I recently moved to London and in doing so I decided to replace my iPhone 5. I needed a British phone number, and the iPhone 5 is two years old. I’m in the upgrade cycle, as it’s known in the business.
As an Apple user, I faced an unpleasant problem: upgrading to an iPhone 5S isn’t much of an upgrade, and it would cost full price, £569 (about $US974). If I bought that, I would miss out on iPhone 6 coming in the fall, which is expected to have a nice, big 5.7-inch screen. I could pay again for iPhone 6 of course, but that would have cost me £569/$974 for two new iPhones in less than three months, leaving me with three perfectly good iPhones — and a $US2,000 hole in my pocket.
People always assume that the best technology triumphs in the marketplace. They forget that price is a huge factor.
The high-end Android phones on offer were much cheaper. The store I was in sold Samsung’s Galaxy S5 for £500, the Note 3 for £560, and the HTC One M8 for £460. The original HTC One was even cheaper, at around £400.
That made me stop and think.
Why am I paying so much money to be an Apple user?
Suddenly, HTC’s lovely all-metal Androids looked extremely attractive. And paying $US1,000 for an iPhone that’s going to be obsolete in three months seemed ridiculous.
Note that in the U.S. a new iPhone tends to cost between $US600 and $US700. That price falls to about $US200 out-of-pocket for Americans who get them subsidized when they buy wireless service carrier contracts.
Now I am acutely aware of the real price of new iPhones: about $US1,000 a pop.
As we approach the launch of iPhone 6 in the fall, most of the attention is around its features. Will it have a 5.7-inch screen? Will it be thinner? Will it have sapphire glass?
But the most important attribute for ordinary consumers will in fact be its price.
So Apple CEO Tim Cook will be having some interesting meetings right about now, on the nature of price elasticity and iPhone demand. Apple will likely want an initial price that’s north of $US600, to maintain its profit margins (and to maintain the “premium” halo on its brand).
Apple knows that it is pushing the limit when it comes to price. Everything you need to know about smartphone pricing can be found in these two charts, one from Apple’s internal marketing executives and one from Kleiner Perkins analyst Mary Meeker. Apple’s chart, titled “Consumers want what we don’t have,” shows that all the growth in the phone market is for devices that cost less than $US300 and have big screens.
Meeker’s chart shows that the average price of smartphones is in a long-term historic decline. Apple is selling phones at twice the price of the average device.
There’s an army of Chinese companies racing to make pretty good Androids for $US100 each.
The price of iPhone 6 will go a large way to deciding what level of market share Apple will win. Right now mobile devices running Apple’s iOS operating system claim about 18% market share. Devices running Google’s Android have about 78%.
The greater the price Apple demands, the fewer people will be able to buy it — and the more Apple’s share will decline.
Now, Apple can still sell more phones while its overall percentage share of the total market declines. I’m not saying that Apple’s iPhone sales will go into decline. The opposite is likely to happen: A huge number of iPhone users are still on iPhone 4S and they’re due for new phones soon. That will trigger a massive wave of new sales for iPhone 6. The new phone will, undoubtedly, be massive.
But Apple needs to ask some serious questions about how it will continue to charge $US600 for a large-screen smartphone in a market that is headed to $US200 for a comparable phone. Samsung’s Note and Galaxy phones, and HTC’s One models, are healthy competitors. (The saleswoman in the store I was in had an iPhone 5S and told me she couldn’t wait to switch to a Samsung because the camera was so much better.)
It’s not just about whether consumers will pay more for Apple. Many people make the argument that BMW does just fine in a world full of Fords, because some people will always pay more for the best. But BMWs and Fords both drive on the same roads — they inhabit the same transport “platform,” so to speak. A Ford can go anywhere a BMW can go. That is not true of phones. Apple and Android phones do not share a platform. Many apps, products, accessories, and software packages are only available for iPhone. You can’t listen to iTunes on an Android, for instance, and you can’t get a 16-megapixel Samsung camera for an iPhone.
So market share is important: Apple users only get to drive on 18% of the roads on the map, so to speak. They’re nice roads — and Apple users are paying high tolls to drive on them — but most people are paying less to connect to a far larger ecosystem.
This is why the price that Tim Cook sets for the iPhone 6 will be by far its most interesting new feature, because it will send a strong message to the market about what kind of share Apple feels it needs to maintain its market position. (And it’s really interesting that Apple is selling the old iPhone 4 in India at discount rates — that proves Apple understands how prices affect market share.)
And in case Cook is reading this, he ought to note that I bought a Samsung Galaxy S5. This is not good news for Apple: I use MacBooks both at home and work, and I have an extensive iTunes library. (iTunes is a surprisingly powerful sticking point when you’re facing the grim reality of paying hundreds of dollars for a device that isn’t compatible with your music.) I ought to be fully tied into Apple’s ecosystem.
I went with Samsung partly because it was cheaper. (I was caught in that awkward forced-upgrade cycle, remember?) But also because when an iPhone sits next to a Samsung in a store, it looks small and feeble like a child’s toy. I was bored and frustrated with my tiny screen, which makes it inconvenient for serious work tasks.
Apple’s marketing slide about not having what consumers want turned out to be completely true for me: I wanted a big phone at a cheaper price. Apple doesn’t sell such a thing.
I don’t believe that Apple will sell the iPhone 6 at a lower price, of course.
But I do believe that the price will decide its fate more than sapphire glass will.
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.