By Dan Gallagher

Apple's never been great about appealing to bargain hunters. Plus, someone's got to pay for that new iPhone chip.

The world's most valuable company announced the newest addition to its largest business on Wednesday. The iPhone 16e succeeds the iPhone SE models as the cheapest smartphones in the company's lineup -- except they are no longer that cheap. The new iPhones start at $599, compared with the $429 starting price of the most recent SE version.

The average price of the new 16e configurations is also just 31% below the average price of all the other iPhones Apple currently sells as new. That compares to a 52% discount that the iPhone SE offered to the rest of the company's lineup prior to Wednesday's launch. The price qualified as the biggest surprise in what was a widely expected announcement that even tight-lipped Apple Chief Executive Tim Cook teased publicly last week. Apple launched its first SE phones starting at $399 in 2016; it last updated the lineup in 2022.

A more premium price tag could limit the appeal of the 16e, at least for those on a tight budget. It also makes the 16e less likely to help lift the current iPhone cycle out of its doldrums. Last month, Apple reported a nearly 1% decline in iPhone revenue for its December-ending quarter -- the first full period of sales for the iPhone 16 family, the company's first artificial-intelligence-enabled devices. Analysts now expect iPhone unit sales to fall nearly 3% in the fiscal year ending in September, according to consensus estimates from Visible Alpha.

But chasing the lower end of the market also has its risks. Apple has long worked hard to maintain its premium image, even going so far as to craft one of its first Apple Watch lineups in 18-karat gold, which it sold for $10,000. It has also worked hard to maintain profit margins that are the envy of the consumer-electronics industry. But staying on top isn't getting any cheaper. Apple spent nearly $32 billion in research and development last year, nearly double what it spent five years prior. The company's annual revenue rose 48% over the same period.

The newest iPhones pose a particular challenge in Apple's trade-off between growth and profit. Apple has equipped the 16e to run its Apple Intelligence service, which requires additional processors. The phone is also the first to feature a new cellular modem that Apple designed in-house as part of a long-running effort to wean away its dependence on Qualcomm. That effort too cost a lot of money and time. Indeed, it has already taken longer than expected: Qualcomm itself once estimated that its chips would be out of most iPhone models by late 2023. But the shift still won't happen overnight, even if Apple's own modem chip performs well in the new 16e models. The current supply agreement between the two companies runs through the end of next year.

A more premium price for the 16e shows Apple keeping a firm eye on its bottom line. The slimmer discount to the rest of its lineup might also limit the degree of cannibalization of higher-end phone sales: The 16e has a less-advanced camera setup than the rest of the 16 range, and also doesn't offer the compact size and physical home button that appealed to some SE users. Apple's not-so-cheap iPhone might not be a huge hit, but it won't be a big profit hit either.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

February 20, 2025 05:30 ET (10:30 GMT)

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