and of course you have the matter of data caps which severely limit how much and often users can access their own data. Internet access at home and via wifi is a different matter.
  • I have no issues streaming media content, high quality or not, from 4g non lte
  • ....until you reach your data cap, that is. After that, you're either throttled to 56k modem speeds, or pay through your nostrils.
  • I don't expect cloud storage to evolve that far in my lifetime. Damn physics! It will take radically new tech, not evolutionary, to have full high bandwidth coverage EVERYWHERE, and why would carriers ever bother to achieve it unless it was simply a side benefit of the tech itself? There's no money left on the table for providing coverage in remote or difficult (underground) areas.
  • Though there is a lot to be said about cloud connectivity and syncing, a totally-cloud based future sounds very dystopian. We have the technology now to produce devices with ample local storage cheaply; I don't think the consumer should give that up lightly.
  • Right, cloud is the future. How so, we pay way too much for data, cloud is open to hacking and if a service decides to change its TOS, closed down, etc you are SOL and you know it. Their is no justification for a 32GB iPhone to cost $100 more, flash is flash and it doesn't cost $100 to double the space. Apple charges it because they are greedy and people will pay it and you know it.
  • No, you're thinking about it all wrong. The baseline iPhone, is 32GB, and it costs $299 (on contract). Apple, realizing that for some people price is important, takes a margin hit on the 16GB models, and lowers the price by $100, and to compensate, raises the price on the 64GB version $100, despite the cost differential not being that high. If you really want Apple to charge the actual price difference, you'll see the price of the 16GB phone go UP, not the price of the 32, and 64 versions come DOWN.
  • Floppy disks of the mobile age?! You must be kidding, 128GB SD card is extremely affordable and offers a ton of storage for music, videos and photos and all for approximately the same price Apple offers an additional 16GB of storage to your iPhone
  • 1. Windows 8.1 already does that with OneDrive, and I wouldn't be surprised to see Microsoft bring that to Windows Phone in the future. 2. SD Cards are not the Floppy Drives of the Mobile Age. They are an important component for device interoperation especially when you're using something like an iPhone which interfaces poorly with other vendor devices. Have fun using AirDrop with an Android Tablet. Cloud Storage is nice, but when you have a 300 MB 1080p video to move to another device, the SD Card swap is often much more economical (Data use when you are not at a WiFi Hotspot) and Faster (Swapping an SD Card is much faster than uploading that to the cloud and then downloading it on the other device). As for price, it makes no sense at all that the phone costs $100 more, except that people are paying for it so why not get the highest profit margins that you can get. There are Android phones that rule their market segment (like the Galaxy Note) which have no issues charging less for much better hardware (internals) than is in an iPhone, along with 32 GB Storage and an SD Card. I'm not interesting in starting a fan debate over which phone is better BTW (so those itching to get into that can just move along, please). The justification for the higher price is profits, and your argument breaks down a bit once you move past the 32GB SKU and realize it's the exact same when you get to 64 GB. Other vendors charge, generally, a $50 higher cost when they double storage at the lower ends (16 to 32GB, 32 to 64GB, for example) and that's still giving them a lot of profits compared to what the higher storage componentry costs them. They do this without an issue because it's still a net win for them, while making their prices more competitive/attractive. Apple is simply fortunate to have a good brand and devices/software that do not compete with any others in the confines of their ecosystem, so consumers don't have a choice in the matter. If they want the extra storage, they have one choice in the matter (well two, they can buy a used device, but you get my drift). Pay the higher prices, or stick with the lower storage SKU.
  • SD cards are the floppy disks of the mobile age? Do you know how useful it is on a phone? The manufacturer can make the phone only 16GB built in, and if the person wants more, they can choose as much as they want (all the way to 128GB). I'm sure something will FULLY replace SD cards (microSD on phones), like the cloud, but we need cellular and wifi coverage like everywhere. Local storage is much more reliable. It just seems Apple wants to make more $, so they rip people off by charging $100 more for each storage upgrade, instead of fitting a microSD in a phone. And I'm sure Apple can still make their phone pretty, as the sim tray looks just fine.
  • I think as far as base model storage is concerned 32 GB is pretty much feasible now. I think 16 GB option should no longer be an option. A decent quality flash storage for handhelds has now ( I guess) reduced in prices to a considerable extent Correct me if I'm wrong please. Coz the system software alone takes up almost 6 GB of storage.
  • You can't store apps on the cloud and people have this thing called data limits to worry about. Also starting in Android M you can mount an SD card as internal storage. There is no excuse at all given the cost of flash memory to be using 16 GB as the lowest option on a flagship phone costing over $600/off contract. This is not just true for Apple but ALL OEMs. No one gets a free pass on this.
  • I always go for the largest storage option available, 128gb is my choice. The cloud will never be the all answer, if you are in a underground location and there is no signal that cloud storage is useless. If you have a plan with a strict data plan using the cloud will cost you on your data plan. I like having my important files on my device to be on hand at all times. I still use the cloud but it is not the all answer IMO. Can hardly wait for my new iPhone with 128 or maybe 256gb of storage????????? That would be killer!!!!!!!!
  • I would get the 256GB of it were available. I have 128GB now. Onboard storage is always better than external storage in my experience. It's faster and less prone to failure. I've had SD cards fail on me. Also not everything can be stored on an SD card, some things need to be stored in internal storage. Sent from the iMore App
  • Cloud isn't the future until Telcos get on board. If anything, we're heading AWAY from that future lately. Well, that, and the assumption that the cloud actually works...
  • When did floppy drive ever have 512GB (which exist today for SD card) and soon Terabytes? Even old Android phone can use high capacity SD cards. Also when you step out of dense urban area, what happens to cell connectivity? On top of that when will free unlimited high speed data plan become a reality? iphone 6S with 16GB (8GB available for user) is pretty pathetic.
  • I agree, I've hoped 32 gigs would become the new minimum option for the last couple of refreshes. 16 is simply too small these days and really ends up limiting the future buying opportunities for apps and music. My wife had an 8 gig iphone 4 and stopped buying music and apps very quickly because she ran out of room and had no where to put it. That's bad for Apple and developers. As far as the cloud observations, there seems to be a disconnect between the people who make these great devices and the companies who allow us to use data. There's this push from most content companies to use the cloud. Stream music, buy digital movies, offload your pictures and access them anytime no matter where you are. Then you have the data companies severely limiting your access to these things because they offer subpar networks. At some point something has to give. Even with Sprints wonderful unlimited data (when you're actually in an area where it works) you'll quickly find out that unlimited isn't really unlimited. The cloud is the way of the future, it's just a matter of how long it takes us to get there. I simply don't believe it's a realistic option for most people at this current date and time.
  • Well said!
  • Preach it brother!
  • 32, 128, 192 . . . the latter matching a new 192/24 audio capability, hence the size and nature of chosen venue on 9/9.
    That really would be something. Momma. Sent from the iMore App
  • If 32-64-128 becomes the norm, then the lowest price iPhone would have to be the same price as the "middle" priced iPhone today, and then each higher tier would have to be a $100 more on top of that. If you don't understand that, then you don't understand how Apple prices their products and probably didn't even read this article.
  • Wrong. Apple has kept the entry level at the same price when boosting min-spec storage.
  • iPhones are a super premium device with a price tag to match. Complaining about a $100 or $200 differential at this point is ridiculous. If you are buying a Mercedes, you should be able to afford all the trim levels. Or think of it this way. For a $100 more, you only get an additional 48GB. But for another $100, you get a whopping 64GB on top. What a deal eh? Sent from the iMore App
  • If you try to justify storage pricing in iPhones by saying it is fine because iPhone is a premium brand, you are doing it wrong.
  • Super-premium devices have a lot more than 16GB storage. The iPhone is clearly not premium. It has become a mid-level spec phone with an excellent OS and app support. It may be premium-priced, but Apple is taking that premium price as profits, and not putting into the phone itself.
  • Especially considering all Android flagship phones start at 32GB. Its as if Apple intentionally wants iPhones to be one step below the Android flagships.
  • "I really want 32GB to become the minimum storage option in the future. " Translation: "I want a $100 price cut on my next iPhone purchase." Not gonna happen. The $199/$650 model needs to have some significant limitation to avoid cannibalizing sales of the $299/$750 model, which is the main seller. Bumping storage to 32GB would kill this barrier as a ton of people would consider 32GB "good enough". The base model iPhone will not be offered with 32GB of storage until 32GB is considered as useless as 16GB is today.
  • It is. A complete joke regardless of how someone tries to justify it. Obviously it's great for apple, or any other oem does it. That's all that really matters. Posted via the iMore App for Android
  • It'll be interesting to see how this changes later in the year with the introduction of a new iPhone. Taking a hint from the recent iPod touch price and storage refresh (where the 64GB model is only $100 more than the 16GB model), I think it's looking likely that Apple will move the differentiating and "premium" factor of their phones to be screen size (as well as possibly features?), as opposed to storage as it is now. On a separate note, I do hope Apple realise that it's 2014 and charging an extra $100 to make the jump from 16GB to 32GB is not okay. I understand it's all about margins, and paying a "premium" for the feature you want but that is just absurd. I'd like to see the 2014 iPhone start at 32GB as well- 16GB (or even 8GB on iPhone 5c) is simply not enough for the vast majority of people in today's world.
  • I'd like a bold move by Apple. iPhone 5S @ $0
    iPhone 6C 4.7" @ $100 iPhone 6 5.5" @ $200 And then from there, last year's model shrunk down to the 4" form factor while the two higher tier models being new devices each year, with the only difference being screen size, like 2013's iPad models.
  • You actually think they'd call the 4.7" version, which will be the flag ship phone, the 6c. There's is no way on earth--laughable.
  • Can almost guarantee 4.7" will be iPhone 6 and 5.5" will be iPhone Air...
  • The iPad Air made sense because it's lighter and thinner than all previous iPad models. I just don't see why iPhone Air makes sense for the largest phone ever released by Apple.
  • Hmm, iPhone Pro? Sent from the iMore App
  • $199 isn't a real price. It's a carrier subsidized price. iPhone 5s currently starts at $650 and goes up to $750 and $850. I guess a "bold move" for carriers would be to subsidize them more, but it's hard to see Apple charging less as they add size and features (things people typically pay more for). It's kinda like saying "I want BMW to be bold and make a $14,999 sedan!"
  • Or like saying, "We're adding a leather wrapped steering wheel with this