2011 - The $49 iPhone

  • Posted: 04 November 2010 04:29 PM

    My current paradigm when it comes to smart-phones:
    1) Android now has the biggest market share, but its market share is fragmented to a degree.
    2) iOS has the second biggest market share, which is a very sizable share
    3) The exact importance of market share is debatable; it is certainly important but it is not the “end all, be all.”
    4) Apple pulls exponentially more profit per phone sale than any of its competitors.
    (http://www.asymco.com/2010/11/03/how-much-profit-did-vendors-capture-from-android-powered-phones/)

    My argument:
    Apple should reduce the price of the iPhone (both the iPhone 3GS and the iPhone 4) by $50.  This would put the entry level price of a contact iPhone in the US at a very reasonable $49.  It would put the iPhone 4 (16GB) at a very reasonable $149.  These prices would be a nail in the coffin from its competition from Android phones.

    Problems:
    1) It would significantly hurt Apple’s gross margins
    2) It could start a price war (if there isn’t one already?)

    Advantages:
    1) Apple could eliminate some/much of its competition from Android, allowing it over time to capture an exceedingly large market share (in terms of both devices and apps) and ensure higher prices/higher gross margins in the future
    2) It could take market share and dev share from Apple’s competitors
    3) It could increase the economies of scale, limiting damage to Apple’s gross margins (though I believe there would still be significant damage)
    4) Many of Apple’s competitors would not be able to compete with Apple’s new prices (especially Motorola, Sony and Samsung)

    Reactions?

         
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    Posted: 04 November 2010 05:17 PM #1

    smitha96 - 04 November 2010 07:29 PM

    My current paradigm when it comes to smart-phones:
    1) Android now has the biggest market share, but its market share is fragmented to a degree.
    2) iOS has the second biggest market share, which is a very sizable share
    3) The exact importance of market share is debatable; it is certainly important but it is not the “end all, be all.”
    4) Apple pulls exponentially more profit per phone sale than any of its competitors.
    (http://www.asymco.com/2010/11/03/how-much-profit-did-vendors-capture-from-android-powered-phones/)

    My argument:
    Apple should reduce the price of the iPhone (both the iPhone 3GS and the iPhone 4) by $50.  This would put the entry level price of a contact iPhone in the US at a very reasonable $49.  It would put the iPhone 4 (16GB) at a very reasonable $149.  These prices would be a nail in the coffin from its competition from Android phones.

    Problems:
    1) It would significantly hurt Apple’s gross margins
    2) It could start a price war (if there isn’t one already?)

    Advantages:
    1) Apple could eliminate some/much of its competition from Android, allowing it over time to capture an exceedingly large market share (in terms of both devices and apps) and ensure higher prices/higher gross margins in the future
    2) It could take market share and dev share from Apple’s competitors
    3) It could increase the economies of scale, limiting damage to Apple’s gross margins (though I believe there would still be significant damage)
    4) Many of Apple’s competitors would not be able to compete with Apple’s new prices (especially Motorola, Sony and Samsung)

    Reactions?

    The market is much larger then the US, and the carrier in each market sets the price based on the contract and how much they are willing to subsidize the handset cost.  The ASP of the iPhone last quarter was $610.  So the real US price is 500, 600, 700.  Apple commands above average subsidies because they bring in high revenue users and also they do their own marketing and warranty repairs saving the carriers from having to provide these support functions.

    As far as a price war,  I would rather see Apple expand to more carriers/countries in 2011.  With such rapid growth in the smart-phone sector their is no real need for a price war.  Save that for when the market is more mature.  As far as future GM, I think Apple will continue to price aggressively for the feature set and should be able compete.  The Android OS is demonstrating great growth, but the the handset manufactures’ profits are slim compared to Apple.

         
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    Posted: 04 November 2010 05:20 PM #2

    smitha96 - 04 November 2010 07:29 PM

    Apple should reduce the price of the iPhone (both the iPhone 3GS and the iPhone 4) by $50.  This would put the entry level price of a contact iPhone in the US at a very reasonable $49.  It would put the iPhone 4 (16GB) at a very reasonable $149.  These prices would be a nail in the coffin from its competition from Android phones.

    Done.

    Here in Canada, the iPhone 3GS sells for $99 with a $50 credit on your bill. The iPhone 4 sells for $159 (16GB). Unfortunately, this is with the standard 3 yr contract. Our contracts are longer, but we can upgrade after the second year. This is normal for all phones here.

    [ Edited: 04 November 2010 06:21 PM by CdnPhoto ]      
  • Posted: 04 November 2010 05:28 PM #3

    The rule of thumb (BCG Theory) is that costs drop 15 to 18% every time total history of a product is doubled.  For example, if the cost was $4.00 per unit for their one-millionth phone, at a 15% drop for every doubling it would be $1.51 for their sixty-fourth million phone.  Of course, Apple refreshes the phone every year so they add back some cost for new features and changed processes.

    By concentrating on a single phone/computer, they were able to bring out a product which was outstanding: well thought out, well engineered, well designed.  They then made a lot of them and drove their manufacturing costs down.  They made lots of money and used some of this to improve their product and their market access.  They invested in designing chips for mobile application; they invented the application store; they worked hard on keeping the customer experience at a high level; and they extended the technology to the iTouch.  The last is not a subsidized product yet sells at prices in the same range as the iPhone.  Look at the iTouch as an iPhone 3g tweaked.  I don?t know their margins on these but I would bet that they are pretty darn good. 

    Nobody else has been able to make a product similar to the touch because they can?t make it and sell it at a profit.  Apple has applied the same situation with the iPad by applying their iPhone and iTouch experience to this product.  Same result, only earlier in the product life cycle.

    If they lowered the price now you are right, their market share would increase, except that they can’t make them fast enough.  Foxcomm is reported to be building anew plant which will add 70,000,000 units to there annual capacity.  Other suppliers are doing the same.  Up to now Apple has tiered their price structure by selling last year’s model for $100 less, and by selling the iTouch.  I look for this to continue, and probably accelerate until the market becomes more mature and saturated.

    A key to understanding what is happening is to recognize that Apple’s competition is not Android or Microsoft, but rather Motorola, Samsung, Rim, Nokia, HTC, Sony-Ericcison, and so on.  Now that Apple has surpassed Rim, only Nokia has the volume required to stay with Apple, and they don’t seem to have the technology.  As Apple’s volume grows, everybody else will try to take market share away from all the other also rans. 

    My gut feeling is that we are still a few years away from Apple initiating an all out price war.  In the meantime they will continue to drive the technology forward and keep their margins huge.

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    Posted: 04 November 2010 06:33 PM #4

    I disagree a little with the original post for 2 reasons:

    1. If history holds true and apple continues to sell a 8gb version of the previous years model for $99 US, I think the iphone 4 will prove a lot more popular than the iphone 3gs is now (I’m expecting less feature change in iphone 5 compared to iphone 4, as opposed to the huge change between the 3gs & 4 models). That should mop up a significant amount of the competitions breathing room without bringing down margins significantly. Perhaps the base model will increase to 16gb also.

    2. As for your other points regarding competition - I think that in the states at least the biggest block to apples market share growth is lack of carriers - I think the primary reason android models are selling so well is due to the unavailibility of the iphone on verizon/tmobile/sprint.

    I would be interested to know the smartphone marketshare on AT&Ts; network alone - this would give a much better indication of what the potential marketshare will be like once apple expands to all carriers (or at least adds verizon)

    [ Edited: 04 November 2010 06:36 PM by Burgess ]

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    Posted: 04 November 2010 08:27 PM #5

    It’s not the initial price of the iPhone that’s a problem.  It’s data and it will continue to be data.  Look out when 4G comes around, unless the telecoms seriously intend to keep their low-gig monthly caps in place with that much speed in play.

    I paid $299 for my iPhone 4 without hesitation.  For those in the market, $199 or so isn’t the barrier. One should care much more about the accompanying voice/data choices.  Let’s not forget how Moto used to sell the RAZR at $500 (after rebate?!) and no one complained.  Also, most of Apple’s money comes from subsidies.  I don’t doubt Apple will not mind a gradual decline in subsidies in exchange for market share in the mobile phone space.

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  • Posted: 04 November 2010 08:34 PM #6

    smitha96 - 04 November 2010 07:29 PM

    1) Android now has the biggest market share, but its market share is fragmented to a degree.

    That’s not factually correct, is it?

    smitha96 - 04 November 2010 07:29 PM

    Apple should reduce the price of the iPhone (both the iPhone 3GS and the iPhone 4) by $50.

    Respectfully, why would you drop the price of a product that literally cannot be kept in stock? If a lowered price will not sell more iPhones, then the only result of your suggestion would be to needlessly throw away profit.

    What am I missing here?

         
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    Posted: 04 November 2010 08:37 PM #7

    You have to remember, Android can take huge market share simply by virtue of Apple’s many competitors retooling for Android.  For example, Samsung alone sold 76 or so million handsets this fiscal year IIRC.  Convert half of those into Android phones?  Boom, Samsung’s Android line nearly outsells Apple. 

    Rinse and repeat for HTC (formerly focused on WinMo phones), Moto, etc.

    Big, freakin’, deal.

    The question is the sustainability of the flood of Android handsets, profit share, and any indications of interference with Apple’s own iPhone/iOS sales.  My early prediction was that Android will become the next Symbian OS.  Symbian OS still far outsells Apple, same as it did when Apple first entered the phone biz.  And how is Apple coping with being outsold…?

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    AFB Night Owl Team™
    Thanks, Steve.

         
  • Posted: 04 November 2010 09:40 PM #8

    Each hand set maker stands on it’s own.  Samsung does not share it’s learning experience with HtC, for example.  Switching from one type of phone to a totally different type means that you have to start all over again on the manufacturing learning curve.  If memory serves me right, the three biggest manufacturers, Apple, Nokia and Rim, made 3.9 BILLION dollars last year.  All of the Android phone manufacturers together made about 59 MILLION dollars.  They just don’t have the financial resources to stick it out for long term, except for Samsung which has a lot of other businesses (deep pockets).

    Nokia’s unit market share has dropped from 48 to 33 percent over the last three years.  Although they still have a reasonable market share they concentrated on low end phones, and as yet don’t have the technology they need to make better smart phones.

    Google makes no direct money on Android.  The premise that they will make a lot of ad money on Android phones seems reasonable but is unproven.

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    Posted: 05 November 2010 12:46 AM #9

    Just to summarize what most posters said:

    a.  Price war is only necessary when the market is shrinking and there is excessive inventory.  Smartphone pie is still growing, so no need for price war.

    b.  Apple sells all it can produce so reducing price would only cut into gross profit.  The pertinent task is to increase production rate.

    c.  US market is increasingly less relevant in the long term.  Focus on international markets especially China.

    d.  The main barrier to buying a smartphone is the data plan.  Should wait for price of data plan declines till it can’t be declined before considering introducing a cheaper version of iPhone.  Until then, current approach of selling previous model is fine.

    e.  Don’t be confused by Google and its Android partners’ psychological warfare.  Keep focussed in delivering a well designed it-just-works user-friendly iPhone.  Also, keep developers happy and AppStore useful for consumers.

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    Posted: 05 November 2010 10:59 AM #10

    Price elasticity is not high below $200. Meaning, in the US, a change in price below $200 does not lead to as big a change in sales as a change above $200.

    Remember one thing above all: pricing is illusion. It’s a signal.

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    Posted: 05 November 2010 11:28 AM #11

    Mace - 05 November 2010 03:46 AM

    Just to summarize what most posters said:

    a.  Price war is only necessary when the market is shrinking and there is excessive inventory.  Smartphone pie is still growing, so no need for price war.

    b.  Apple sells all it can produce so reducing price would only cut into gross profit.  The pertinent task is to increase production rate.

    c.  US market is increasingly less relevant in the long term.  Focus on international markets especially China.

    d.  The main barrier to buying a smartphone is the data plan.  Should wait for price of data plan declines till it can’t be declined before considering introducing a cheaper version of iPhone.  Until then, current approach of selling previous model is fine.

    e.  Don’t be confused by Google and its Android partners’ psychological warfare.  Keep focussed in delivering a well designed it-just-works user-friendly iPhone.  Also, keep developers happy and AppStore useful for consumers.

    Perfect recap Mace!

         
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    Posted: 05 November 2010 12:23 PM #12

    smitha96 - 04 November 2010 07:29 PM

    1) Apple could eliminate some/much of its competition from Android, allowing it over time to capture an exceedingly large market share (in terms of both devices and apps) and ensure higher prices/higher gross margins in the future

    Apple isn’t getting pushed into a small niche because of price. Android is kicking iPhone’s ass because it gives users more options. $200 contract price isn’t killing anyone.

         
  • Posted: 05 November 2010 12:29 PM #13

    Bosco (Brad Hutchings) - 05 November 2010 03:23 PM
    smitha96 - 04 November 2010 07:29 PM

    1) Apple could eliminate some/much of its competition from Android, allowing it over time to capture an exceedingly large market share (in terms of both devices and apps) and ensure higher prices/higher gross margins in the future

    Apple isn’t getting pushed into a small niche because of price. Android is kicking iPhone’s ass because it gives users more options. $200 contract price isn’t killing anyone.

    BOGO deals don’t hurt either. They make profit margins evaporate however.

    I’d like to see someone offer a wifi-capable smart phone with an OPTIONAL data plan.

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    Less is More (more or less).

         
  • Posted: 05 November 2010 12:31 PM #14

    To the vast majority of you, thank you.  You have provided some very thoughtful and insightful comments.  I just wanted to thank everyone for that.  I truly value AFB.

    On a follow-up: Google’s approximate revenue from Android last quarter was approximately $1 billion, correct?

         
  • Posted: 05 November 2010 12:48 PM #15

    I don’t think you can equate the $1bn run rate that Google claims they are making from mobile due entirely to Android.  How much of that revenue was generated from iPhone for instance?  Admob is one of the largest advertisers on the iPhone lest we forget.  Google search is also the default search tool bar in Safari as well.

    Trying to dig through the numbers of what Google is making from Android is almost pointless.  It is a part of their mobile strategy, not the be all and end all (which almost every commentator conveniently forgets when trying to make out Android as being the only way Google will succeed in mobile).