Sorting out a week’s worth of iPhone wackiness
Apple truly is a company apart. Who else could create such a tempest over something so mundane as a price cut on a single product?
After the initial shock of last week’s $200 iPhone price reduction wore off, the media fed on the reaction of angry early adopters. The next day Steve Jobs uncharacteristically apologized to said customers and offered them an olive branch in the form of a $100 coupon good for any Apple Store purchase.
Wall Street saw all this as a sign that Apple had stumbled badly in its cell phone strategy and punished the stock for the rest of the week. By Friday, AAPL had slipped from $144.16 to $131.77, a drop of 8.59 percent. But give Apple credit for knowing how to play investors. After it announced the sale of the millionth iPhone yesterday, the stock recovered $4.95, more than half of last week’s loss.
Over the weekend pundits, both on Wall Street and in the Mac community, alternately argued that last week’s erratic developments either portrayed Apple in a panic or the company had artfully planned out the entire sequence of events weeks ahead of time.
I surmise Apple had intended an iPhone price cut before Christmas, but saw slowing sales numbers and decided that taking action sooner would spur more holiday sales – just as Jobs said. I don’t think Jobs considered the customer reaction at all; the price cut was purely a business decision. Reading Jobs’ apology letter, I believe he was genuinely surprised by the ferocity of the reaction. A large number of iPhone customers, many of who were among Apple’s most loyal customers, genuinely felt the company had betrayed them. The sentiments expressed in those e-mails, punctuated by the heavy media coverage, got to the normally impenetrable Jobs.
Faced with the necessity of immediate action, the company could not have devised a better response than the $100 Apple Store coupon. It should placate a majority of the angry customers, most of whom can find plenty of things they’d want in an Apple Store. It costs Apple some money, but all of it will be spent with Apple anyway. And the media thoroughly covered the whole affair, helping rescue Apple’s reputation as a company that cares about its customers.
Fundamentally, the iPhone price cut was a shrewd business move. I don’t think Apple is sacrificing as much on its profit margins as Wall Street at first feared; Jobs hinted last week that economies of scale and falling component prices had helped bring down the cost of manufacturing the iPhone. And imagine what the $200 price drop will do for sales volume. Apple has positioned the iPhone to succeed – if you don’t think so, just wait until Jobs announces the device’s holiday sales numbers at Macworld San Francisco in January.
Comments
The price cut, I think, has less to do with declining sales than with the iPod touch introduction. At $399 for a 16GB touch, sales of the 8GB iPhone would have been cannibalized by the touch if the iPhone had remained $200 more expensive. Now, though, you either get a 16GB touch but with no phone and no camera and no external speaker and less software, or an 8GB phone that includes a camera and a speaker and extra software that doesn't come with the touch. Seems like a reasonable pricing strategy to me.
Posted by: Michael Cohen | September 11, 2007 11:20 AM
When I bought it full price for the 8 GB I thought it was a great phone. I worked the economics and it made more sense than continuing using my (beloved) Blackjack under same plan conditions. I expected the phone to lower on price eventually but not so soon which makes you feel taken for a ride. If Apple would have made a special sale event instead a list price reduction, like other wireless providers do, I would have been a bit less disappointed. I believe that this pricing strategy, not typical Apple, will backfire sooner than later: people will wait a few weeks to get their newest products 1/3 cheaper, wait for next version, faster price reductions, etc. Tsk, tsk...
Posted by: G Montiel | September 11, 2007 3:26 PM
You shoud re-think your 'lagging sales' argument -- the iPhone outsold any phone in it's class in July. How, by any notion, does that equate to lagging sales?
Apple typically never drops the price of a product without actually changing it or the entire category offering. You mean to tell us that with the most hyped product they've ever made, so soon after it's release, that they did not consider that they'd get the reaction they got from customers? Please. My guess is Steve Jobs' letter was drafted well before the announcement of the iPod touch, etc.
Posted by: f5 | September 11, 2007 10:14 PM
I'm not saying the iPhone didn't sell well (although iSuppi backtracked today on its assertion that the iPhone outsold the BlackBerry -- apparently the entire BlackBerry did outsell the iPhone). I'm saying Apple wasn't selling as many on a day-to-day basis as they had expected at this stage.
On the second point, I do still think Jobs underestimated the customer reaction. Even if he thought some people would be unhappy, I doubt he foresaw the extent of the reaction. I believe he was focused more on the cheers he expected to hear from customers who had been waiting for a price drop to buy.
Posted by: Dave Zeiler | September 11, 2007 10:32 PM
It's stuff like this that sets Jobs and Apple apart as business geniuses. So they sell nearly a million iPhones at a $200 premium. In big round numbers that's $200 million that they wouldn't have made. They announce they're cutting prices and that they're not giving a penny back, hoping the storm passes. It doesn't, they pull $100 gift cards out of their hip pocket. They do this, knowing full well that A) a good 25% of those cards will never be redeemed. B) They still get to keep $100 million in profit C) whatever portion of iPhone owners who got them from AT&T instead of the Apple Store now HAVE to come to the Apple Store and D) You can't leave an Apple Store with $100 to spend and not spend $150 or $200. So, Apple gets to keep $125 million plus of the iphone price premium, they created a new demand for a product that was losing the "hype" by dropping the prices and making it seem like a bargain at $400, and their customers love them for taking care of them with that $100 they didn't have to give away. They're brilliant.
Posted by: Shawn Watkins | September 14, 2007 8:40 AM