10 FAS: 1 – iPhone Price and Profits vs Nokia, LG, HTC, RIM, Palm
July 23rd, 2007
Daniel Eran Dilger
The tech analysts beholden to Microsoft have jumped at the prospect of creating a toxic party tray to welcome Apple’s entry into mobiles, stopping only to ask how high publishers want them to pile the phony iPhone bologna.
Here is the first of ten fake scandals they’ve splashed across headlines and blog postings to create a wave of iPhone misinformation in their cultish attempts to shore up support behind the faltering, embarrassing mobile platforms they’re paid to make excuses for.
Fake Apple Scandal 1: The Wild Profiteering on the Expensive iPhone!
This first invented Apple scandal that analysts have worked hard to establish is that the iPhone is not only very expensive, but also grossly overpriced in an effort to profiteer on the interest in the iPhone. Gizmodo likes to refer to the “iPhone Fanboy Tax” as a populist way to cater to readers who want feel better about their choice to own a phone that’s not made by Apple.
Analysts take every opportunity to remind consumers that the iPhone costs at least $2000 over two years. The Street’s leading jackass Brett Arends even insisted that the iPhone’s real price was well over $17,000, because a young person could invest their mobile budget over a lifetime and earn interest on it. He failed to point out that his sensationalist, red herring iPhone warning also applied to every other phone on the market as well.
The problem with all the contemptuously feigned grief over the iPhone’s price is that no analysts actually compare the iPhone to the actual price of other mobiles; they simply assign it absurdly scary numbers to instill a fear that the iPhone simply costs too much for a reasonable person to consider. Fear is not information.
Three Price Tags to Compare.
As with nearly any purchase, there are three prices to consider in buying a mobile phone:
- Upfront cost on the day of purchase.
- Total cost of ownership over its lifetime.
- Resale value after it is replaced.
A nuclear powered car priced the same as other cars on the market–but which required millions of dollars in refined fuel to operate–simply wouldn’t be a economical.
A $600 PC laptop that costs half as much as a new Mac Book–but which is worthless after two years of grief–isn’t really a good deal considering that the Mac Book would easily command more second hand after two years than the “savings” offered by a generic laptop.
Prices don’t exist in a vacuum. Here’s how the iPhone’s price and value compare to other phones in each respect.
Upfront cost: The mobile subsidy shell game tries to make phones appear to be free or nearly free in an effort to get customers in their store and sign them to long term, expensive contracts.
The upfront purchase price of the iPhone is higher than other subsidized phones, but it’s not higher than the really desirable phones on the US market: those unlocked phones from Europe that all the analysts compare against the iPhone when they talk about features.
That’s right, while comparing the iPhone in price to heavily rebated, featureless phones that often sell for $99 or less, they compare the iPhone in features to a selection of high priced imported phones that are often not available subsidized at all, and are typically significantly more expensive than the iPhone.
While the high end of competing phones do offer features the iPhone lacks, it is rarely pointed out that the iPhone similarly has key features unmatched by any phone on the market, including enough Flash RAM to make the iPhone usable without having to buy additional memory cards. The iPhone has 32 to 128 times as much RAM.
Some of the high end mobiles that defined the state of the art prior to the release of the iPhone offer features such as a better built in camera with flash or offer 3G UTMS service. However, they all have:
- half the battery runtime of the iPhone.
- a clunker design that’s commonly twice as thick as the iPhone.
- less than half the iPhone’s screen resolution.
They also include very little Flash RAM, typically only 64 – 128 MB, a large portion of which is already used the by phone internally. To match the iPhone’s capacity, you’d need to add at least another $100 Flash RAM card.
That pushes these phones’ prices well beyond the price of the iPhone, and belies the myth that the iPhone is, as Microsoft CEO Steve Balmer falsely asserted, “the most expensive phone in the world.” Among similarly featured smartphones, it’s actually among the best priced in terms of competitive value.
Total cost of ownership: The iPhone does require a two year contract, and analysts love to add the full price of the contact into the price of the iPhone. What they fail to ever point out is that every phone requires service, and that Apple’s iPhone pioneered a discounted AT&T plan that costs about $500 less over two years than the plans required by other smartphones in the US.
That means that the iPhone is cheaper overall than other phones when considering total cost of ownership over its lifetime, even much cheaper phones with a subsidized upfront cost. Obviously, more expensive phones that compare to the iPhone in features are even more expensive when a service plan is included.
Add in the cost of enough RAM to make these phones usable–and the $100 annual licensing fee for using Blackberry push email service–and the total cost of ownership of even cheap phones rapidly outpaces the iPhone.
That explains the need for analysts’ handwaving about the iPhone’s “scary price.” If they hadn’t unleashed their misinformation campaigns, the iPhone’s overall value would be painfully, embarrassingly obvious.
Pointing out the true cost of the iPhone makes their lack of credibility painfully and embarrassingly obvious.
Resale value: One thing the analysts never bring up is resale value. That’s because a typical second hand mobile is nearly worthless. After two years, even the fanciest mobiles look old and outdated. The frantic pace of technology advancement creates a short upgrade cycle that induces users to buy a new phone regularly. Since most mobiles are only phones with some mobile-dependent PDA features, and since there are so many discarded phones on the market, second hand mobiles have a resale value near zero.
The iPhone is also a high quality iPod and WiFi web browser, making it useful even without mobile service. In fact, lots of people are interested in using it as a fancy iPod today at full price, and are trying to spoof activation in order to own it without a phone plan.
When a user upgrades to a new iPhone in 2009, their original iPhone will still retain a decent resale value, just as Apple’s iPods uniquely retain a high resale value. A 2005 iPod might only need a new battery, now commonly available for $20 or less in a DIY kit.
Even a broken iPod is worth significantly more second hand than competing MP3 players, particularly the PlaysForSure models abandoned by Microsoft, which are now largely worthless and obsolete. There was never any real demand for new PlaysForSure players, let alone second hand ones.
So despite analysts’ hyperbolic claims, the iPhone is not only competitively priced against similarly featured phones, it’s actually cheaper in the long run when compared to any smartphone, and it will retain more value after two years than any other phone.
Anyone trying to make the case that the iPhone is expensive is simply presenting carefully constructed but false information.
iSuppli’s Faulty Profit Analysis.
The real reason analysts seem so upset about the iPhone’s price is not that it’s more expensive, but that it appears to be profitable for Apple.
The famous iSuppli parts breakdown gustimate purported to demonstrate that Apple has given the iPhone a price that includes a 50% profit margin, nearly double the cost of its parts. However, this is false for two reasons.
The first problem is that if the iPhone is grossly overpriced at $600, how is it that other high end phones from Nokia, Sony Ericsson, HTC and LG aren’t similarly overpriced? They cost $750-950, and offer a poorer screen, uglier interface, bulkier package, and less battery runtime. Why should they cost significantly more?
And what about the lower end phones from Motorola, Palm and Blackberry, which offer nothing comparable the iPhone’s hardware features, but still cost hundreds of dollars?
The second problem is that everything is marked up to cover overhead, shipping, and other costs. The iPhone’s hardware markup is no different than other typical consumer electronics, outside of video game consoles and other categories where the hardware is sold at a loss in an effort to sell games. The company has also reported:
- the $200 iPod nano cost Apple $90
- the $500 PlayStation 3 costs Sony $805.85
- the $300 Xbox cost Microsoft $323
- the $400 Xbox 360 cost Microsoft $525
Little mention is ever made about iSuppli’s teardown price estimates of other phones, although company spokesman Eric Pratt reported that he “expects similar margins” for HTC’s TyTN and Nokia’s N95. There were certainly no press covering iSuppli’s guesswork on other phones’ cost or profits. Why not?
While it’s embarrassing that Microsoft and Sony appear to be losing money on their flagship game consoles, it is well known that the margins on the iPod nano were not over 50%. Apple sold tens of millions of them, and has not reported profit results that support the idea of 50% profit margins on the bread and butter of its iPod sales.
The idea that Apple’s iPhone is unreasonably priced and has an unusually and excessively high profit margin is a fictional creation of paid-to-say analysts.
The next time you hear a pundit referring to the iPhone’s “$2000” price or its “50% profit margin,” you can rest assured that ignoring the rest of their comments is probably the best way to avoid being mislead by the noise of their desperate astroturfing.
This is only the first of ten Apple scandals invented by fraudulent info-twisters. The next faux-scandal made it to the headlines in an even more painfully absurd and embarrassing way. It’s up next.
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