When Apple's iPhone first came out in 2007, it was so novel and lustworthy that customers were eager to pay good money for it. They needed to, too, because the original iPhone started at US$499 with 4 GB of storage, and if you wanted, you could buy the 8 GB model for $599.
In time, however, Apple embraced carrier subsidies so that users could get a new iPhone starting at $199 with a two-year contract. While that was good for sales, it also artificially leveled the playing field of perceived customer value and gave Google time to duplicate the smartphone User Experience.
Nowadays, thanks to those same industry subsidies, many customers see Apple's smartphone competitors as offering an equivalent product for an equivalent upfront price. It doesn't matter to those customers that Apple is receiving higher subsidies than competitors, that Apple therefore makes more money for each iPhone than Android OEMs. To them, the Samsung Galaxy S4 is the same US$199 that Apple's iPhone 5 costs, an artificial leveling of the playing field when it comes to perceived value.
Apple will probably change that with future products like the iWatch.
The history of technology development is rife with unintended consequences. The carrier subsidy, where everyone pays $199 for pretty much every first-class smartphone has likely done a lot to create the impression that all smartphones have the same value, independent of what the carrier has to pay the manufacturer on the back end. For example, AT&T sells the iPhone 5, the BlackBerry Q10 and the Samsung Galaxy S4 all for $199. They all appear to be in the same league, according to customer perceptions.
Of course, on the back end, Apple has been making a lot of money. Carriers pay Apple about $600 for an iPhone. If Apple suddenly dropped the cost US$100, would the carrier pass that on to the customer? Not likely. In reality, the carrier is in control of customer perceptions about value. Meanwhile, analysts see the low cost and low profits made by other smartphone makers as putting downward pressure on Apple's gross margins. That's why they fuss about gross margins and many have become nervous about Apple's continued ability to make the high profits it has been making with the iPhone.
Back to the front end. With the advent of Android 4.3, "Jelly Bean," Google and its partners have been able to create the perception that Android phones are "just as good" as the iPhone. Subsidy pricing further augments that customer perception. That all came to a head in 2012 when observers realized that Apple no longer had a significant market advantage. Well, perhaps except for privacy and security, but few seem to see that as a slam dunk edge for Apple. Android customers aren't exactly burning up the Internet, running amok, and becoming recklessly exposed to threats.
In essence, unintended consequences in the courts, mobile OS development and carrier subsidies have leveled the playing field, and Apple's claim that it makes "the best" falls on deaf ears for many. All that may have contributed to the notion that iOS 6 had run out of competitive gas, and Apple was forced to breathe new life into iOS 7.
Unleveling the Playing Field
Apple would probably like to return to the iPod model for its next generation products. There, Apple would have three significant advantages.
- The time Apple is spending to develop the next generation products will help ensure that they won't be subject to the vagaries and court decisions related to smartphone patents.
- Apple's vast retail chain will allow it to capture all of the margin and squeeze competitor profits.
- Apple will once again have retail pricing control.
Pricing control would be key. Being able to pull the rug out from under the competition by steadily reducing, say, the iWatch price would allow Apple to squeeze competitors out of the market all the while maintaining its reputation for quality products. Competitors might attempt to mimic Apple's iWatch and successors, but they'll no longer have the benefit of carrier subsidies to create the illusion of equivalent value. Apple can once again use its manufacturing expertise, leverage with upfront cash in billions to manufacturing partners and the retail store advantage to make life difficult for the copiers, a strategy that worked brilliantly with the iPod.
In one sense, the iPhone can be thought of as Apple's entry ticket, the cost of admission to a huge consumer electronics market, rather than the end game. In the future, Apple would very much like to return to the prospects of making life very, very difficult, for the competition.
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