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.
“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.