A price cut on the iPhone can be easily summised by what's right in everyones face.
Look at it this way:
Apple introduces 8 & 16 GB iPod Touch at $299 & $399.
(Clue-16GB flash memory available.)
Apple cuts price of 8GB iPhone from $599 to $399 matching price of 16 GB iPod Touch.
Discontinues $499 4GB iPhone.
(Note @ $499 & $599 Apple has sold close to 1Million iPhones in 1st quarter of availibility. Meaning customers are willing to pay price for product. History shows that Apple never walks away from customers willing to pay premiums for its products.)
(Note-Apple plan Euro launch of iPhone by end of 2007, which mostly uses 3g mobile network.)
Reasonable assumption:
Before Euro Launch of iPhone Apple will:
1)introduce $499 16GB iPhone
2)introduce $549 8GB 3g iPhone & $599 16GB 3g iPhone
It would also seem reasonable that by Euro launch there will be upgraded camera features, maybe even the addition of video capabilties.
Seems logical. Technology is already available. Euro market will demand 3g network capabilty. Reasonable explanation for price drop so soon after introduction.
If you look at the patterns that Apple has displayed with product introductions since the return of Steve Jobs, then one would certainly know that Steve and Apple would never leave a robust market for a $600 product behind.
Apple got the market primed with the original pricing struture of the iPhone and proved to the Market that they can compete on the high end. They then turn around a drop that high bar for entry and hit the market with a new high end.
I never try to predict what Apple will do next but these moves are so obvious that I'm willing to go out on a limb on this one.
If nothing I've learned, being one that watches Apple, is that Steve Jobs has figured out how to play the market like a fiddle in many cases. What's astounding is that analyst and journalist and Wall Street hasn't figure this out yet.
Here's the thing, though: as a consumer, I couldn't care less whether it's a savvy marketing move by Apple. It's all well and good for a company to make decisions that will get it the most money: hey, it's a multinational corporation, they want to make money. Good for them.
However, as a consumer, I do have two rights:
First, I can complain loudly about how I got screwed out of a couple hundred bucks. Being a product "assassin" is a time-honored tradition, and unless Apple changes their tune, one I fully expect to embrace.
Second, I can stop giving them money.
Am I being irrational? Perhaps... but any economist who expects consumers to always act rationally should probably change jobs.
Thanks for the follow-up from yesterday, Carl. Great analysis as usual!
I was a little surprised they made such a big cut in one go. Probably would have been better to do $100 now and another $100 when they introduce a new enhanced (or European) model. A $100 difference between the iPhone and the Touch would probably be acceptable in the interium without affecting iPhone sales. On the other hand, Apple just gave the competition a big wedgie.
With a $200.00 discount on the iPhone, I wonder if a significant portion of the cell phone fence-sitting public would now switch to AT&T even at the cost of terminating their current wireless contract?
It's a great story up to this point, but like most corporate-think these days, it's incredibly short sighted.
The next time Apple comes out with a must-have product, people will simply wait 2 or 3 or 6 months before buying it. Sure, some people will "need" to have it right away, but after this move, that proportion will be much smaller than last time.
People don't like to be taken advantage of. Not in such a crass manner.
What's the difference between the iPhone price drop and the Aperture price drop? (and subsequent voucher program) If it was good customer service then, why isn't it good customer service now?
Plus: If they had waited with the price cut until october, there would have been even more existing iPhone customers complaining...
I agree with Daryl on the pending release of the 16gig iPhone and the 3G iPhone. This is no different than Steve releasing new iPods with the old iPods moving down in price and the new ones taking the old price points. The only difference is that Steve didn't let the other shoe drop. He didn't intro the new 16gig iPhone or the 3G iPhone. Why? Because this was the iPod product refresh day, not the iPhone product refresh day. If Steve had released a 16gig iPhone or a 3G iPhone, that's what people would have been talking about today, not about iPods. Of course, they're talking, actually whining, about their $200 today.
Now, one item in Carl's blogpost caught my eye. I thought credit card price protection was thru a 3rd-party insurer. I don't think it reverts back to the original merchant.
My AMEX gives me return protection up to $300, which is not enough for an iPhone. And, it has theft and damage insurance up to $1000 for 90 days. So, a nefarious iPhone owner could have their phone stolen, if they wanted to recoup their $200.
Why not do what I planned on doing back when I bought my 4gig iPhone back in June. I plan on giving my iPhone to my mom who loved it, when she played with it, around Xmas, when I hope the new 3G iPhones are available.
So $599 8GB iPhone probably did have an approximately 55% gross margin. And it was not a myth as "analyst" Munster suggested. The price drop of $200 probably brought 8GB iPhone inline with Apple's ~30% margin.
If as suggested by Munster that the $599 8GB iPhone gross margins were around 30%, the price drop now would reduce gross margins to 0%.
Cy and the other pis* and moaners:
Clearly anyone that was an early adopter really likes Apple or had the discretionary income to by the iPhone.
A couple of thoughts:
If your ego is so attached to being one of the first to have the iPhone, run right now and get help. Otherwise, get a hammer and crush that dam* phone to smitherens.
Anyone that feels crushed that they no longer have the bragging rights to be one of the few elite gods, email me. We can arrange for you to send me the ill begotten piece of technology.
It is clear there is a market willing to pay for a luxury item. Someone else has mentioned other designer brands. If this group can't stand the fact that they feel short changed on $200, I can only imagine how they treat other people, how they came into their wealth, what type of luxury car they drive, etc.... Some of these people are ruthless in their business dealings and I've noticed that they'll go to great lengths to win, win, win.
Apple made a product, you bought it. The value of the product you bought has not changed, however, your perception of that value has.
And last, clearly anything that I have said will not affect how you conduct yourselfs. Grow up would be a good thought now, though you'll not listen.
Elm
"The next time Apple comes out with a must-have product, people will simply wait 2 or 3 or 6 months before buying it."
Wasn't that Carl's point? Apple signaled through price that they needed some people to wait. And plenty did--how many times have I read "I really want one but I'm waiting for the price to come down." How many analysts predicted a price drop or a lower cost model?
Note also that SJ never asked anyone to wait in line... and never said phones would be scarce.
You can't buy tech products (or real estate it turns out) without the risk -- and with tech it is a certainty -- that the price will be lower in the future.
The reaction is nothing new--no one likes price used to ration things. Witness the outrage when a disaster sends gas prices up... when in fact the price needs to go up to signal to people that there's a shortage and they should really only buy it if they need it.
Apple took a risk when they introduced the iPhone. It was a new product category for them, so they had no historical data to guage potential sales. As a result, they put it at an initial high price point that was guaranteed to cover the component and inventory costs and serve to ameliorate the R&D costs. If it failed, they could write off the remaining R&D costs and not have to write off the component and inventory costs. This is good because the component and inventory costs are cash out of pocket to the overseas parts suppliers and manufacturers. R&D costs are internal, and R&D has the potential to be re-used internally in the future. (It's not like they'd have to bury "unsold" R&D in a landfill in Logan, Utah, in order to get a tax write-off...)
Now that they have the initial sales data and they know it's a popular product they can drop the price and ameliorate both the component costs and R&D costs over a longer period of time. They also get a cut out of every AT&T service plan, which only increases as a percentage of revenue of each unit sold over time as component and manufacturing costs go down.
It's not like this is even unprecedented for Apple: The original 5 GB iPod came out at $400 in late 2001. In my mind at the time this was overpriced, as I had bought a 6 GB Archos Jukebox months earlier at MacWorld in January for just over $300. As a new product category, Apple priced it high enough to cover their component and inventory costs and ameliorate their R&D costs (which weren't actually that high for the iPod--one of its major "bold" features was FireWire). Apple didn't drop the price of the iPod as severely and quickly as the iPhone, though, because it didn't take off as quickly: It was initially a Mac-only product, and there were no 2-year service plans that they'd have a guaranteed percentage of revenue from. The iTunes Store didn't even exist until it was rolled out with the 3G iPods in early 2003, a year and a half later.
BTW, you can't ignore the fact that if Apple hadn't dropped the price of the iPhone now, the $300 price premium of an 8 GB iPhone at $599 over an 8 GB iPod touch at $299 would have severely hurt Apple's iPhone sales. Instead, Apple is punching up their iPhone sales and looking at them to go through the roof with this price drop.
*Maybe* what they should have done is only drop the price of the 8 GB iPhone model by $100, and introduced a new 16 GB model at the previous 8 GB price of $599. The iPhones would still have had $200 price premiums over the equivalent capacity iPod touch models, though. This would have steered a lot more people towards the iPod touch instead of the iPhone, especially when considering the 2-year commitment that comes with the iPhone, and potential consumer buy-out costs to switch networks. This would also have served to dilute Apple's brand, though, as the iPhone is their premium offering and they want as many customers on that platform as possible. It's also where real growth is possible, vs. the standalone music player market. Everyone knows those two markets are converging. Apple needs to be as strong as possible in the mobile phone market, while they only need to keep their momentum in the the standalone music player market (since they already practically own it).
*Maybe* instead what Apple should have done is released the iPod touch at $100 more for each model. They would have instead then gotten lambasted for charging $400 and $500 for 8 GB and 16 GB devices that were "only" media players, though.
It's a tough call, but in the end I think Apple will only stand to benefit in terms of sales, marketshare, revenue, *and* customer loyalty from the pricing they set for the iPod touch and iPhone on Wednesday.
BTW, it's not so much Apple's loyal customers that have long memories of Apple's supposed missteps and slights, it's the anti-Apple camp. They're the ones who bring up "flops" and "failures" like the Mac G4 Cube and the Newton. Meanwhile, the people who actually bought those devices (I never owned a Cube, but I own four Newtons) happily keep on using them for years. And even Apple's "mistakes" become collector's items!
Apple's loyal customers WILL forget about being "screwed" by this iPhone price drop fairly quickly. Apple's product release timetable and track record will ensure this. The timing for this partiuclar short-term memory reset is even well known: Next month Apple will release Mac OS X Leopard, and by that point only the anti-Apple detractors will ever even remember the controversy over this $200 iPhone price drop.
I'm impressed with the price drop. What a shot across the bow of the competition.
Also, the $100 rebate for early adopters is an in-store rebate. So through good accounting that rebate will be much less significant and still generate good will and customer relations.
"I always say that price is the last refuge of the desperate (or incompetent, depending on how snarky I'm feeling that day) marketer; it's what you sell when you have nothing else to sell."
Could you remind me who it was said that?
Oh wait, it was you - about the Zune. What's different now it's the iPhone?
Good point Charles about the price being the last refuge. And I accept completely the responsibility of applying it to the iPhone. Steve Jobs didn't have anything else to sell on this model of the iPhone, so he cut the price to boost volume. Guilty as charged. And yes, it was just like the Zune; it's a play for volume sales to boost market share.
But the difference for Apple was the need to rationalize the iPod/iPhone product line. Zune has no other models in its line. Apple has the iPod touch, which was going to cannibalize iPhone sales if the prices weren't rationalized. The price-to-function difference was just too great between the two products. So Steve did the "last refuge" bit, because the alternative -- having iPhone sales fall off a cliff because of iPod touch sales -- was an even worse outcome. It was again, just marketing.
Great thoughts all,
Carl
"UPDATE: Apple announced it is providing $100 rebates to all 8GB iPhone customers who haven't received other rebates. That means it will collect only a $75 million premium on the first sixty days, not $150 million."
Actually, they *aren't* giving a $100 rebate--they're giving a $100 *store credit*, which is an extremely important difference, for four reasons: first, like any gift certificate/credit, it forces the customer to spend that $100 at the Apple store, not elsewhere, which means that they *will* recapture that extra $75 million sooner or later. Second, the actual out-of-pocket cost to Apple for the $100 credit is $0; they won't actually take any loss (even a temporary one) until the customer actually exercises that credit. Third, even when the customer does take them up on the credit, Apple's out-of-pocket cost is really only the wholesale cost of the product, so they're only losing perhaps $30 or so on each $100 credit.
Fourth and most importantly, however, human nature when it comes to gift cards/credit is to spend *more* than the actual amount--no one is going to spend *exactly* $100 with their credit; they'll buy a nano for $149 and apply the $100 towards it. Result? Apple makes back their $100 and another $49 to boot!
Conclusion: Apple will end up MAKING money on this deal, in addition to the positive PR value!
Elmer,
I'm not a super-duper Apple zealot... in fact, I've never owned a Mac. iPods are the only products I've ever purchased from Apple. While I'm a pretty egotistical guy, it's not ego that drove me to purchase an iPhone. I was in the market for a new phone -- the novelty of my SK3 had worn thin -- so I took the plunge, with not-a-little-bit of hesitation. One of the things that assuaged my fears was that Apple, by all reports, was a classy company that did right by its customers. Whether you agree with me or not, I FELT that dropping the price by a third after only two months was a low-class move by a company that is held to a higher standard. (Let this be a lesson to the marketers: if you market your product as being 'deluxe' or 'high-end', sometimes you have to take steps to protect that image. Sometimes, those steps are expensive ones.)
It's not a question of bragging rights, it's not a question of ego. I don't feel crushed. It's a question of asking a company to walk the walk when it's been talking the talk.
It's not a question of the /product's/ value, it's a question of the value of the /customer experience/. I, as one of the egotistical braggarts who actually BOUGHT the product, felt that the experience had been harmed. Whether you agree with me or not is totally irrelevant to the point: iPhone customers were annoyed.
I'm rarely surprised when idiots on the internet turn on something or someone that has provoked their wrath. I'm surprised at the depth of that hatred in this case, though. I've been called everything from whiny to pissy to stupid, and this has been the theme throughout a deluge of comments and messages. All because I had the unmitigated gall to purchase a device and expect it to meet my standards for a good experience. The nerve!
Despite what you may believe, I /am/ a grown-up. The fact that you're upset with me about something as incredibly trivial as what cellular telephone I've purchased reflects far more poorly on you than it does on me.
DIAF,
Cy
There is now a rumor of a 16GB 3G phone will roll out in Germany this November. That upgraded model could certainly be the cause of the price drop and deletion of the 4GB SKU as well.
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