Profits come first with new iPhones, iPod Touches
“For some users, there’s never enough memory,” Greg Joswiak, Apple Vice president of Worldwide iPod and iPhone Marketing, said in yesterday’s press release announcing memory-enhanced versions of the iPhone and iPod Touch.
Apple is banking on it.
The new model of the iPhone boasts 16 gigabytes of storage capacity, twice that of the existing iPhone. The catch: you’ll pay a $100 premium for that extra 8GB of memory. Apple will continue to sell the 8GB version for the same price, $399, with the new one going for $499.
The iPod Touch got a similar upgrade. The existing 8GB and 16GB Touches do not otherwise change and will be sold at the same prices ($299 and $399) while a new 32GB model will go for $499.
Here we see Apple applying a lesson it learned with the introduction of the iPhone last year. Recall that originally Apple sold a 4GB model selling for $499 and an 8GB model priced at $599. Just two months later came the infamous $200 price cut on the 8GB model and the elimination of the 4GB model, which wasn’t selling nearly as well.
Apple learned that 1) the original iPhone price was too high and 2) most customers willing to buy a premium mobile phone also were willing to pay an extra $100 for the model with the most storage.
Fast forward to yesterday. Instead of following the pricing strategy it typically uses with new Macs and iPods -- offering beefier specs for the same price as the models they replace -- Apple is offering static prices on existing models while counting on the extra memory to entice customers to fork out $100 more.
Silicon Valley Insider did some math based on iSuppli’s breakdown of the cost of the iPhone’s components and calculated the 16 GB iPhone will reap a profit of $201 versus the 8GB model’s $141. (I’m ignoring the AT&T contract factor, since it provides the same profit in both cases.)
On one hand, this move is good for Apple as a company and good for AAPL shareholders because it gooses the iPhone’s profit margins. But it stinks for customers, who aren’t really getting $100 worth of added value with the new models. Flash memory is not that expensive. Silicon Valley Insider surmised that Apple’s profits could be even higher than its estimates, assuming that flash memory prices have dropped further since iSuppli did its analysis last July.
Why might Apple do this? I’m guessing that the ever-growing number of unlocked iPhones – for which Apple does not collect any revenue from a service contract with one of its partner cellular carriers – has thrown the strategic planners in Cupertino for a loop.
Apple has tried bullying customers to preserve that lost revenue by bricking unlocked iPhones with software updates. But that was a public relations catastrophe. Perhaps fearing damage to its relationships with its partner cellular carriers, Apple also has passed on another option -- selling unlocked iPhones at a higher price.
Beyond the problems with preserving high profits, Apple’s lofty goals for making the iPhone/iPod Touch into “the first mainstream WiFi mobile platform” means it needs to sell a lot of both in 2008.
So we get new models with premium prices based on a solitary improvement (albeit an alluring one) provided by a component Apple can obtain increasingly cheaply.
Small wonder Apple’s customers sometimes can’t decide whether they love the company or hate it.
Comments
Apple has been playing that game for way too long, and even the most faithful of its followers are getting tired of that. I am holding on to my money until I see a real change on the Iphone's features.
R
Posted by: Rodrigo | February 6, 2008 1:00 PM
David,
Continuing with the "games" Apple has been playing have you heard or commented on the stories regarding Apple locking or disabling the video out from the Ipod with video (5th gen?, I lose track)? I know on mine that I can connect the output to a tv and watch videos being played on the ipod on a tv. Now it is either being disabled on newer ones or requires some pricey addition.
Can you help me out on this story?
Rich
Posted by: Rich | February 6, 2008 2:12 PM
Your wild guess about unlocked phones causing a problem is rather bizzare, as they still profit from the hardware and the lenghs that people go to hack the hardware just illustrates how hot the product is. Also, PR catastrophie? It was just a field day for Wintards.
The reason they are still selling for the same price is that sales are fantastic, as was reported last quarter. They can always lower the price later. Duh.
Posted by: Brian | February 6, 2008 3:10 PM
Jobs is out of iTouch here. But he has always been a hit or miss kinda guy.
If he wants to excite the marketplace in the middle of a recession he needs to lower prices and stop offering out of touch pricey items like skinny laptops and overpriced memory. He has an obligation to shareholders to stimulate sales not depress them. Apple has dropped over $10 alone since the new memory roll out.
Instead He should be bundling offers like free trial movies, lower prices & extended play time (24 hrs. is ridiculous!)to get as many Apple TVs in people's homes. Maybe some free music with new ipod purchases to generate new interest. Americans are losing homes at a rate of 7000 a day. Instead he is acting like we’re still ascending in the housing bubble of yesteryear and will pay any price for new gadgets.
Posted by: Dr. Dave | February 6, 2008 3:56 PM
@ Rich
I believe the video out on the 5th generation iPods will continue to function normally, but the new iPod Classic models have the function disabled. The suspicion is that Apple feared the new iTunes movie rentals could somehow be pirated via the iPod's video out. Notably, iTunes video rentals will not play on 5th gen. iPods.
Posted by: Dave Zeiler | February 6, 2008 4:25 PM
I'm shocked! Imagine that a company should make more money on a more expensive item. I'm going back to my car dealer and demanding that they sell me my AC at cost since I'm already buying the basic car. In fact I should demand that they sell me their top end model with all the bells and whistles for the same profit as they make on their no frills base model. While I'm at it, I'm going to demand that Microsoft sells me the Ultimate version of Vista for the same as the home version because the cost of the disk and packaging is the same...
Posted by: Myles | February 6, 2008 7:07 PM
Amazing.
Apple reduces price on a product that many claimed to be expensive and everyone goes crazy...slams Apple.
Apple adds a more expensive model with double storage capacity to it's line up, everyone goes crazy....slams Apple.
Apple has best sales and profits in q4 market goes crazy...slams Apple.
Now appearantly it Apples responsiblity to make the impending recession better for consumers by disreguarding the profit in their own products.
How is it possible to be successful in all the wishes that everyone appears to have for Apple.
I for 1 am glad the people that run the company can see beyond all the media crap and continue to do a great job delivering desirable products.
Posted by: Darryl | February 7, 2008 9:16 AM
@ Myles
Amen, brother! Apple could offer the bigger storage units for less than they are, but this is a market economy and these products are luxury items. Just because it seems that everyone has an iPod does not mean we all need them. Therefore if Apple wants to price according to what the market will bear, it is up to them to figure out what that magic number is.
As for Vista Ultimate, well, I am running Leopard Ultimate for the same price as Leopard basic! ;-)
I use Vista as well at work, and frankly I wouldn't pay for the "extra" features. From my OSX perspective it looks suspiciously to me like the Basic versions are intentionally crippled and missing features that ought to be there from the start. Again, though, what will the market bear?
Posted by: Adam Stevenson | February 7, 2008 9:50 AM