Why there won’t be a $99 iPhone anytime soon

Mon, Oct 27, 2008

Analysis, Finance, News, Rumors

According to Needham Research analyst Charlie Wolfe, Apple has room to cut the price of its iPhone in half, devastate competitors in the process, and go on to rule the smartphone market. There’s only one problem: Wolfe is dead wrong, and provides no analysis to back up his assertions.

There are a number of reasons why Wolf’s analysis is flawed:

1. Apple isn’t operating in a vacuum. Wolfe talks about Apple cutting the price of its iPhone in half as if its the only party involved in the process. In reality, the reason iPhones are as cheap as they are is because AT&T pays a hefty subsidy to Apple for each and every iPhone sold. If Apple cut its prices in half, either AT&T would foot the bill, or Apple would take a hit in its gross margins, two scenarios that each company would never agree to. AT&T, while successful in its goal to lure away customers from competing providers such as Verizon, is suffering some short term financial losses as a result of the heavy subsidy price it pays. There’s no reason to think that it would decide to burden itself even more just so Apple could sell a few more phones. And Apple is a company with a track record of taking its gross margins seriously, and with the iPhone already aggressively priced compared to similar smartphones on the market, there’s no reason why Apple would feel the need to slash prices even further. The iPhone 3G is selling like mad at current prices, so why rock the boat?

2. A price cut wouldn’t be as impactful as Wolfe likes to think. The iPhone only works on AT&T’s network, so the pool of customers who would be inclined to purchase an iPhone is diminished right from the start. Millions of cell phone users are currently tied up with family plans and other types of phone contracts, and there’s no evidence to suggest that there are a significant number of people who wouldn’t buy a $199 iPhone, but would buy a $99 iPhone.

Wolfe notes:

“Any such price drops would be potentially devastating to competitors in the market, according to Wolf. The analyst believes that a $100 cut in the iPhone 3G’s advertised price could “double or triple” projected sales and quickly overtake most other smartphones on the market and leave only successful but “niche” smartphone manufacturers like Research in Motion, which produces the BlackBerry.”

Wolfe clearly hasn’t been following Apple too closely the past few years. Unusually aggressive price cuts to garner more market share has never been Apple’s style. Sure, it could sell iPhones at 50 bucks a pop and grow its market share exponentially, but that’s not in Apple’s DNA. Apple is a company that provides premium products, and prices them accordingly. It believes that market share is the result of innovative products, not a by product of cheap pricing. And Apple has a history of adding value to its products while maintaining its price points – not the other way around.

3. Market share is fickle. – Wolfe brings up Motorola’s experience with the RAZR as an example of a company quickly growing market share. The only problem is that market share is always changing. Successful companies don’t worry primarily about market share, but on putting out great products at affordable prices. Motorola’s phone business was on top of the world just 2-3 years ago, and now it’s barely on the map. So while a price cut might indeed grow Apple’s market share, a business plan driven solely by that metric is evidence of a short sighted business plan.

In the end, Wolfe’s analysis fails precisely because it provides no analysis at all. Sure, Apple could increase its market share by slashing the price of iPhones by 50%. Okay, what else is new? I mean, it could increase its market share even more by slashing prices by 75%! Truth be told, there is no way for Apple to slash prices and keep its margins intact, while keeping AT&T happy at the same time. As Apple continues to increase the storage capacity of iPhones, it is possible that an 8gb might be available for $99 sometime in the distant future. But for the time being, don’t expect any significant iPhone price drops anytime soon.

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15 Comments For This Post

  1. anonymous Says:

    The $99 iPhone is a sure thing. Apple has been more aggressive on price this year. Case in point, I’m typing this on my $800 MacBook. šŸ™‚

  2. Anonymous Says:

    what i read somewhere a while ago that a cost of an iPhone is 175 to build. So why lose profit on each phone? 199.99 is still attractive, before that price drops we’re sure to see a new model of an iPhone i bet.

  3. Ouch! Says:

    Damn,

    WOLFE GOT SMACKED.

  4. Anonymous Says:

    Nice article. Agree with you, I doubt Apple will slash iPhone prices any time soon.

  5. FFT Says:

    With every price drop, the phone loses more and more cachet. Obviously, it’s fine to lose ‘cachet’ to a certain point – you make up for it with increase sales. However, with the phone already trading at $199 with a 2-year contract, I’m dubious that the price could go lower while Apple simultaneously maintains the phone’s coolness / desirability factor. Frankly, I thought the $499 / $399 price point was perfect – when the iPhone 2.0 debuted, I expected a surprise announcement of a higher-end model in the same period, so as to keep the ‘elite’ momentum of the phone going while simultaneously spreading the lower form of the device to ready the way for Apple’s now-launched app store (where numbers = revenue). Didn’t happen. Was surprised. Still a bit puzzled. Wouldn’t be at all surprised to see the price hold stable on this model for the reason I’ve discussed herein; wouldn’t be surprised to see the next iPhone debut at a substantially higher price than the 2.0, assuming it carries even moderate changes as compared to its 2.0 predecessor. Might see the $399 / $499 pps reestablished.

  6. martinzed Says:

    If Apple cuts the price of the iPhone I for one would less inclined to buy one. Unlike the iPod this market is not Apple’s alone and I think the whole Apple product line would suffer with a ‘cheap as chips’ philosophy, for the reasons FFT (above) said. I buy Apple products for the perceived, and actual, quality. And higher prices = better quality (real or perceived).

  7. PeterG Says:

    Apple has never been about market share. Steve himself said so:

    “If you went to BMW and asked them why they don’t outsell the Ford Taurus, they would say they don’t want to make that sort of car.”

    Which reflects Apple’s long standing mission: Create innovative, high value products.

    What analysts sometimes forget is that revenue, not market share, is the true end-goal of any company. It’s not how many units you sell that matters, it’s how much you make on those units. Apple made a conscious decision to position itself as a maker of innovative high-value products, not a maker of mass-market commodities. And if the current health of the company is any indication, that position seems to have paid off.

    Peter.

    Peter.

  8. FFT Says:

    I guess everything is relative. To me, an entry price of $199 does not demarcate a ‘high value product’. I fully admit that to some, it may. However, I possess strong doubts that it serves to signal ‘high value product’ for the people who have previously been Apple’s champions: bleeding-edge / tech-forward / early-adopter set. In other words, the opinion leaders of the tech realm. There’s a pretty rich discussion available on this point: how much has Apple historically valued cachet / exclusivity? Recently? What are the trends? Is the fact that we’re dealing with a cell phone market rather than a personal computer market or an OS market indicative of a different pricing approach (perhaps because those tech-forward sorts are no longer the revenue drivers that they were when Apple was selling pcs)? To what extent can we draw parallels between Apple’s pricing and output strategies for its ipod line – I think there are many similarities.

    But the bottom line is that, while a $599 phone signals ‘high value’ (or ‘sucker’ depending on your perspective) a $199 phone really doesn’t seem to pass muster in that regard. Methinks market share has gained significant priority in the preference ranking of Apple execs since they entered this business. Again though, I am still left with my central puzzle: when the phone was priced at $500, Apple wasn’t exactly hurting for business. It wasn’t on track to sell 10 million, but I’m mystified why they didn’t attempt to maintain a hold on the high-end market while simultaneously expanding downmarket via a multi-product strategy? I can’t imagine the executives were banging their heads on their desks yelling ‘we have to find a way to have people stop buying these $500 phones!’

  9. UltraSPARC Says:

    If you actually read the article, every thing you’ve pointed out becomes moot. gg

  10. Martin Says:

    Apple makes a ton more money on contract commissions. In case you don’t know the phones t-mobile give you for free cost them $200+ but they make it back because their service is so cheap. Apple makes roughly $800 for those 2 year contracts. Increasing their market share by dropping the price is the only reasonable thing to do because for every $100 loss they make an extra $800 over 2 years. That is an additional profit of $700. It decreases the margins but increases overall revenue.

    Also I doubt it costs them anywhere near $175 anymore. Chinese factories are pumping out $70 (wholesale) 8 Gig knock offs. I understand that there is a difference in quality but these phones also offer features apple doesn’t like dual simcard (2 numbers 1 phone), Quad Band, Higher MP cam, and much more. I doubt a less feature rich phone with a bit better quality (not much from the look of their charger cables) is over 3X as much to produce than what they (Chinese) sell it for.

  11. anonymous Says:

    “Successful companies donā€™t worry primarily about market share, but on putting out great products at affordable prices.”

    That’s a load of dung from some moron who’s never been in a boardroom.

  12. JJ Says:

    Apple will not go this low for 1 reason only–profit margin will go lower . . .

  13. bimalesh Says:

    The whole story is iphone selling for $199 or $99 is hoax. Apple get a lot of money from telecom company for the 2 year contract. A clear indication is the price of simlock free iphone is Belguim since simlock is not legal there. It cost around 600 euros.

  14. bimalesh Says:

    The whole story is iphone selling for $199 or $99 is a hoax. Apple get a lot of money from telecom company for the 2 year contract. A clear indication is the price of simlock free iphone is Belguim since simlock is not legal there. It cost around 600 euros.

  15. web design Says:

    #2 in that article doesn’t get that fact that if all those millions of people are tied up to other cell phone carriers, it would be more appealing to drop their service and switch if they saw that they were saving $100 off their cancellation fee.

    Did I make sense?

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