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iPhone Price Cut? Here is My Objective View on This!

I noticed that Apple is no longer going to make any more 4GB iPhones

So yesterday I was happily catching up on my RSS feeds when I noticed that there was some Apple buzz. I took a look and saw some photos of the new iPod Touch, which is basically an iPhone that can only use WiFi instead of EDGE and obviously has no phone in it. It's quite impressive-looking. Then I noticed that Apple is no longer going to make any more 4GB iPhones, they're selling off their remaining stock at discount. Then I noticed that Apple has dropped the price of the 8GB iPhones by $200.

I shrugged and kept skimming through my RSS feeds and then went back and noticed that a tremendous crapstorm had started brewing about the price drop in the iPhone. There are two clear and distinct camps. One camp is complaining that they bought the iPhone before the price drop and they're stomping mad and want some kind of discount, refund, or other compensation (store credit is one option I've seen bandied about). The other camp accepts the price drop as a force of nature and is calling the other camp whiners. In fact, this has turned into somewhat of a war between the two camps. What you don't see much of are objective people sitting in the middle. That's where I come in.

I bought an iPhone. I didn't wait in line overnight so I could be among the first to get one. I think I got mine 3 weeks after launch, but I'm not sure (might've been 2 weeks...). Yes, I knew getting into it that I was buying a generation 1 product, but I also knew that Apple was software updating these things, so I had very little to worry about on that front. Everyone also accepts the "rule of 1 year", which means basically that your iPod/iPhone/iMac/iThingamajig is going to be obsoleted by new hardware from Apple in roughly one year. It's a given.

So I was pretty shocked when I saw that Apple was dropping the price on the iPhones and making a product line change only about 2 months after the product launch. When approached about the subject, Steve Jobs had this to say:

"If they bought it a month ago, well, that's what happens in technology,"

Yes, technology does work this way. Everyone knows it. A year after you buy any new consumer electronics gizmo, there will either be a better one available for the same price, or your model will be cheaper than you bought it for, or both. Here's what doesn't happen in technology: a manufacturer drops the price of a fairly expensive piece of connected consumer electronics by 33% 2 months after that piece of electronics comes out. Its unprecedented, but not for the reasons you think.

Let's take a look at this purely from a logistics and financial standpoint - let's not talk about how raging pissed off people are that they "lost" $200 on this deal. Assume every single component required to make the iPhone suddenly became 33% less expensive to the wholesale market, Apple would have to re-inject its supply chain with the new components. It would then potentially have to do re-tooling in manufacturing plants and, while these plants are in China and operate quite cheaply, they don't operate that quickly. In other words, while Steve Jobs may be claiming that the price drop is due to technology, it has absolutely, positively, nothing to do with technology.

If the technology had suddenly become cheaper, we would see the after-effects of such a price drop in technology somewhere around the December time frame, maybe November if the drop happened while the first roll of iPhones was coming off the lines. We would not be seeing the price drop now.

What this shows is that when the iPhone was released, it was released with a price tag that was at least $200 higher than the margin at which Apple could remain profitable on the device, because you know full well that the current price is still going to make Apple money on each sale. So what? you might be thinking. I was originally thinking that as well - it is the job of a company to make money, and if Apple can charge $200 more than a profitable margin on a device and people will still buy it - then more power to them.

Here's where it gets bad for Apple. This particular price drop at this particular time is a marketing blunder. If people see that Apple can drop prices on a brand spanking new hardware product by 33% 2 months after it was released without it being technology/hardware-influenced (despite what Steve claims) then people are going to come to a single conclusion that will be bad for Apple:

 Apple's hardware pricing is completely arbitrary

Whether you believe that the reason Apple's hardware costs more than other competetive devices is due to their obsession with quality and industrial design, the general public (general public does not include fans or zealots) at this point is going to think two things right now that are bad for Apple:

  1.  From now on, I will not buy any hardware from Apple until several months after it is released, or possibly even second generation.
  2. If Apple can drop their prices by 33% without it being caused by a reduction in their cost, then why am I paying a premium for their hardware to begin with? If the iPhone was priced 33% higher than it could have been, how much is their markup on the iMacs or the Macbook Pros?

In short, some of the shiny gleam on the Apple name picked up a little dust with this marketing maneuver. Sure, Apple will recover, and certainly people will forget about this price drop and its not going to do long-term damage to the company.

However, it has probably created a lot of skeptics who might otherwise have remained fervent supporters. It might have turned a few zealots into downgraded fanatics, and returned a couple fanatics to normalcy.

So to put my giant rambling to an end, here's my thinking: No, I am not demanding my money back for my no-longer-manufactured 4B iPhone. I love my iPhone, it's the best freaking device I have ever owned hands down. Nothing Apple does will change that. Yes, Apple will sell a flaming truckload of iPhones and iPod Touches this coming holiday season - it could be the biggest iPod season EVER for the holidays. Am I ever going to buy an Apple product again without first waiting 2-3 months after its release? hell no. Is some of the mystique about Apple's "quality-based" higher price point gone? Yes. Is my next computer going to be a PC because of this marketing blunder? Hell no. :)

links: digg this  technorati  reddit

More Stories By Kevin Hoffman

Kevin Hoffman, editor-in-chief of SYS-CON's iPhone Developer's Journal, has been programming since he was 10 and has written everything from DOS shareware to n-tier, enterprise web applications in VB, C++, Delphi, and C. Hoffman is coauthor of Professional .NET Framework (Wrox Press) and co-author with Robert Foster of Microsoft SharePoint 2007 Development Unleashed. He authors The .NET Addict's Blog at .NET Developer's Journal.

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Most Recent Comments
ZenWarrior 09/07/07 08:22:45 AM EDT

Why this article? *Everyone* knew Apple's margins on the iPhone were to die for. Didn't the author read anything at all about the iPhone before purchase, other than the hype? Apparently not.

internetjoe 09/06/07 06:07:05 PM EDT

Oh dear Oh dear - All this talk about apples price as though the Iphone is not a Joint venture with someone else. ATT had nothing to do with it i guess.

That darn stupid Jobs GUY makes so many bad business decisions.

admcs 09/06/07 04:21:49 PM EDT

Well, you've a pretty decent middle ground, but the backbone of your argument on the price drop is potentially and reasonably flawed. It is correct the factories cannot retool with new components overnight, but there is another factor you may not have considered. The same components purchased at a lower price by Apple. Yep, same guts, but lower price on those guts. Most likely components in question are the memory chips and the LCD panel.

How can this happen?
1. Price drops in raw materials or efficiencies gained in raw material factories.
2. Apple negotiated a better price. One of two things happened here. A. Apple met a contractual obligation to purchase X units of X part of iPhone effectively dropping their cost. Or B. Apple was not able to negotiate with an open book due to the secrecy behind this product. iPhone is announced and they can hit the negotiation tables hard. Without a doubt negotiations set in place for the iPod touch memory affected overall pricing across the board. It's like buying the ten gallon container of Arkansas lard at Costco, cheaper.

Either way, the fruit of this price reduction is passed along, and in this case very quickly.

But why so quickly? While investors want to see Apple pack the profit in, they don't want to see Apple reducing potential market share because they've kept a product at a price 33% too high for more than a quarter.

The change makes a lot of sense to me and is not unfounded in the world of Apple. Especially when they are faced with mounting competition from others that are releasing products that very much rival the iPhone at a lower price to the consumer. Pure business. Pure genius.

david 09/06/07 04:14:38 PM EDT

I understand those who are upset because they just bought a more expensive model. In the technology world though this happens alot in competitive markets. Yes Apple could have kept the price high and continued to take market share away from the other smart phone players. But with the Holiday season looming fast, and a lot more competition from Motorola, Palm, LG, Samsung, and even possible Microsoft, this move is pre-emptive. Many people complained that they wouldn't jump aboard unless the price was closer to the 399 barrier for the 8gig now that it's been dropped, they should be able to double/triple their sales. The company i work for the IT guys have the iPhone, as do many others. I picked up a friend at Philly airport last night and saw 6 iPhones in an hours time, 5 of which looked ceo like.

While this has caused some outrage among early adopters and critics, I think in the end at the end of the quarter the critics will be thrilled, Apple will take market share and a wider base of fans will be on board.

Scales of economies, the more product thats moved the quicker the price can drop. Stop complaining. And buying a 1st gen of a product, you are the beta testers of sorts

Allen Welty-Green 09/06/07 04:01:43 PM EDT

I have another thought - I think that iPhones might not have been moving as briskly as they projected, so they needed to goose up the market and try and recapture some of their momentum. They may actually be taking a loss on these, expecting to make their money from some sort of kick-back with ATT on the monthly plan. Scratch deep enought and I'm sure you'll find ATT somehow involved... also, ramping up production on the touch iPod, which no doubt uses many of the same components, may have introduced an economy of scale factor which did indeed lower Apple's cost.

RichS 09/06/07 03:55:15 PM EDT

If you really knew anything about Apple's pricing history, you would know they never just drop the price on a specific model. Improvements are made... new features... whatever, but usually a new model is introduced at the same price as the old. Only then does the old model get a price reduction.

I think what's happening here (and is the "aggressive" part of Apple's marketing) is that a 16GB model will be announced (for maybe $499, pricing the phone a reasonable $100 over the 16GB iPod touch) as soon as the 8GB version's supply drops to where they want it. Announcing a 16GB version now would have stalled the remaining 8GB sales before the holidays. Now that would be a marketing blunder. So they take a little hit from all you genius "market analysts" out there, wait to introduce the larger capacity phone in a month or so, and smile all the way through the holiday buying season.

Apple doesn't do anything without a good (and usually profitable) reason.

Brian 09/06/07 03:36:04 PM EDT

you sounds very bitter, i don't think that you as someone who just made a 200 dollar blunder can have an objective view.

Monty 09/06/07 03:14:22 PM EDT

There are a few problems with your assessment:

1. Everyone knew the iPhone was grossly over-priced long before it was released and that Apple could sell them for half that price. The argument was that it was 'okay' for Apple to charge that much because (a) people would pay it and (b) their products are worth it.

2. We all knew that the hype surrounding the iPod was ridiculous, and that Apple was cashing in on the hype by charging well more than the technology was valued based on the components.

3. Everyone knew item 1 and 2, and there was a large number of folks shouting 'you are getting ripped off!', yet people bought it anyway.

Now it is somehow Apple being bad because they changed the price dramatically?

Sorry. I do not buy it.

iPhone News Desk 09/06/07 01:16:04 PM EDT

So yesterday I was happily catching up on my RSS feeds when I noticed that there was some Apple buzz. I took a look and saw some photos of the new iPod Touch, which is basically an iPhone that can only use WiFi instead of EDGE and obviously has no phone in it. It's quite impressive-looking. Then I noticed that Apple is no longer going to make any more 4GB iPhones, they're selling off their remaining stock at discount. Then I noticed that Apple has dropped the price of the 8GB iPhones by $200.