Apple’s Future Products: Unlevel the Playing Field

| Analysis

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.

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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.

  1. 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.
  2. Apple's vast retail chain will allow it to capture all of the margin and squeeze competitor profits.
  3. 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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Football image via Shutterstock.

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Comments

mhikl

John, there are so few original thinkers, out-of-the-box kind, in your field. Limited by memory & duty I can juggle only about five at any one time: Messrs Martellaro, Kirk, Dilger, Gruber, the Bajarins, & the graph guy. Now there alone is the proof that Alpple trounces what ever it chooses to trounce. Me thinks the history of iPod strikes fear in the hearts of all challengers.

I feel a poem coming on but know from experience that that is one box out of which the tech community can not climb.

graxspoo

There’s a flip-side to this, which is many people see no need to pay more if they can get something that “gets the job done” for less. The “level playing field” you speak of does not exist in the pre-paid carrier offerings. In my opinion in the pre-paid space the iPhone simply looks overpriced, because a Samsung Galaxy more or less does the same thing as the iPhone, but costs less. In fact, I’d rather have a phone that does not have a fragile glass back, even if that glass back increases the cost of manufacture. In short, Apple has benefited by having a lower end cost to consumers, and they have also benefited by being able to squeeze more profits out of the carriers.

adamC

I am looking at the future generations of the A chips Apple are developing and I am not surprise that they will be as capable as what intel are making today then the field will be more level. Imagine mobile apps are as capable as desktop apps.

And we are getting there because Apple is betting heavily on mobile.

wab95

By Irrespective of mechanism, John, I believe that you are correct on the point tha Apple require a differentiator for their product offerings.

Many people have made the point that graxspoo above makes, namely that many purchasers simply want something to get the job done, and will, following Second Law principles, seek the lowest cost means of doing so.

This is part of our global tech culture, born from the PC era, in which the ecosystem consisted of our largely isolated desktop - at least at the start of those wars and in advance of the take-off of the Internet - and a period that witnessed the birth of the ‘race to the bottom’ during which the value proposition of hardware purchase and ownership was defined as the least price per unit (whether device, storage space or memory based).

Those were simpler times. More Germaine to this point, the ‘job’ was then, as now, defined by the state of the art ecosystem, which in the ‘80s and 90s was defined by OS on one’s isolated desktop. Our expectations revolved around what we could do on our self-contained solitary computers, and the range and speed with which we could do those tasks.

Exit the PC and enter the post-PC era, and we have what you are wont to say in the USA, it’s a whole new ballgame. The true task or ‘job’ has evolved, and is no longer synonymous with what many hold as the perceived task. Many people continue to view ‘the job’ by PC era metrics, namely speed and range of functions on a device. Tat worked for devices functioning in splendid isolation; however that no longer defines true work or task set. Why not? Because the ecosystem in the post-PC era has changed, and is now defined by seamless interoperability with other devices and integration with cloud services, in which all devices, including the venerable PC, are subordinate to the cloud. In other words, the job is now digital lifestyle management, putting our data where we are when we need it, on whatever device we happen to have with us or on our device of choice. Isolation has yielded the day to integration into a wider world.

Not everyone has awakened to this new reality, as witnessed by the startling lack of such activity amongst Android device users; however they will in time, either by being dragged to it, or voluntarily waking from their time-warped slumber.

Meanwhile, Apple can help sound that revelly by having obvious product and, more importantly, service differentiators that, using the clinical term, embarrass the competition (meaning exposes deficits and weaknesses in a system), which in turn will aid the average consumer to appreciate the true meaning of ‘the job’ in the current era, and inviting them to become full participants and users of those tasks. Economies of scale will then take effect impose unforgiving but necessary choices on Apple’s competition to either play on Apple’s terms (and therefor to Apple’s strengths) or play an entirely diffences game, and ceding that arena of integration to Apple.

Neither of those choices will be attractive to those competitors, but they where we are all headed in the post-PC era.

wab95

John:

Let me add, there are times that we are not best served by autocorrect, as my post above demonstrates. I would welcome a return to being able to correct mistakes.

Also, I find that accessing your site on an iPad still causes an annoying reset to the top of the page while trying to scroll down. This appears to have started just over a week ago.

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