Apple’s (AAPL) holiday iPhone sales missed the mark. And as the economy continues to crater there’s no reason to assume that things will improve this quarter. So it’s time for Apple to fix the problem — by cutting the phone’s price and doing what it can to make iPhone service cheaper.
Apple reported that it shipped 4.36 million iPhones last quarter, below the Street’s expectations of around 4.8 million iPhones.
Why the miss? We think the phone — especially in this economy — is still too expensive for most buyers, especially its service plans.
Supporting evidence: In contrast to the iPhone, Apple’s iPod line blew out expectations. We think the iPod touch, which offers many of the iPhone’s features without an expensive cell contract, had a lot to do with that — stealing iPhone sales in the process.
How can Apple get things back on track and make sure rivals like Research In Motion (RIMM), Google (GOOG), and Palm (PALM) don’t gain ground on the iPhone? (This is a platform land grab, if you recall.)
Cut the iPhone’s entry-level price to $99 as soon as possible.
Apple COO Tim Cook defended the iPhone’s $199 price tag on the company’s earnings call yesterday. “…We see nothing in the marketplace anywhere close to it,” he said. But that’s simply not true, or RIM and Google wouldn’t sell a single phone.
Recall that most of the iPhone’s wholesale price — more than $600, on average, according to Piper Jaffray — is subsidized by carriers. So if Apple cut the price by $100, it would still get more than $500 wholesale per iPhone. That’s still significantly more than the $300 or so (retail) it gets for the average iPod touch.
If cheaper components mean Apple can knock $100 off the iPhone and get margins similar to those the $199 iPhone got last July, we think the company should cut the price. (Apple can continue selling more expensive, premium iPhones with new features, even as basic as more storage or more colour choices.)
Convince carrier partners to cut iPhone service pricing.
AT&T’s cheapest published iPhone plan is $70 per month, and the carrier forces you to spend another $15 per month if you want a reasonable number of text messages. With fees and taxes, that’s $100 per month. Too much.
Tim Cook: “…The fear that we would have and I think that everyone has in this market, is that the economy may slow the adoption rate of smartphones, because generally smartphones generally command higher monthly fees and that may keep some customers to not signing up for higher contracts.”
What could AT&T do? We don’t think they’ll cut the $30/month they require iPhone buyers to spend on 3G data service. But they can easily offer cheaper phone calling plans — $25 or $30 per month — with fewer minutes. And they could easily comp some text messages — which barely cost anything — as they did with the first generation iPhone’s plan.
Either way, iPhone owners would still be spending more money on service than average AT&T subscribers — especially on data service, a key growth metric that carriers need to show off to Wall Street.
Release an iPhone messaging platform so iPhone owners don’t have to get ripped off on text messaging.
Last summer, Apple said they were building a real-time “push” messaging system so that iPhone apps could alert you when you’re not actively using them. That’s the last we’d heard about it.
But Apple could save many of its iPhone buyers $15 to $20 per month — $180 to $240 per year — by giving messaging apps an end-around AT&T’s text messaging service. Free messaging between iPhone owners could also encourage more people to pressure their friends and relatives to buy iPhones.
We realise that Apple is a company that sells premium products and doesn’t feel any need to cut prices to boost market share in any of its business lines. “We’re not going to play in the low end voice phone business. That’s not who we are,” Cook said yesterday.
But Apple is in a platform race against rivals whose products are steadily improving. So unless Apple has more radical technology announcements to make, it’s going to have to cut prices to boost market share.