It’s that time of the year where people start to contemplate what Apple should do with the pricing of its iPhone line.
In a month, Apple will announce the iPhone 6. This release is expected to be a radical departure for Apple.
After years of releasing one uniform screen size for its new phones, Apple will reportedly introduce a 4.7-inch iPhone and a 5.5-inch iPhone. Apple currently offers a 4-inch iPhone (the 5C and 5S) and a 3.5-inch iPhone (the 4S).
With a wide variety of models and screen sizes, Apple has an opportunity to stratify the pricing of the iPhone in a way it never has in the past.
Around this time last year, there were rumours — which turned out to be true — that Apple would introduce a colourful plastic phone called the iPhone 5C. People thought Apple would make the 5C a low, or mid-range, priced phone.
Apple didn’t make the iPhone 5C low-cost. It didn’t even make it mid-range. It costs ~$550 off contract, which is still in the high tier of the smartphone market.
After the 5C came out, just about everyone gave up on the idea of a lower-cost iPhone.
Benedict Evans, an analyst at venture capital firm Andreessen Horowitz, decided to take a look at the notion of a cheap iPhone.
Evans isn’t convinced that Apple won’t eventually move down in the pricing curve:
“If you look at the history of Apple’s pricing, it has always made products at the high end but also in the mid-range. It has pushed to find the ‘lowest viable price’ for an ‘Apple-quality experience’ (and then added 10% or 20%, perhaps). In 2007 that price for a smartphone was $US6-700, but now it is $US200 or $US300. That is, there is absolutely no technical reason why Apple could not make a great iPhone and sell it for $US300 or so today.”
But why would Apple release a low-cost iPhone? What is the benefit? From a profit perspective, Apple wouldn’t gain much, says Evans:
One can argue about the detail, but the key point is that if you sell 40m ‘iPhone Nanos’ (and presume for the moment that you actually can) at $US250 at a 20% gross margin, that generates $US2bn a quarter in gross profit for a company that reported almost $US15bn gross profit last quarter. That is, a blockbuster iPhone that doubles Apple’s market share adds just 15% to gross profit, beforeallowing for the inevitable cannibalisation of the high-end product. Factor that in and you probably only add 5-10% So, this does not really address the ‘growth question’ – it doesn’t double Apple’s business again.
While the impact of a low-cost iPhone might not be reflected in Apple’s profits, Evans believes it will be good for Apple’s business overall. And, perhaps of equal importance, it will be bad for Apple’s top rival Samsung, and Android.
Even apart from the financials, the broader value is the impact on the ecosystem landscape. I am not convinced that iOS, with perhaps 500m-600m active devices already compared to Google Android’s 1bn or so, can really be described as sub-scale, especially given it has two thirds of app store revenue. However, adding a ‘gateway’ device in the mid-range with significantly more unit sales would build a much deeper moat around that ecosystem. (Though it would also dilute that high-level customer base.)
The other side of this coin is of course the impact on Android. The two markets where iPhone sales are effectively at parity with Android are the USA and Japan, and those are also the two markets where the subsidy structure means that the iPhones is not at a big price premium to Android. This is probably not a co-incidence. Meanwhile, we also see strong indications that the second-hand market for iPhones, mostly in the $US2-300 range, is also extremely strong. It doesn’t seem unreasonable to suppose that a new, attractive iPhone in this segment would be highly competitive. So, such a phone would sell, and sell well, and take a big chunk of the most valuable Android customers.
Apple doesn’t need to release a lower-priced iPhone. The iPhone business is very strong even without a mid-tier phone in the line up. And we’ve seen Samsung’s profits slip as it chases market share.
But that doesn’t mean there’s no merit in Apple releasing a mid-range phone. It could extend Apple’s ecosystem while simultaneously limiting the reach of Android.
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