Can Apple afford to go cheaper with new iPhones?

Posted:
in iPhone edited January 2014
Conventional wisdom says Apple both desperately needs a cheaper iPhone model to compete with low end Android and Nokia offerings, while also holding that lower margins would destroy the company's profitability. Its history offers examples of reaching a middle ground.

iPhone5

Is Apple's high end iPhone 5 failing?

Apple's stock tumbled 5.3 percent this week after speculation that $20 million worth of extra inventory at a key supplier must mean iPhone 5 sales are slipping. Of course, it could also mean that Apple shifted to either a new supplier or a new generation of components.

At the same time, top U.S. carriers AT&T and Verizon Wireless released quarterly figures that indicate that not only are iPhone sales higher than the previous year, but that iPhone 5 continues to account for half of all iPhone sales.

Since Apple doesn't detail the exact mix of iPhone models being sold globally or for each region sales group (for competitive reasons), carrier reports are helping to illuminate the fact that most of the new iPhones being sold are Apple's latest and greatest model.

That's in sharp contrast to Samsung in Q4, when just 15.4 million, less than a quarter of its total 60 million phones sold, were its higher end Galaxy S3. The 2011 iPhone 4S by itself beat the Galaxy S3 by two million units globally and iPhone 5 sold 27.4 million units.


Source: Strategy Analytics


Apple continues to struggle to make enough iPhones to meet global demand, so finding a market for high end iPhones is not as much of problem for the company as its competitors, who continue to ship phones and tablets that often don't end up actually getting sold to end users.

Apple may however need to more aggressively target the low end of the market.

But Apple never competes on price, right?

Asked when Apple would build netbooks in 2008, Steve Jobs famously said "we don't know how to make a $500 computer that's not a piece of junk, and our DNA will not let us ship that."

A report by Jun Yang, Anand Krishnamoorthy and Jungah Lee, published by Bloomberg in February insisted that Apple's new chief executive Tim Cook "already reversed a vow by late founder Steve Jobs that the company wouldn?t introduce a scaled-back and cut-price version of the iPad."

Of course, Apple has actually cut its prices before. WebObjects dropped from $50,000 to $699, and then became free. Mac OS X Server unlimited dropped from $1,000 to $499 to $49.99. Final Cut Pro dropped from $1000 to $299. Aperture fell from $499 to $79.99.

Well perhaps Apple just doesn't lower prices in hardware, then? No that's not right either; the company extended its dominance in digital music players a decade ago by introducing the iPod mini and then the iPod nano and shuffle. Three years into the iPad, Apple similarly released its smaller, lighter, cheaper and slightly less profitable iPad mini.

GPS


And don't forget the Mac mini and Mac mini server, or the much cheaper $99 Apple TV that replaced the original priced at $229. And we don't even need to discuss cheaper Macs, iPods and iPads because Apple has also sharply discounted the iPhone itself, starting with the original model that was repriced from $599 to $399 within months of its unveiling.

Then, one year later, Apple introduced the improved iPhone 3G model with a cheaper build, packing more power and features in a plastic case that allowed it to sell for half the price, just $199 on contract.

Since then, each new generation of iPhone kept getting better at the same price, and previous years' models are now sold at a $100-200 discount. This pricing pattern has allowed Apple to offer a "good, better, best" selection that ranges from $0 to $199 with a contract.

Competing on price without a subsidy

Apple's not being significantly undersold in markets like the U.S. where carrier subsidies effectively erase the low end of the market in order to sell more expensive, data plan connected devices.

However, in emerging markets, developing countries and prepaid markets, Apple is being undercut by bargain bin feature phones such as Nokia's S40 platform, low end Android offerings, Windows Phone models, Blackberry and other cheaper options.

Without a subsidy, Apple's cheapest iPhone 4 remains around $450, or about $485 in the UK and just over $520 in France (at the prevailing exchange rates). At those prices, its not hard to see why Android is penetrating the budget market in Europe far more successfully than in America.




Source: ben-evans.com


So far, Apple has focused on releasing new models that either extend the state of the art or expand carrier options. Since the release of the original iPhone 4, Apple has significantly revised the design only a few times: first to make it compatible with Verizon (and later Sprint) via CDMA, then to release a global iPhone 4S model, then to offer the LTE-capable iPhone 5.

Apple hasn't made an intentionally cheaper new version of the iPhone since the 3G in 2008. That appears to have been the optimal strategy over the past four years, given that it has enabled Apple to earn 73 percent of the industry's profits as Samsung, Nokia and others have less effectively pursued market share via lower end phones.

Mobile hardware profits


Going forward however, it appears the iPhone is now reaching the turning point the iPod hit in its fourth generation: a position of dominance over the high end that makes it increasing sensible to turn the company's attention toward reaping the lower end of the market.

The 2004 iPod mini allowed Apple to rapidly eat up remaining market share among lower end MP3 players. Last fall's iPad mini appears to have similarly helped the company to hold onto and even expand its wide lead in tablets. A cheaper iPhone would very likely help the company's efforts in making traction in markets like India and China, where vast markets are demanding a cheaper device.

What about the less successful Mac mini?

In addition to the iPod mini and iPad mini, there's also another recent example of Apple addressing the lower end of the market with less success: the Mac mini.

Originally released in 2005, Apple appeared hopeful that PC users would buy the $599 model to replace their existing box, potentially reusing their same keyboard. mouse and display. The new model wasn't nearly as successful as is mini siblings in the iPod and iPad families. Most desktop Mac buyers continue to buy iMacs.Would a cheap new iPhone work out as well as lower end iPods and iPads have, or might it sell as unexceptionally as the Mac mini?

So the question remains: would a cheap new iPhone work out as well as lower end iPods and iPads have, or might it sell as unexceptionally as the Mac mini?

This all happened before

In addition, there's also a warning example further back in Apple's past. Way back in 1991, the company decided it needed cheaper Macs to compete with the expanding array of lower end DOS PCs.

Existing Macs had been selling from $3,800 to $10,000, equal to higher end IBM PCs. But no-name clone PC were being offered for closer to $1,000.

Apple's plan to offer lower cost Macs back then was to simply repackage old models. It recycled the 1986 Mac Plus as the Mac Classic for $999, and sold its 1987 Mac II in a new box it called the Mac LC, for $2,500. This helped Apple expand its offerings and sell more machines, but overall consumers weren't really that impressed with Apple's approach to the low end of the PC market.

In modern day terms, the "cheap Macs" plan of 1991 would amount to Apple today offering its original 2007 iPhone for $99, and its iPhone 3G for $199. Those models would technically be very price competitive, but they would be terrible phones to sell today, given users' current expectations.

They couldn't run today's iOS software or apps (much the same way the 1991 cheap Macs couldn't run a variety of titles popular at their release), and such repackaged old iPhones wouldn't compare well in perceived performance to the intentionally low end models Nokia is currently selling.

Cheap new iPhones might instead just enhance the notion that Apple's products are overpriced (as the 1991 Classic and LC did) while helping the company to earn less money while dealing with more product models and the operational headaches that come with that.

Apple needs to be cautious in developing a cheaper iPhone today not to make the same mistakes.

Another example of targeting a low priced iPhone


There's yet another example of Apple targeting a specific segment of customers who need a lower price: educational iMacs.

Apple actually developed a special eMac model in 2002 just for education. Today, the company continues to sell a lower end iMac model specifically for the education market, with lower specs that drive the price down but also make it in general a poor value for most general purpose users.

Following that model, rather than just recycling old existing iPhones at lower prices, Apple would need to develop an intentionally cheaper version of the iPhone, which it could potentially market exclusively in developing countries or attach to low end prepaid carriers such as WalMart, MetroPCS and Virgin Mobile, reducing the risk of eating into higher profit models.

Apple doesn't like to design lots of new model variety, as every new model creates new complexity in operations: forecasting, component procurement, inventory management and so on. Were Apple to create a specially value engineered iPhone, it might likely take the place of the iPhone 4

The design of the iPod touch demonstrates how Apple can build a lower end device with some component compromises to reach a lower price target. While a 32GB iPhone 5 has an unlocked price of $749, the similar generation 32GB iPod touch costs just $299.

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The price gets that much lower not just by dropping its mobile hardware, but also through the use of a cheaper A5 with less system RAM and lower end camera. But the new iPod touch doesn't come across as a low end, cheap device.

The advancement of new generations of hardware components is occurring at such a rapid pace that it now may make more sense for Apple to design both a new high end "iPhone 5S" and a new low end iPhone, rather than just continuing to sell the iPhone 4S and 5 at a discount at existing price tiers.

The broad price range of iPods, including the fact that Apple now sells two generations of iPod touch, gives the appearance that a cheaper new specially designed iPhone is overdue. If it makes sense to custom value-engineer the low end of the iPhone range, this is the time to do it.

At the same time, Apple may also achieve a similar result by discounting or even financing its existing models for users, making iPhones more readily affordable to price sensitive users without complicating its supply chain operations with an entirely new model.
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Comments

  • Reply 1 of 138
    Another reason to introduce a new, less expensive iPhone mini is to unite everything this year with the lightning connector. Apple replaces the iPad 2 at $399 with the current iPad (4) when introducing the new iPad, and no more 30 pin connectors.
  • Reply 2 of 138
    pfisherpfisher Posts: 758member


    Bingo. Great article. If the iPhone 4 only costs $200 or so to make (guessing here), then if they sell it for $300, they are making their typical profits.


     


    Prices for technological products always come down, of course. Even for Apple. Its their game to lose or win. And winning doesn't mean more than 50 percent share. And losing could be a 10 percent share. 30 would be healthy - worldwide.


     


    The rest of the world loves the iPhone, too, but it's more than a months income for a lot of people. So they buy Samsung or Blackberry at 1/4th the price. Yeah, not the greatest phones, crappy in fact, having used them, but people do what they can do.


     


    Apple doesn't need to be the premium brand. They can have a cheaper model of stuff.

  • Reply 3 of 138
    isaidsoisaidso Posts: 750member
    " Tim Cook "already reversed a vow by late founder Steve Jobs that the company wouldn%u2019t introduce a scaled-back and cut-price version of the iPad."

    That's the stupidest comment I ever heard. By this guys logic Apple, then has done it with virtually every product they make.
    13" Macbook Pro
    11" Macbook Air
    21" low end iMac

    All "scaled-back" "cut-price" versions of their full versions.
    (again; if you are going by this logic)
  • Reply 4 of 138
    isaidso wrote: »
    " Tim Cook "already reversed a vow by late founder Steve Jobs that the company wouldn%u2019t introduce a scaled-back and cut-price version of the iPad."

    That's the stupidest comment I ever heard. By this guys logic Apple, then has done it with virtually every product they make.
    13" Macbook Pro
    11" Macbook Air
    21" low end iMac

    All "scaled-back" "cut-price" versions of their full versions.
    (again; if you are going by this morons logic)

    Damn, we all know DeD is a fanboy and writes the best fanboy pieces of all tech sites but you don't have to go name calling... Asshole.
  • Reply 5 of 138
    chabigchabig Posts: 622member

    Quote:

    Originally Posted by isaidso View Post



    "Tim Cook "already reversed a vow by late founder Steve Jobs that the company wouldn't introduce a scaled-back and cut-price version of the iPad."


    I'm with you. Steve Jobs never made such a vow. All he said was that their competitors were going down the wrong road with their 7" tablets running scaled up mobile phone software. iPad Mini doesn't do that.

  • Reply 6 of 138
    isaidsoisaidso Posts: 750member

    Quote:

    Originally Posted by mrrodriguez View Post




    Quote:

    Originally Posted by isaidso View Post



    " Tim Cook "already reversed a vow by late founder Steve Jobs that the company wouldn%u2019t introduce a scaled-back and cut-price version of the iPad."



    That's the stupidest comment I ever heard. By this guys logic Apple, then has done it with virtually every product they make.

    13" Macbook Pro

    11" Macbook Air

    21" low end iMac



    All "scaled-back" "cut-price" versions of their full versions.

    (again; if you are going by this morons logic)




    Damn, we all know DeD is a fanboy and writes the best fanboy pieces of all tech sites but you don't have to go name calling... Asshole.


    Comment I quoted wasn't made by DeD, it was made by Jun Yang, Anand Krishnamoorthy and Jungah Lee.


    Now I'm going to go in a corner and have a good cry because you've hurt my feelings. image

  • Reply 7 of 138
    asciiascii Posts: 5,941member

    Apple's no.1 rule is: don't make junk products. It follows that there are 2 ways they might move forward from here:


     


    (1) They figure out how to make a low-cost iPhone that's not junk


    (2) They just can't figure it out


     


    (1) is self explanatory.


    (2) is where it gets interesting. Remember Steve said they "Didn't know how to make a $500 computer that was not junk." But that didn't mean they abandoned the market, rather they invented a whole alternative product: the iPad.


     


    So what entirely new (not the iPhone) product could they come up with to address the low cost phone market?

  • Reply 8 of 138
    isaidso wrote: »
    " Tim Cook "already reversed a vow by late founder Steve Jobs that the company wouldn%u2019t introduce a scaled-back and cut-price version of the iPad."

    That's the stupidest comment I ever heard. By this guys logic Apple, then has done it with virtually every product they make.
    13" Macbook Pro
    11" Macbook Air
    21" low end iMac

    All "scaled-back" "cut-price" versions of their full versions.
    (again; if you are going by this logic)

    Agreed. A fully spec'd iPad mini is marketed as "every inch and iPad," and priced accordingly. It's only marginally less expensive than the iPad 2.
  • Reply 9 of 138
    jungmarkjungmark Posts: 6,626member
    Apple will release a new low cost iPhone only if it makes sense/cents.
  • Reply 10 of 138
    gazoobeegazoobee Posts: 3,754member


    Apple already makes a "cheap" iPhone by selling last year's (and the year before that) models.  This is their "cheaper iPhone" strategy.  


     


    IMO the only way it makes sense for Apple to come out with a cheaper iPhone is if the cheaper iPhone essentially replaces this "old model" sales strategy that fills the cheap phone spot already.  What I would envision is that they might simply put last years iPhone internals in a cheap plastic case.  With a slight downward revision of their margin, this kind of device could easily sell for just a couple of hundred bucks off contract and be free on contract.  


     


    That way there would only ever be two iPhones on sale at any given time:


     


    - this years model (expensive but worth it)


    - last years model in the cheap plastic case (practically free for the cheapskates) 

  • Reply 11 of 138
    slurpyslurpy Posts: 5,085member
    I honestly think in their next update, Apple needs to drop both the 4 and the 4S, and come out with one "lower end" phone to replace those, and one "higher end" to replace the succeed the 5.

    For the iPad, they should drop both the iPad 2 and the iPad4, update the mini to retina, and introduce the iPad 5 ("new iPad) for $399. This will simplify the product line and make the full sized iPad more lucrative. I doubt they want the mini eating most of the sales of the regular sized iPad, and right now the price gap between the 2 is too large. So they would have:

    - new lower end iPhone (polycarbonate?)
    - iPhone 5
    - new higher end iPhone (5S? Larger screen?)

    - iPad mini (retina)
    - iPad (using mini design)

    This would also serve to deprecate all non lightning products, and I think make it easier for people to make a decision. I understand the need for the "in between" products because of pricing dynamics, but I think they can move past that now. Oh, and they should also drop the old style MBPs soon.
  • Reply 12 of 138
    gwmacgwmac Posts: 1,795member


    More affordable doesn't mean cheap. People also forget that Apple did make a $499 Mac Mini that wasn't junk. It was a while back but if memory serves it sold very well. A cheaper iPhone is all but inevitable as is a larger screen iPhone. I think the cheaper iPhone will make its debut first and probably be tied with a China Mobile announcement. It will have lightning but I am doubtful if the first version would include LTE. Lacking LTE along with an older, slower CPU, less RAM and storage and perhaps a smaller screen should be more than enough differentiating between the higher end iPhone line. 


     


    Steve Jobs and Tim Cooke both realized it is always better to cannibalize a few sales of your own product line than lose the sale completely to another company. They also understood that getting people locked into to the iOS ecosystem often means those customers will stay loyal. How many iPhone users for example decided to get an iPhone because they enjoyed their iPod Touch first which made the transition easier. I am sure we will see the usual crowd of just sell the 4 and 4S cheaper unlocked or just add telephony features to the iPad Mini. 


     


    I wouldn't be the least bit surprised if this cheaper iPhone is just the next version of the iPod touch but they add 3G to it. The Touch sales  have been declining as more people decide to use their smart phones for music. Why not just convert the Touch into the cheap phone and it is up to the end user if they choose to buy a voice/data plan or not. They could still offer a cheaper version of the Touch that lacks the telephony components. The new Qualcomm universal chip or similar  that can work on pretty much any GSM, CDMA, or even LTE frequency in the world would mean you no loner have to buy an AT&T, Verizon, Vodafone, or any other carrier specific version. Just sell one version and let the customer decide which carrier they want to use and of course specific carriers could sell it for free or $99 on contract. 

  • Reply 13 of 138
    herbapouherbapou Posts: 2,214member
    I am not sure if a low cost iphone is needed in developped markets, but its badly needed in emerging markets. The emerging markets needs are diffrerent than developped markets, so serving the old iphone doesnt fit there need at all.

    Emerging market parameters:

    Unrelyable power grid
    Limited wired internet access.
    Low income, unable to afford multiple devices.

    From those parameters, what they need is a low cost phablet with either long battery life or replacable batteries. Retina displays or deluxe casings are irrelevant for those markets, it doesnt fit there needs.
  • Reply 14 of 138
    apple ][apple ][ Posts: 8,360member


    I'm still trying to figure out what the endgame is here, because that is not at all clear to me.


     


    I mean, what is Apple's purpose and why do they exist?

  • Reply 15 of 138
    kdarlingkdarling Posts: 1,640member

    Quote:

    Originally Posted by chabig View Post


    I'm with you. Steve Jobs never made such a vow. All he said was that their competitors were going down the wrong road with their 7" tablets running scaled up mobile phone software. iPad Mini doesn't do that.



     


    Actually, he said the opposite, that scaled DOWN tablet apps wouldn't work. 


     


    "The reason we [won't] make a 7-inch tablet isn't because we don't want to hit that price point, it's because we think the screen is too small to express the software."  - AI : Steve Jobs squashes rumors of smaller, 7-inch tablet from Apple

  • Reply 16 of 138
    apple ][apple ][ Posts: 8,360member

    Quote:

    Originally Posted by KDarling View Post


     


    Actually, he said the opposite, that scaled DOWN tablet apps wouldn't work. 


     


    "The reason we [won't] make a 7-inch tablet isn't because we don't want to hit that price point, it's because we think the screen is too small to express the software."  - AI : Steve Jobs squashes rumors of smaller, 7-inch tablet from Apple



    First of all, the iPad Mini is not a 7" tablet. It's 7.9", so it's more accurate to call it an 8 inch tablet, as even one inch makes a huge difference in tablet size and usability. And also, the iPad Mini's aspect ratio gives it a much larger screen area than that of crappy 7" Android tablets.

  • Reply 17 of 138
    solipsismxsolipsismx Posts: 19,566member
    kdarling wrote: »
    Actually, he said the opposite, that scaled DOWN tablet apps wouldn't work. 

    <span style="font-family:'HelveticaNeue-Light', 'Helvetica Neue Light', 'Helvetica Neue', 'Segoe UI', Helvetica, Arial, 'Sans Serif';font-size:11px;line-height:17.09375px;">"The reason we [won't] make a 7-inch tablet isn't because we don't want to hit that price point, it's because we think the screen is too small to express the software."  - AI : Steve Jobs squashes rumors of smaller, 7-inch tablet from Apple</span>


    No, he didn't say that. He very clearly stated, "We know developers aren't going to [...] change their software every time the screen size changes," he added. "When we make decisions on 7-inch tablets it's not about cost, it's about the value of the product when you factor in the software." On top of that he stated exactly what chabig paraphrased, that the current lot of 7" tablets are DOA.

    Apple didn't make a 16:9 7" tablet that required nearly as many developer contortions to get apps to work as you write on AI, but instead made an ? 8" tablet with the same aspect ratio and resolution as a currently shipping iPad that required no additional effort by developers thereby making the App Store options for the iPad mini over 200,000 strong on the very first day.


    Other comments of interest you ignored from that article:
    • "As a software driven company we think about the software strategies first."
    • "When we make decisions on 7-inch tablets it's not about cost, it's about the value of the product when you factor in the software."
    • "Sorry, I'm not going to write a watered down version of my app just because you can sell this version of your phone for $50 less."
  • Reply 18 of 138
    sockrolidsockrolid Posts: 2,788member


    Originally Posted by pfisher View Post


    Bingo. Great article. If the iPhone 4 only costs $200 or so to make (guessing here), then if they sell it for $300, they are making their typical profits.



     


    That's the problem with discounting older iPhones.  Component costs come down over time, but probably not fast enough to offset the $100 price drop of the year-old iPhone model and the $200 price drop of the two-year-old model.  So Apple probably can't maintain new-iPhone margins with their older phones.  


     





    Originally Posted by pfisher View Post


    Prices for technological products always come down, of course. Even for Apple. Its their game to lose or win.




     


    Yes.  In (probably) less than 20 years, Apple will need to replace their hardware revenue with something else.  Maybe technology licensing (Siri in cars and home automation, camera software, chip designs, etc.) but most likely digital content distribution and iCloud services.  As they say in Hollywood, "Content is king, but distribution is King Kong."


     


    I have a sneaking suspicion that Apple's "TV solution" is their key to success in this century.  Not just a television set.  An infrastructure combining elements of iTunes and iCloud, but with vastly more live and pre-recorded content than is now available.  Apple would make their money through rental, subscription, and sales of audio and video content.  And I think Apple might wait until 4K TV sets are commonplace.  That could be catalyst for change in the TV industry, and Apple could be planning to further disrupt the industry.  To re-make TV in their own image the way they remade the music industry.  So don't hold your breath for an "iTV" any time soon.

  • Reply 19 of 138
    solipsismxsolipsismx Posts: 19,566member
    @ DED,

    What's with changing the title of these Saturday pieces from Editorial to Opinion? Did not enough people understand that editorial [U][I][B]is[/B][/I][/U] an opinion piece?
  • Reply 20 of 138
    jusephejusephe Posts: 108member
    The iPod touch 5 gen. + a good ol' Nokia combo is a few magnitudes better than any cheap smartphones...
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