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Apple's 16GB iPhone 6S is a serious strategic mistake

Stephen Lam/Getty Images

The unveiling of Apple's latest smartphone, the iPhone 6S, showed that Apple has an impressive ability to keep pushing forward the frontiers of hardware design. But the announcement also came with one note that struck sour for even some of the company's biggest fans. The entry-level edition of the phone comes with just 16GB of storage — room for songs, movies, photos, apps, etc. — an amount that was arguably too low even a couple of years back.

The continued fall in storage prices has made Apple's lack of generosity in this regard more glaring. The user experience of an under-equipped iPhone can be quite bad, and the iPhone 6S comes with features — like the ability to shoot ultra-HD video — that are going to fill up a 16GB phone in the blink of an eye.

The decision to sell this device isn't beyond explanation — it pretty clearly boosts Apple's profits — but in a broader sense it's not a very sound business strategy. Apple is already an extremely profitable company with an extremely large existing stockpile of cash. But it suffers from some skepticism about its long-term prospects. Under the circumstances, it ought to leap at an easy opportunity to trade a little profitability now in order to lay the foundation for more success down the road.

A 16GB entry-level unit drives higher margins

It's not too hard to figure out what Apple is up to here. Leaving the entry-level unit at 16GB of storage rather than 32GB drives higher profit margins in two ways. One, it reduces the cost of manufacturing the $649 phone, which increases profit margins on sales of the lowest-end model. Second, and arguably more important, it pushes a lot of people who might be happy with a 32GB phone to shell out $749 for the 64GB model. A 64GB flash storage chip is more expensive than a 16GB flash chip, but it's not anywhere near $100 more expensive, so pushing people up the chain increases not just revenue but profit margins.

So stingy storage on the lowest-end iPhone pushes up Apple's revenue and profit margin, and that's the kind of thing self-interested companies do. Something to whine about perhaps, but not really a shocking story.

Apple has more money than it knows what to do with

This is fine as far as it goes, but it raises the question of what purpose is served by Apple amassing more money. Apple pays out large (and growing) sums of cash to existing shareholders in the form of dividends and buybacks, but its enormous cash stockpile keeps remorselessly marching up toward $200 billion.

This highlights the fact that the margin-boosting potential of the 16GB iPhone 6S doesn't serve any actual purpose.

The marginal extra dollar of iPhone revenue that Apple earns doesn't go into the pockets of shareholders or employees, doesn't finance investment, and isn't realistically going to finance an acquisition. It's just a vague hedge against eventual future bankruptcy. That's a somewhat understandable impulse for an incredibly successful company that actually experienced a near-bankruptcy back in the late 1990s.

But it doesn't really make a lot of sense.

Killing the 16GB phone and replacing it with a 32GB model at the low end would obtain things money can't buy — satisfied customers, positive press coverage, goodwill, a reputation for true commitment to excellence, and a demonstrated focus on the long term. A company in Apple's enviable position ought to be pushing the envelop forward on what's considered an acceptable baseline for outfitting a modern digital device, not squeezing extra pennies out of customers for no real reason.