Daniel Eran Dilger
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Apple’s iPhone Price Cut Unleashes Complaints

iPhone Price Cut
Daniel Eran Dilger
While introducing the iPod Touch as a version of the iPhone lacking cellular mobile features, Bluetooth, and an integrated camera, Apple also set a new price on the 8 GB iPhone and discontinued the 4 GB model. That move angered some buyers, who felt the $200 price cut after just ten weeks on the market was too much, too soon.

Jumping on Price Cuts.
Along with the irritation of price conscious consumers, pundits known for delivering a negative spin on all things Apple also seized the opportunity to suggest that the iPhone’s price cut was based on flagging sales.

Among them was Scott Moritz of TheStreet, who earlier announced that Apple had “missed a 1 million unit sales target” and that rivals were “rejoicing,” failing to point out that analysts had really only set targets between 150,000 and 300,000 for the iPhone’s opening weekend.

John Gruber of the Daring Fireball declared Moritz “Jackass of the Week” yesterday for saying that the iPhone price cut “will add more evidence to the speculation” that the iPhone “may not be selling as rapidly as some optimists had expected.”

Gruber noted that Steve Jobs publicly stated Apple was on track to sell a million iPhones in its first quarter, and that independent reports said that the iPhone had outsold every other smartphone on the market in July. He linked to a Reuters article citing iSuppli’s report that Apple had grabbed 1.8% of the US mobile market, based on consumer surveys of two million US participants.
The Street

[Daring Fireball]
[More on Scott Moritz and the Jim Cramer Misinformation Engine]

Competitive Pricing.
A number of readers asked why Apple would drop the iPhone’s price so dramatically after just a little more than two months, and whether such price cuts really as unprecedented as some pundits suggest they are. In other competitive markets for consumer electronics, aggressive price drops are typical.

Over the last two months, Sony dropped the price of the PlayStation 3 by $100, and Microsoft responded with a $50 price cut on the base price of the Xbox 360 and additional price cuts on its external HD-DVD player option.

Neither Sony nor Microsoft make money selling game console hardware; both are competing on price to establish a large user base and expand their gaming platforms. Sony is also working to push its new Blu-ray HD disc format over Toshiba’s HD-DVD, which is supported by Microsoft.

[Origins of the Blu-ray vs HD-DVD War]
[Blu-ray vs HD-DVD in Next Generation Game Consoles]

Why Cut the iPhone Price?
However, Apple is making money on the iPhone. Why would it cut the iPhone’s price while the phone is currently selling at the top of the smartphone charts? Jobs said the new price was intended to make the phone more attractive during its first holiday buying season. However, it’s also facing new competition from Apple’s own new iPod Touch.

Priced at $299 for the 8 GB model and $399 for the 16 GB version, the iPod Touch delivers the iPhone’s splashy, multitouch Coverflow iPod features and its “breakthrough Internet device” functions via WiFi and the mobile Safari browser. It’s nearest competitor is Nokia’s N800 Internet Tablet, which costs $399, only provides a quarter of a GB of Flash RAM, and requires a stylus to use. The iPod Touch is also gunning to replace the hard drive based “iPod Classic.”

Apple could have left the iPhone priced $300 above the 8GB iPod Touch, but by dropping the price, it makes it very difficult iPod users tempted by the Touch to not simply spend the extra $100 to gain a phone, Bluetooth, and a camera. Since Apple’s iPhone also earns the company a share of service revenues from AT&T, pushing as many iPod Touch users toward the iPhone as possible makes a lot of sense.

For Those Who Can’t iPhone.
However, there are a large number of people who can’t buy the iPhone. Some are tied to existing mobile contracts and can’t or don’t want to move to AT&T. Among them are millions of iPod users overseas. Since Apple won’t be able to get the iPhone set up with providers around the world within the next year, it makes sense to sell them the portions of the iPhone that it can market worldwide.

That strategy is highlighted by the fact that the iPod Touch is already localized in a dozen and a half languages, including French, German, Japanese, Dutch, Italian, Spanish, Portuguese, Danish, Finnish, Norwegian, Swedish, Korean, Simplified Chinese, Traditional Chinese, Russian, and Polish. The US-bound iPhone lacks any localization or support for alternative language keyboards.

That indicates Apple is aiming the iPod Touch at foreign markets. Apple has also de-emphasized its hard drive players, only leaving a physical disk inside the iPod Classic, at its previous price points.

That aggressively targets iPod buyers toward the iPhone, while still allowing them a variety of different models and prices to choose from. In order to keep sales of iPhones from being eaten up by iPods, its price had to be highly motivating, and the iPod Touch had to be competitive as well.
New iPods

[Curious Stuff about the New iPods]

Apple’s Worldwide, Preemptive Strike on High End Smartphones.
Reader Neil Adamson points out that the iPod Touch will also help Apple cut into the high end market for smartphones in a preemptive strike. “People will be able to keep their existing mobile phone (with built in camera) and buy a Touch to add video and WiFi networking. Just go and buy a WiFi data plan and you have in effect a two component iPhone. So now there is less incentive to buy a new expensive Nokia smart phone in non iPhone countries.

”Of course, this is also why the iPhone prices had to come down in the US, otherwise people would keep their Motorolas and opt for the iPod Touch. The other part of this is that the Apple iPhone user experience is about to go global via the iPod Touch. That means that Apple will have deployed that patented technology everywhere. It just became a whole lot more difficult for other companies to introduce iPhone clones into non iPhone markets.“

Adamson also noted, ”Today Apple cut the price of its iPhone by $200.00 and apparently thousands of people feel betrayed. What a lot of nonsense. I would say that you should not spend $600.00 on anything, unless you can justify the expense. I stood in line on June 29, and I got my iPhone.

“For me it was money well spent, it is the best phone I have ever owned. I delayed upgrading my old phone for almost 2 years, just on the rumor that Apple would enter the phone market. I have not been disappointed.”

Is A Lower Price A Bad Deal?
For iPhone buyers who already purchased the iPhone however, that price drop might seem severe. However, even at $600 the 8 GB iPhone was a better deal that other smartphones. Adding in the price of service, the iPhone cost less over two years than even phones that appeared to be priced at $99 like the nearly worthless Windows Mobile Motorola Q.

The hardware cost of the iPhone is really insignificant compared to its service plan. While incendiary bloggers have latched onto Apple’s iPhone price cut to parade out a handful of steaming mad consumers threatening to form a class action lawsuit to ameliorate their frustration with being stuck in a market economy, the reality is that Apple set a fair price on a premium product, and is now lowering the price further to broaden its appeal.

iPhone customers who recently bought an iPhone have 14 days to return it, and many credit cards come with “price protection” programs to refund the difference, but the idea that products won’t or shouldn’t change in price–particularly at the intersection of the bleeding edge of high technology and fashion–is highly unreasonable.

What that $200 price drop means for existing iPhone users is a bit less exclusivity but the potential for a much greater user base, resulting in more iPhone savvy websites and more interest from third party developers of hardware and software products. That will make existing iPhones more valuable, not less.

Any frustration at the lower price pales in comparison to an alternative scenario where Apple could have announced a new iPhone model that made the existing ones appear obsolete.

[Phony Rage About iPhone Price and Profits]
mobile prices

Unprecedented Discounting?
Last month, Apple introduced new iMacs that were priced $200 less than the models they replaced. However, when compared to past models with equally configured features, the price drop was closer to $600. Nobody appealed to violence or the courts to right this perceived “wrong.”

One reader posting to a heavy breathing, sensationalist blog report on Apple’s iPhone price cut noted, “I bought a Sony Ericsson P800 for $1050 when it first came out (same day). Two months later the price was around $800, six-seven months after that around $600 – same difference as the iPhone.

”Apple did not lower the price because they felt charitable – they lowered the price because they want more people to bite and go get the phone. The early adopters bought it, most of the consuming public didn’t because of the price – drop the price, get more people – simple economics. Early adopters know what they are in for – the time span does not matter. It can be 1, 2, 6, 12 months, price will drop. Who is to say that after x time it’s fair for a price to go down?“

Similar price drops are common in the disposable world of mobile phones, where even the newest technology is commonly worthless within two years. The Motorola RAZR, Palm Treo, and even the simple LG Chocolate feature phone all debuted at $500 or more, only to rapidly drop below $100, often within just a year.

Bills of Materials and Manufacturing Costs.
Part of that rapid price drop comes from the continual discounting of component parts and the economies of scale that drive production costs down as manufacturing ramps up. For most mobile phones, hardware prices are obscured behind the illusion of subsidized pricing. Apple’s retail prices aren’t.

Further, Apple’s customers watch prices and set expectations based on past pricing; however, the iPhone is a very different product compared to the company’s existing portfolio of computers and iPods, which tend to follow regular and predictable cycles of upgrades and price changes.

Of course, whenever Apple is involved, threats of class action lawsuits are bound to occur. Since the early adopters who shelled out the money to buy an iPhone reported being very happy with the product, it’s hard to see how a minority can now behave as if they are somehow owed a refund for the ”real price“ of the iPhone.
iPhone Nano

[Kevin Chang, iSuppli and The iPhone Nano Myth]

What do you think? I really like to hear from readers. Comment in the Forum or email me with your ideas.

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1 comment

1 The Great Google gPhone Myth — RoughlyDrafted Magazine { 10.21.07 at 5:13 am }

[…] 10 FAS: 1 – iPhone Price and Profits vs Nokia, LG, HTC, RIM, Palm More Absurd iPhone Myths: iSuppli, Subsidies, and Pricing Apple’s iPhone Price Cut Unleashes Complaints […]

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