iPhone Shows That Cheaper Phones Are Still Important

from the price-is-important dept

Mon, Jun 9th 2008 12:20pm — Mike Masnick

The iPhone has received plenty of well-deserved (and plenty of not-so-well-deserved) hype and press over the past year or so, but one of the key points that Apple tried to make when it launched was that a premium phone deserved a premium price -- and people would pay for it, even without a massive subsidy from a mobile operator, as is typical of other phones. And, while there definitely was a huge crush of Apple fans who had to buy the iPhone early, the fact that Steve Jobs quickly lopped $200 off the price, just months after it was introduced, suggested that the number of people willing to pay that kind of premium wasn't as much as expected. In today's keynote, as was widely predicted, Jobs launched the new 3G iPhones with another $200 cut off the price, so the base model with 8gigs is now $199 -- down into the range of your typical subsidized smartphone.

While the iPhone has done plenty to get people to rethink mobile interfaces, it seems clear that Apple may have initially misjudged how people would respond to premium-priced phones. Jobs had promised 10 million iPhones sold in the first 18 months, and has reached about 5 million in the first 12 months (nothing to sneeze at, obviously). However, to get up to that 10 million number, he had to drop the price to be competitive with other phones. It's a smart move (though, it's not clear if the $199 is subsidized or not), given the market conditions, but beyond the lessons that everyone will talk about concerning Steve Jobs' strategy in launching the iPhone, the most interesting of all may be how the initial pricing structure backfired -- but was changed so quickly.

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Filed Under: iphones, pricing, steve jobs, strategy
Companies: apple

19 Comments

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Dave, 9 Jun 2008 @ 12:40pm

Did it backfire?
Did the initial pricing structure backfire?

One thing you learn in business school is that the holy grail is to get each customer to pay the maximum that they will pay. This maximizes revenues but is very hard to do in consumer goods such as the iPhone that are sold en masse.

But Jobs has done a good job of doing just that. How many million did he sell in the first few months at $599 and how many more at $399? And now the price is reaching the market plateau that will possibly get the extra 5 million people to buy. So he might have moved 10 million already at $199, but he would have lost all that extra premium on the first 5 million (somewhere between 1 and 2 billion dollars). I don't think his strategy failed.
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inc, 9 Jun 2008 @ 12:50pm

I'm sure that enough money was made to pay for the R&D of both phones. This is also a prime example of competition lowering the price of goods. The iPhone also has more competitors now that are jumping on it's weak points. Google's Android is also a threat to their interface. This move will certainly help kill the competition.
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William Jackson, 9 Jun 2008 @ 12:51pm

Backfire?
The early higher price slowed demand slightly thus reducing the number sold on Ebay. Plus Apple got the money that would have gone to the Ebay sellers. They sold 6 million phones in less than a year, and they ran out a month ago.
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Kevin, 9 Jun 2008 @ 12:52pm

If only
Jobs and company would likely have been more successful with a premium price if they had offered integration with MS Exchange and the SDK in conjunction with the initial launch. They missed an huge market segment by ignoring the enormous corporate market.

However, Jobs has successfully opened consumer market for full featured internet devices; a market that will grow exponentially from here. Like it or hate it, the iPhone is a game changer. The mobile phone market is changed forever.
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Anonymous Coward, 9 Jun 2008 @ 1:21pm

Re: Backfire?
Way to spin that Apple Ass Kisser. They sold "5 million in the first 12 months" & they didn't run out last month. Go to AT&T you will find plenty of the old iJunks. They just pulled the iJunks from their Apple store's because they knew they would be selling more of the "new" iJunk 2.0 in a month or so.
Apples are overrated & overpriced junk. Always have been & always will be.
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Anonymous Coward, 9 Jun 2008 @ 1:43pm

Not sure why say it's unclear
Less than 5 minutes on the iphone webpage shows this:

" Requires new 2-year AT&T rate plan, sold separately "
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PRMan, 9 Jun 2008 @ 1:47pm

They could have sold more...
They could have sold more if they didn't tie it to AT&Ts crappy service with crippled internet speeds.

With T-Mobile, Verizon and Sprint also selling them, they would easily be past the 10 million mark right now. In fact, I would probably have one right now but I refuse to do business with AT&T.

I'm not really sure what the "exclusivity" contract bought them, but I hope it was a lot of money.
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Jim, 9 Jun 2008 @ 2:06pm

Re: Did it backfire?
I seem to recall some sort of retroactive discount for initial buyers. So they ended up charging
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James, 9 Jun 2008 @ 2:07pm

HAHAHA!
All those idiots who proudly waited in line.. f'd once more.. maybe next time he'll use lube? :-P
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Oliver Wendell Jones, 9 Jun 2008 @ 2:41pm

Re: They could have sold more...
They could have sold more if they didn't tie it to AT&Ts crappy service with crippled internet speeds.

Where I live (small town in the middle of the Midwest) AT&T is the worst possible service to have as there aren't many towers in the are that support it and the few people that do use can't make or receive calls in a lot of locations, plus the AT&T data network here is horribly slow.

If Apple had chosen two cell companies that don't compete directly with each other (i.e., there are no AT&T cell stores anywhere near here, it's all Altell or U.S. Cellular around here) and maybe, just maybe there had been a cell company that I could have used, then I just might have bought an iPhone, but as it sits now - as long as AT&T is the only choice, then it would be stupid of me to buy an iPhone as it would be virtually unusable where I live, work, etc.
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Kriss, 9 Jun 2008 @ 2:45pm

Higher monthly plans, lower phone price
the phone price is subsidized by the higher monthly plan price AT&T is charging - after the 2 years required contract, customers will ultimately end up paying more than they would have at the old prices (but will feel it less than were it all at once). Kinda sucks, but this is smart on Apple's part - they get their $$ upfront from AT&T and don't have to worry about those buyers that jailbreak and don't use AT&T service.
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Nismoto, 9 Jun 2008 @ 4:52pm

Re: Higher monthly plans, lower phone price
Higher monthly plans?

I was an existing Cingular/ATT customer. I purchased an iPhone and only had to pay $10 more per month for the additional line. THAT'S ALL.

The multimedia packages cost more for the iPhones but they are not a requirement. These plans cost around $20 more a month. They HARDLY subsidize the cost of the phone.
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Nismoto, 9 Jun 2008 @ 5:02pm

Re: Re: Backfire?
Tard.

There are soooo many over-priced cell phones on the market today. So what! You say it like Apple invented over-priced electronic devices.

I have never owned a single Apple product until the iPhone came along, but I have owned MANY cell phones. The iPhone: RDP, FTP, full web browser, unix, video, audio, emulator, cell phone, etc.; junk it is not.
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Jacob, 9 Jun 2008 @ 5:26pm

Cingular/AT&T
I probably would have got one too but as a former customer of AT&T, I refuse to use the worst service on the planet. Plus, with the number of people that were racing to hack the iphone to work with other networks then selling them for near double the price the already over-priced iphone was, that goes to show they would have easily exceeded the 10 mark. Let alone the delays for international users. Worst. Move. Ever.
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Anonymous Coward, 9 Jun 2008 @ 7:29pm

The thing isn't worth ten cents if Apple still insists on AT&T as a carrier
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Sos, 9 Jun 2008 @ 7:37pm

Strategy
Mike this is a well known product marketing strategy known as skimming. The price of the product is initially set high to skim off buyers who are willing to pay the price for the right to own the product first.

This strategy was also used for a number of gaming consoles. I remember the PlayStation 1 being sold for over $700 at first. The price dropped by over half after a few months.

Now Apple are obviously employing a penetration or predatory pricing strategy to gain maximum market share - since the features that made the iPhone unique are no longer thought of as revolutionary by the market.
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Seth Brundle, 9 Jun 2008 @ 8:37pm

consider this
when the iPhone 1.0 came out for $599, the 3G Windows Mobile MDA smartphone was being given away free with contract.

The actual cost of ownership of a new iPhone has actually gone *up*, thanks to the higher AT&T rates for the 3g iPhone.

Nothing ever really goes down in price in Apple-land.

Remember the $499 Mac Mini launched years ago? Despite computer prices continuing to decline, its now $599.

The cheapest Apple laptop is still 2X as expensive as a mid-range Dell.
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Iron Chef, 10 Jun 2008 @ 1:15am

Takeaways from WWDC '08
I find it interesting that the comments here seem focused just on the price drop without really focusing on what's going to grow the business. This is something Apple is very keen about.

Now, most of the keynote was focused on:

+ Renewed enterprise focus (MS Exchange, VPN, Push Email, Remote Wipe, et al)
+ Developer support with SDK 2.0 (Which by the way.. is very, very impressive)
+ 3G
+ excellent contracts and vendor management (70 countries-- their goal was only 12)

...And only lastly was the price drop.

Apple's foray into SaaS/Web 2.0 with Mobile Me is extremely impressive, and seems useful as a Outlook replacement.

Of all the points, it seems that the SDK and Third party support is really going to push the platform forward. I think it's going to be tough for anyone to catch them.

Today's $4.00 drop of the stock is real telling of how Wallstreet doesn't fully grasp what's cooking in the kitchen.

http://stream.qtv.apple.com/events/jun/0806wdt546x/m_080690210abcn_650_ref.mov
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an, 12 Jun 2008 @ 8:44am

"no-subsidy" model backfired
what actually backfired is the no-subsidy model. most of the world does not use operator subsidies to sell phones. what the iphone has shown is that US users are deeply entrenched in this model. the major downside - users are under operator lockdown with long term (2 yr) contracts and this will have a direct impact on openness (which maybe moot for iphone because they want to control apps anyway).

now the hope is that android/google can make a real dent on openness.
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