For years, Apple’s been told its products were too expensive – and prospered mightily. Today, many suggest Apple should launch a low-cost iPhone. Will history repeat itself, or have the rules of the Smartphone Wars changed in ways that will force Apple to alter its strategy?
Dismissing the prospect of a Low Cost iPhone isn’t all that difficult. Just look at Apple’s history. For years, the high tech pundits have hectored Apple for it’s inability to see the wisdom of the cheap. In the late eighties and into the nineties, they insisted that a low cost Mac was the only way the company could survive against the swarm of PC clones. Steve Jobs returned and righted the Apple ship, no LC Mac required.
A decade later, the netbook was cast as the killer torpedo that would sink the resurgent Mac business. Jobs famously dismissed the netbook as a cheap plastic device Apple would never stoop to make: “We don’t know how to build a sub-$500 computer that is not a piece of junk.”
At the September 2012 iPhone 5 launch, Tim Cook announced that the MacBook is the #1 selling notebook in the US (5:30 into this video). Couple that with the success of the iPad, and the netbook is dead. And thus, by analogy, there will be no iPhone LC. Apple doesn’t do cheap. The company will focus on a premium customer experience and enjoy a high profit margin. The race to the bottom will be left to Android clones. Move along, nothing to see.
Not so fast.
Using Apple’s history — and particularly the sorry netbook story — to dismiss the iPhone LC makes questionable assumptions. As Marx (Karl, not Groucho) liked to say: ‘History doesn’t repeat itself, it stutters’. Smartphones aren’t PCs, only smaller; the rules of the Macintosh game don’t apply to the iPhone. The Smartphone Wars are waged by markedly different laws, and are waged well by Google and Samsung, unencumbered by a PC past.
But let’s back up: What would a Low Cost iPhone look like, whom would it serve, and just how “low” is Low? The easiest way to picture the thing is to drag out your old iPhone 3G or 3GS. A plastic body, an “original-resolution” screen (no Retina here), a slow processor and even slower wireless connection. It’s not today’s iPhone 5, with its metal body, lovingly machined chamfers, Gorilla Glass, high-speed A6 processor, and 5 megapixel camera.
The phone would serve the prepaid market, it addresses customers with little or no credit. Everything is paid for with cash up front: You pay the full, unsubsidized price for the phone and you buy “minutes” (let’s call them units of wireless network utilization) in advance. Buying units for these devices is a simpler experience than I imagined: Go to the neighborhood drugstore, pick out a phone card by a (virtual) carrier such as TracFone, and the cash register prints an activation code you then enter into the phone. Simple, pervasive, and very successful — even in a “rich” country such as the US.
So far, Apple has avoided the prepaid approach. When we give $199 to Verizon for a $650 iPhone, the $450 subsidy is an act of faith by the wireless carrier. The philanthropic organization assumes we’ll pay our bill every month for two years, by which time the carrier has recouped the subsidy. This is the postpaid world that Apple understands.
As for the pricetag, let’s assume that an iPhone LC would cost about $100 to manufacture — that’s half the cost of the basic iPhone 5. If we apply a 60% margin percentage — the same as today’s iPhone 5 — the unsubsidized iPhone LC would sell for $299.
That’s too high. Let’s try lower numbers: 50% margin gets us down to $199; 30% to $149. To get to the magic $99 unsubsidized retail, with an un-Apple 30% margin, the iPhone LC would need to be manufactured for less than $75, about one third of today’s iPhone 5.
And even $99 may not be low enough. Go to Amazon and look for prepaid cell phones. The first models start at $6.99 (not recommended, I tried one at $8.99 for my visiting Mother-in-Law, that was a mistake). Real smartphones running Android 2.2 start at $49.99 – today! For another $10 you get 2.3. The $80.73 Kyocera Rise runs the much more modern 4.0 (Ice Cream Sandwich) version. (I checked prepaid prices in other countries and the situation is similar.)
In his earnings release conference calls, Tim Cook constantly refers to Apple’s interest in the vast prepaid market segment but so far it’s been all talk. The reason for the gap between words and deeds sits in plain view on Amazon’s prepaid cell phone page. As more devices enter the market, we can only imagine what the page will look like a year from now.
The prepaid market, without carrier subsidies, is already in a PC-like race to the bottom. For Apple to enter and prosper in this segment, it has to determine two things: What sort of premium can it get for a low cost iPhone, and what would the device mean for the rest of the product line?
Apple execs are fond of saying they’d cannibalize their products themselves rather than let competitors do it. Even if exquisitely executed and priced just so, it’s hard not to see the (putative) iPhone LC as the augur of a new era of lower Apple margins. In other words, the iPhone LC wouldn’t be born of a tactical decision to add a new set of customers, it would be a strategic move that signals a new phase in the Smartphone Wars.
Apple loves to control the game. So do Google, Microsoft, Samsung, and everyone else, of course, but Apple’s love is an unusually intense, deeply seated drive that stems from Steve Jobs’ own (carnal as opposed to deliberate) need to master and direct every aspect of the game.
In the PC business, Jobs pushed vertical integration down beyond hardware and software, and into its retail chain of Apple Stores, thus ensuring a tightly controlled delivery of the product experience. The same applied to the iPod and its integration with iTunes. The well-controlled media delivery and novel micro-payment system was a huge win: In 2006 iPod revenue outpaced the Macintosh line.
The iPhone started with Apple fully in control. AT&T stood aside and let Apple run the table, handle all aspects of the customer experience (except for call quality). Later, the App Store extended Apple’s control of the game. The iPhone became an app phone and a phenomenal success.
(We also have the counterexample of Apple TV, an exception that proves the rule. TV content owners, distributors, and carriers haven’t let the Cupertino company seize control of the customer experience, and thus Apple TV remains a “hobby”.)
Apple is still in control of its iPhone ecosystem… but things have changed. Now the company faces Google and Samsung. Google isn’t just Android, it’s also a provider of a wide set of services such a Google Maps, Gmail, Google Docs and Drive, Google Voice, and on and on. Samsung is more vertically integrated, makes its own smartphones components, and spends more marketing money ($13B last year) than anyone else.
In today’s smartphone scene, can Apple still enjoy the control — and the ensuing profit potential — it craves? And if not, how will it react? Tactics or strategy?
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18 Comments
quote:
“We don’t know how to build a sub-$500 computer that is not a piece of junk.”
But Apple knew how to do a new “concept” at $500.- with the iPad.
Also, we must remember that to get into the low-cost iPod they delivered the iPod shuffle. Do we remember all those pundits that said that a screen-less iPod would not success?
In the same line-of-thought it is possible that Apple gets a “new concept” or “I-do-not-know-what” to get into the pre-paid market.
Some telco executive told the news that Steve Jobs wanted to avoid the telcos.
Could it be possible?
Apple already has FaceTime and iMessages. Could it be a wi-fi phone? (OK, Cisco failed with their own iPhone!)
Could it be a virtual-SIM phone (less cost)? Telcos do not like that.
Or, maybe, Apple shifts the revenue stream to apps. Low cost phone + app purchase may be tempting (although prepaid users are skimpy at paying, they also are more impulse motivated to buy).
Just look for a “new concept.” (Do we remember the iPod+RotatyWheel presented in January 2007?)
In Russia, the prepaid market is the only market. SIM locking is illegal so carriers don’t offer contracts. Guess what, people buy iPhones. iPhone 5 is $1000 at carriers’ stores, $800 in online stores now. Older models are cheaper (iPhone 4 is around $500.) So, at least outside the US, prepaid doesn’t mean low-cost.
BOM for iphone 5 was $206.
if your reduced by 50% the cost of display, ram, nand, camera, SOC, LTE chip.
the BOM is $140.
a lot of people want smartphone but if they don’t spend money or use apps
than what is the point of cheap iphone.
Why not drive prices up, instead of taking a dive? How? By “lifecycling” Apple products and forcing its competition to build sufficient quality into products to do the same.
Currently Gazelle will purchase my used and even my broken iPhone because, I assume, the components have enough material or “bullion” value. Why shouldn’t Apple offer to take iOS devices in trade? Why hand off to Gazelle all the good will and good business?
More importantly, product recycling is a critical and inevitable policy change. And the first one in will get the bulk of the credit. Does Apple really want Google, Samsung, or Microsoft to grab the brass ring? I’ve put up a petition asking Apple to take the lead and a leap that it is best positioned to succeed at. http://cl.ly/0A302L3Y0c0r
Apple doesn’t make low cost. Apple doesn’t make junk. Has Mercedes ever made a low cost SL? When a company has difficulty keeping up with demand for its premium product, why make cheap?
Something is happening behind the Apple curtain. The iPhone 5 is good enough. The real future is with iPad mini’s. A full blown computing device for under $300 that lasts all day, instant on, can connect to LTE when necessary. This is where Apple is going to increase their market share. There are signs of this staring to come into focus. Check out some of the new display tech, new processors and liquid metal stories.
The new Corvette C7 has for dashboard a tablet.
For the cars driving themselves they need to communicate together.
Augmented reality will be soon the new craze.
How this tsunami of digital (numeric) gizmos are going to be integrated, let hope nicely, in our day to day?
What if the much-maligned Lightning connector’s “adaptive interface” is the prelude to an iPod-Shufflesque evolution in the phone space? What if the iPhone 5 was the Trojan Horse to get the accessory manufacturers to create all kinds of compatible docking devices so the newly evolved xPhone quickly and easily slots into a ready-made environment within Apple’s ecosystem.
This sure beats coming in with a smaller/different device with a necessarily smaller dock that has to start from scratch. Now the way is already prepared.
Apple has already begun to test consumer credit spread over 12, 18 or 24 months in China as a way to make the iPhone buyable to a larger market while maintaining their premium brand desirability. In the plan 12 months has no credit cost then something like 8 and 6% for the other periods. Apple is also letting T-Mobile (I hope i have that right) in the States who are selling data plans and separately they will sell you an iPhone on credit. Surely T-Mobile can only be doing this with Apple’s permission.
Depending on the outcome of these experiments Apple may use credit as one strand of a multifaceted approach. I do believe Apple will broaden the iPhone offering but its a complex calculus to find a price point that will swell buyer numbers enough at likely a lower margin to increase profits overall despite some cannibalisation. One should remember that while only having a small overall marketshare apple has something like 75% profit share. Therefore 80% of the non-apple market contains only 25% profits to be pursued and obviously the cheapest phones yield minimal profit. So Apples challenge is to know the price point and margins that will maximise profits for their efforts.
A $299 prepay phone with 12 months interest free credit anyone?
The iPad mini serves as a good example of apple is playing this game. They opted for a higher price than the pundits wanted at a slightly lower margin than the finance community had the stomach for. Well soon find out how the first innings went on that model.
There is a Mac-based personal computer available for $329 today, which was completely unimaginable at this time in 2010, only 3 years ago. In the same way, it may be impossible for us to imagine an iPhone that retails for $149 unsubsidized.
The people who say smartphones today are like the PC market are right, only it is not at all like early 1990′s PC’s — smartphones today are like 2005–2010 PC’s. The iPhone, like the Intel Mac, has taken all of the high-end and almost all the profit, chasing Android and other phones down into $99 unsub prices, just like Windows Vista/7, which were both so very proud of the way they ran better on netbooks. Next comes a new kind of low-cost iPhone that matches 2010′s new kind of low-cost Mac: iPad. That will eat Android alive like iPad has been eating Windows alive, taking over 30% of its sales in just 3 years.
We don’t know what the low-cost iPhone looks like, same as we didn’t know what to expect from iPad. But somebody is going to have to explain to me what is going on with iPod nano if it is not on its way to becoming a phone. Every year it gets one step closer. And iPod touch is a 3G chip away also. And it starts at $189.
So there is a lot of low-cost iPhone smoke already. Given the iPod shuffle, I find it hard to believe that there won’t be a full line of iPhones at some point. Given $329 iPads, I find it hard to believe that anyone truly believes Apple will leave low-cost phones to everyone else.
What is weird is that for decades, PC makers were so sure there would be no $500 and $300 computers from Apple that once iPad shipped, they are all toast. There was no plan B for those guys other than cheap Mac knockoffs. Where is the plan B for Android once the iPod nano gets a feature phone inside and still sells for $149?
If all a company has is their price point (e.g. HP in 2010, Samsung in 2013) then they are at-risk that somebody will design a better device just for that price point. I say “somebody” but history tells us it will be Apple. Everybody else innovates in cardboard while Apple innovates in all other materials. An iPhone nano might use Liquid Metal to be cheaper. It might use iPod OS to be cheaper. It might have a new kind of app to be cheaper. Apple can do all these things because they have the technology and talent to do them.
Anyone who has to reach back to the early 90′s to explain today missed that Apple was re-founded in 1997 and has refuted the early 1990′s a few times already: iPod nano, iPod shuffle, free-with-contract iPhones, $999 MacBook Air replacing $1799 MacBook Air, iPad replacing Macs at half price, iPad mini replacing Macs at 1/3rd price.
I think a big problem is many pundits just can’t imagine what the phone market looks like if — for example — iPod touch and nano had 3G phones added but maintained their price points. Even 3 years later, for many it is hard to understand that the Windows PC as we know it has already been killed by iPad. The denialism is religious in nature. The generic technology world has shrunken down to feature phones and TV’s and so as a matter of faith generic technology people have to pray that Apple will decide not to play in feature phones and TV’s. If Apple will sell $49 music players and $329 personal computers, there is no doubt they will make $149 phones. Samsung has been eating other generic technology makers to survive iPhone, but they are setting themselves up to be brutally killed by iPhone nano because the one thing Samsung has is price.
apple is a mall store now, like sharper image once was .. of course they will have cheap phones, and other devices
In most growing markets (for mobile) prepay is King. What can Apple do about it.?
If you look today at figures showing hyper growth in mobile customer base, one easily discovers that they are in developing countries (Asia, South America, Africa) in which close to 99% of the customer base is prepay..Many of these countries have granted or are about to issue 3G even 4G licenses to develop Mobile Internet…
Prepay is best adapted for countries in which commerce is “done in the street”, with all dealers assembled in the same corners (the “souk” model), which take their commissions from selling top up cards.
Prepay is adapted to economies relying on cash, with relatively underdeveloped retail banking. Hence so many mobile operators following Safaricom to develop mobile money, attaching a bank account to a prepay number, providing info on money going in or out of the account, allowing for cash deposit and cash transfer…
Prepay is the best way to secure a reasonable performance in working capital. The mobile operator sells wholesale cards, gets the cash from resellers, and does not have to put in place complicated cash collection processes
When one has access to true customers consumption, you would be amazed how some customers spend on prepay… Pb is that in many western countries prepay is perceived as cheap offers .. and certainly in SV..
I am currently involved in a consulting project in one African country. I can guarantee to readers of this blog that I hear bout Chinese I Phones (imported from Dubaï) for lack of possibility to import true ones…(or thru friends))
And I heard more than once that countries with low level of literacy SIMPLY NEED simple smartphones with screens appropriate for viewing You Tube (mobile Internet for us is not about surfing or writing, it is about seeing content..)
To catch growth in developing countries and bring something that would change the game…AA could thus think about
* a phone with an even stronger focus on voice command/Siri/Access to local content..
* a phone which would be an easy to use as a purse, allowing thru a simplified I tunes (and Western Union ?) money management/transfer
* a ruggedized version.. (It’ ain’t downtown San Francisco in terms of comfort)
* with a wholesale distribution model.
and if AA does not do It.. Google may well do it
Apologies to @Hamranhansenhansen if I’m simply reiterating his points.
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But it’s really astonishing to imagine that Apple, which has three MAJOR disruptions to consumer tech (iPod, iPhone, iPad) and several MINOR disruptions (MacBookAir, iTunes, AppleTV), has no more in its labs.
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Equally astonishing is the idea that Apple, the acknowledged world master of design, engineering and logistics, cannot apply those skills to the quite different “job to be done” in China, India, Brazil and other lower-income nations which today lack the 3G and 4G networks and other crucial infrastructure (widespread mobile culture, apps, …) that provide a large part of the value of a smartphone.
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I won’t claim to know what is the optimal form factor for 2013 in lower income countries. I think it’s only necessary to note that a phone built for China’s phone standards won’t undercut US or Japanese margins by more than a tiny cut in gray market sales; Apple has all the pricing flexibility it could ask for. So I can’t imagine who is better positioned to provide the right product than Apple, nor a firm better able to understand what those needs are.
@Walt French
You are right, IMO. Apple can do it! But I also remember Steve Jobs saying:
“I’m as proud of the products that we have not done as the ones we have done.”
So, the question is: Should Apple do it? Must Apple do it?
As always with the Apple/BMW analogies… Should BMW do a low-cost car?
Neither I’m American, nor I live in America, but I think that there is a law the forces public companies’ management to do the best in shareholders interest.
Highest revenues is surely in shareholders interest.
Market share at very low profit, I do not think so.
@ Luis Masanti: yes, the question Apple is asking internally is “should we,” not “can we?”
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But I think the answer is “yes, we will build a device that’s right for the Chinese market, because we can make a first-class device for the very different needs there.” Profit margins may not be as high as if they sold low-cost-of-production devices in high-price markets, but they can be much more than zero, which is what they will get from selling the wrong devices.
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Further, per the Disruptive Technology paradigm, there’s no reason to let Samsung, ZTE or other lower-cost manufacturers gain market share and especially, ecosystem and store expertise, in the way that Dell funded the assemblers and motherboard firms to become full-fledged competitors.
The comments show Apple does the design questions — what’s now technologically possible? and makes a focussed package? and is desirable? — then sees if the market votes it a success. But the packages are not in isolation, because the technology is making ubiquitous computing possible. But possible doesn’t mean desirable — it just means possible, and that’s perhaps why there’s so much interest in what Apple is thinking long term. They created the iPad market. The nano, the shuffle, the Mac minis, the iPad, these are all packages advertised in the context of an environment — where would you use this? Jobs leisurely sits on a couch with his new iPad — because that’s where most people are going to use the iPad. So it is all about the environment where the tech would make sense. That’s the “humanities” part. It would perhaps be a smaller “cheaper” device that gives you access to information in ways not practical with cut-down phones. Perhaps that’s where Siri is going, if the tech can make it possible.
The flaw in the argument is that a significant number of people buying an $80 would happily pay $160 for an iPhone.
The potential problem for Apple is that it really doesn’t have a decent solution for the prepaid market. And the massive danger for Apple is that the US may also become one (TMobile is supposedly going this route next year).
A prepaid market is a better market for consumers, and a postpaid market has significant legal pitfalls. Many countries already don’t allow them.
Honestly, I think a $200 unsubsidized iPhone would be sufficient for Apple to capture a large portion of the market.
The top end belongs to Apple. Apple just needs enough compettiveness to have a total market share which stops it from falling behind Android as a platform.
The BOM on an iPhone 5 may be around $200, but the COGS is well north of $300. When thinking about margins or pricing on a low cost iPhone, you can’t forget about all of the other costs that go into the device outside of the components.
The other question that doesn’t seem answered is: what does a cheap iPhone do better than the current iPhones? iPod Nano, iPad Mini, MacBook Air all did certain things better than their predecessors, a low cost iphone would just be cheaper.
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