The true value lays however in adding network specific apps to differentiate the mobile networks with iPhone from the one without to boost the appreciate value of the product. Visual voicemail is the first example. There is still a large list that Apple and the Networks could implement...
Apple has an very significant advantage that no other company can replicate: namely, the legion of devoted Mac users who for the most part will support the company no matter what. Since, many notable tech writers also fall within this camp, or in the very least cannot resist writing about Apple, Apple gains press coverage that other companies cannot buy.
In the consumer market, Apple is unstoppable so long as it doesn't get too greedy, and continues to put out consumer friendly products.
"the legion of devoted Mac users who for the most part will support the company no matter what" Actually we are Apple's harshest critics. Remember the G4 cube? Beautiful machine; awful price point. Even Steve's famous "reality distortion field" didn't sell many of those.
The iPhone has a UI at least 5 years ahead of everyone else, but it's also got a great, compelling lock-in thing going on: NO OTHER PHONE HAS iTUNES. And no one, MSFT included has authored an even slightlty compelling alternative to iTunes, so far, for managing ones digital life.
re: "the legion of devoted Mac users who for the most part will support the company no matter what" - - Just keep thinking that thought. You're just another one of those people "trying to figure out which trench Apple is occupying, when Jobs is flying in jet fighters for surgical strikes."
Droves of previously non-Apple using people are switching to the Mac (large percentages of people that buy Macs at the Apple Stores are new to the Mac) and a large but lesser percentage of iPhone purchasers don't use Macs.
"the legion of devoted Mac users who for the most part will support the company no matter what."
If you think this is true then I don't believe you know many Apple fans. Apple fans are always pounding Apple for every minor quirk in the product they offer; features, look, feel and price. Go and read a mac forum after a new hardware introduction and the level of vitriol directed at Apple can be scary. Look at the disdain the dock is still treated with or the finder. If you ever see the acronym FTFF on a Mac board it means Fix the F'ing Finder.
What seems to be missing in most of these iPhone pricing discussions is iPod pricing.
Look at Apple's products over the last several years. The prices are such that you can often justify the additional cost of getting the next item up in the pecking order. So if you're looking at a 4 GB Nano you will probably justify the 8 GB version. If you're looking at the 8 GB Nano you might justify the iPod classic or the 8 GB iPod Touch.
The iPhone fits into this equation with its current pricing. If you are considering an iPod Touch you might be able to justify the additional cost of the iPhone because of is additional features. If they had left it at $599 this would not be the case.
Apple has consistently priced its products so that they cannibalize sales from themselves. But usually this means more expensive products taking sales from less expensive products. Leaving the iPhone at $599 would have broken this trend and would have meant that the iPod Touch would be taking lots of sales from the iPhone.
It all seems pretty simple to me and I'm surprised so much ink has been spilled over this without looking at the entire lineup of iPods and how the iPhone fits in price wise from the customer's perspective.
Great article Carl! Keep up the good work!
Your analysis of the iPhone gameplan, together with the price-point analysis, is spot on. I too am amazed how many so-called tech and finance experts (not to mention so-called competitors...) misread or misunderstand Apple.
Apple is always two or three steps ahead of everybody - they know what is coming, and the planning and execution is perfect. What was that quote Jobs used at the iPhone launch?: 'I skate to where the puck is going to be; not to where it is'.
Disclosure: I also own Apple stock!
This write up ranks up there with Ridley Scott's work directing that 1984 epic Super Bowl ad for the intro of the MAC. Keep up the great truth-in depth - writting about Apple, Carl, and more power to all these great positive comments. If the SHORTERS could only hear and understand. The 'short' in truth is that the Apple train has left the station... no stopping now.
Carl - this is probably your best post.
And considering the quality of your other posts that is a great compliment.
keep up the good work!
Excellent post, Carl. What amazes me is that the analysts and journalists who follow Apple are so clueless about the company they claim to follow.
As for the comment from a random John: Precisely because of that upsell pricing that you described, I think the iPhone price was driven by the iPod nano. The iPod nano could've started at 199 and still sold well, but Apple priced aggressively at 149 in order to have a huge market of video players. Then using those numbers, Apple is hoping to sign up even more video content for iTunes, maybe even rentals, which could then help to sell more AppleTVs.
There is another reason that Apple has built in deferred income into the iPhone's marketing and tax structure. Much of that is the subsidies from the mobile phone providers. But there is another reason: Apple intends to upgrade the Operating System of the iPhone periodically just as it does with the Macintosh. Tax law requires that a "free" upgrade be tax deferred.
Will Apple lose anything by improving the features on the existing iPhones? No, because most of the iPhone's buyers will not be current Smart Phone owners. The majority of iPhones will be sold to the 90% of people who currently have "feature phones." These people often think that the Smart Phones are too complicated to use. But an iPhone is not.
You can safely give your grandmother an iPhone for Christmas, but a Trio? No way.
With the recent price cut, Apple is setting up to get even better traction with its iPhone.
The absolute intransigence of businesspeople amazes me. Hulk-like, Apple has smashed the portable music industry, the portable video industry, and is on its way to dominating the computer and cellphone industries, too. If I was heading up a large technology company, the very first thing I would do is learn everything I could about Apple and then figure out how to beat them at their own game. How many different industries can the Apple juggernaut lay waste until someone, somewhere figures out how to compete with them? So far, the CEOs have been burying their head in the sand and whimpering, "It can't happen here."
Thanks for this excellent article! I do have to disagree (partly) with this:
"Now, if Apple were to cut the iPhone price to zero, would any of this be happening? Not a chance."
If Apple/AT&T were to launch the iPhone for $0 (but with the 2-year contract, of course!), they would have "sold" 1 million unit during the first weekend alone, supply-permitting. The thing to keep in mind is the iPod part of the equation. If the iPod touch is $299, why not get a FREE iPhone and just pay for the phone bill? Of course, it would be harder for Apple to squeeze revenue-sharing out of AT&T. But it would absolutely blanket the market with the iPhone. I have not yet met a person who doesn't covet it. At $0, the barrier of entry is no more. Remember when the RAZR first dropped past the $49 mark? Everyone on the street seemed to have one. The difference is that those people grow to hate the RAZR. iPhone users predominantly love it. I think there's very little harm for Apple to lower the price some more other than cannibalizing the sales of the iPod touch.
You've clearly never heard of the Razr before.
3-4 years ago, the Razr did exactly what the iPhone is doing now. No subsidies or discount for the first 6 months. Everyone wanted one. It was the "it" phone.
Until the holiday season, when suddenly "it" was everywhere. Discounts, subsidies. And now that everyone had one, "it" was just another phone.
@ Jorge,
I agree. However, the difference is all in the user experience. The RAZR early adopters put up with the crappy interface because of the "it" factor. The iPhone adopters don't have to "put up" because the interface is already one of (if not THE) best ones out there. It doesn't matter if the iPhone is priced at $600 or $60, the user experience is still garnering loyal customers that rave about it. And by the time the iPhone is "everywhere", there'll be version 2. 
C,
A terrific article.
Very few analysts take the time to really understand Apple, why its gross profit margins are out of this world, and why it dominates categories so quickly.
I'm reminded of:
"If you're really serious about software, make your own hardware."
Steve must feel like he's on the biggest roll in histroy as these mobile companies fight to put their heads on the block.
R
Great post.
I've worked in the cellular industry for nearly ten years now and I can attest that nobody likes their cellular phone and nobody values them at all. People don't take care of them like they're a $300 piece of electronics, they take care of them like something they got free from a box of Frosted Flakes.
Nobody's going to stop the free phone fiasco, because the majority of the phones sold are free phones, but it's such a rude awakening for consumers when after two months they break their free phone and expect another one only to be told that it's going to cost them hundreds of dollars.
That's the difference with iPods and cell phones, people understand their iPod has value because they shelled out for them. I wish North American cariers had gone the direction that Europe has gone, or followed the cable companies. You buy your device (cellular phone) and then you pay for service.
I drove down to the US the other day and bought an iPhone and unlocked it so I could use it in Canada. It's a brilliant phone, and by far the best I've ever used.
Richard:
Sure Apple's fans can be a double edge sword. Apple set the bar high, and people expect a lot from the company. Nonetheless, no other company can gather the media attention Apple can. This is in large part because of Apple's user base, and partly because Apple's long going competition with Microsoft.
Tom B:
I didn't claim Apple fans would support every Mac product. I claimed that for the most part the legion of devoted Mac users will support the company no matter what provided Apple doesn't get to greedy. The Cube was a flop not because Apple didn't have support from its fans, but because it really didn't have a place in Apple's product placement, and if I recall the economy was tanking then. You could get a more powerful feature compact Power PC Tower with a Display for less money then a Cube. You could also buy an iMac for less money. So that was an example of Apple just not figuring out where the product fit in its placement map. Apple took a huge loss because people bought more sensible priced computers to the Cube. I considered buying a Cube because it was a great computer, but considering I could get a lot more computer for less money I didn't. Because of the Cube's failure, I could buy a Dual G4 Power PC Tower for $1499 with a free 17" monitor thrown in (a $1000 discount). Sweet. That was because the Cube was competing with Apple's other products, and Apple had trouble moving the Towers as well.
Now Apple carefully separates the features and prices of its different lines. If the Cube came out instead of the Mini at the same price points as the mini I would buy the Cube.
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