Filed under: Analysis / Opinion, Apple Financial, Apple, iPhone
The falling price of the iPhone
The NYT's Bits blog has a post up by Matt Richtel that has some interesting info on the numbers behind iPhone sales. Richtel has analysts saying that the iPhone is selling so well that, based on volume alone, Apple can sell the iPhone at a loss, and come out on top. They can even cover all those rebates Jobs is giving out to people who bought the iPhone early.Not really surprising, of course (especially not about the rebates-- Apple wouldn't have done it if they couldn't afford it). But it is a reminder that Apple is no longer playing the computer game. They're playing the cell phone game now, where you sell the hardware cheaply (relatively cheaply, anyway), and make it all up in the subscription. Richtel's analyst says AT&T is likely paying Apple $360 an iPhone in subscription payments over the two year contract.
And that means that the iPhone's price definitely isn't done dropping yet. Considering the iPhone's manufacturing costs have been estimated at less than $300 (and that's earlier this year-- they have likely dropped since), it's very feasible that Apple may eventually do what most cell phone manufacturers eventually do: give away their cell phones for free with a service plan. It definitely won't happen by Christmas (although another price drop may come even before then-- every day of experience Apple has making iPhones makes them cheaper to produce). But eventually, either Apple or even AT&T will be able to eat the cost of the phone entirely, just to hook users into a two year contract. Within a year, we may see a free iPhone.
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Reader Comments (Page 1 of 3)
Thushara said 11:10PM on 9-19-2007
Very nice blog.
Thushara
http://www.chempro.org
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jonathan ober said 11:21PM on 9-19-2007
if they sell for nothing will I be able to get that money back from apple :)
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Scott said 11:24PM on 9-19-2007
I doubt we're seeing a free iphone anytime soon. Cheaper versions perhaps, but not free. Part of the issue apple is dealing with is "perceived value". Consumers may be turned off to an ipod touch or other ipod if they can get a iphone for "free".
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Manuel said 11:37PM on 9-19-2007
That doesn't make sense, they'd have to give up registration in your home and "selling" it at the Apple Online Store.
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Andre said 11:30PM on 9-19-2007
"But it is a reminder that Apple is no longer playing the computer game."
So, uh, when did Apple stop making Macs?
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Cameron West said 11:41PM on 9-19-2007
IMHO: not gonna happen. But what would I know? Scott (#3) hits the nail on the head. It's why Gucci and Versace don't have 50% off sales, even though they could afford to - if only they were selling clothes and not fashion. While I'd love to be proved wrong, I think Apple realises that dominating the market comes at the cost of leading it. Which is why it has taken such good care (!) of early adopters. (I mean who would have thought that a certain technology would become cheaper, or even - gasp - redundant?)
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aj_robins said 12:02AM on 9-20-2007
"free iPhone"???
Not terribly likely, as that would be an incredibly stupid move on Apple's part, if for the only reason that it would kill a significant chunk of their iPod sales. They're much more likely to introduce "better" models (more memory, 3G, etc.) at similar price points. Now, the prices may come down a bit, but, if the iPhone prices come down, the iPod prices have got to move a bit, too, and these can only go down so far.
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hardmanb said 8:54PM on 9-20-2007
These wide-open competitive analyses are all based on Apple intending to penetrate and overwhelm the cellphone market. The cellphone is much bigger and more international than the computer market.
Steve Jobs announced his long range goals in January...to capture "1%" of the cellphone market, which is around 5% of the smartphone market.
Nothing I have seen indicates that Apple is doing anything other than their normal market strategy...to capture a significant minority of the fashionable and elitest high-end portion of the market. I don't think Apple has any designs on the "free", cheap, and lowend segments of the cellphone market...and that is the vast bulk of the market. Apple consistently aims at the affluent, pricy and high-profit segments with their products. Apple would be overjoyed, and their stock soaring through the roof, announcing record profits, if they captured anything near 3% of the market and 10$ of the smartphone market...and that would translate into sales by the end of 2008 of about 20 million iPhones. That's Apples kind of market. If the iPhone were ever to become "free"...then by then Apple would be selling a much more advanced product for $599 (or more). Remember people in Europe and Asia are used to using smartphones that cost around $1,000. Why give away the iPhone for free?
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jeff said 12:05AM on 9-20-2007
My guess is you will NEVER see and iPhone for free, probably not one for under $200. Fast downward pricing is what got Motorola in the dire state it is in now. It took a hugely successful product the RAZR and in a few short years dropped the price from $500 to -$25 after rebates. Yes Amazon will pay you $25 to 'buy' a RAZR. The RAZR went from being a totally cool phone to the 'everyone has one' phone. Gone are Moto's margins and revenue growth and market share. Apple doesn't even care about marketshare in computers, and it won't in cell phones either is my guess. Profitable non-commodity products and a profitable company is what they are after. Moto's net profit margin was 2.46% over the last 4 quarters, Apple's was 13.8%. Apple is worth $122 billion and Moto is worth $39 billion. Computer marketshare leader Dell? $63 billion.
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Chris said 5:35PM on 9-25-2007
I agree with both sides of the argument. My only thought is that while it wouldn't make sense for Apple to provide "Free" iPhones with a contract (way too much infrastructure changes are needed for each and every Apple Store to provide activations), it does make sense for AT&T. We are more likely to see AT&T branded iPhones and apple chugging along, selling the product as is now. AT&T's business model is designed around this type of sales strategy.
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Matt said 12:16AM on 9-20-2007
To say nothing of the fact that giving away a "free" iPhone, originally priced at 2/3rds of an iMac, would put a giant spotlight on just how lucrative those contracts are for the people selling them.
I think we'll see the Apple IV before we see the free iPhone. Actually, that'd be great. Who do we talk to about getting an Apple IV in the development pipeline?
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Mike Schramm said 12:24AM on 9-20-2007
I do agree that Apple won't be passing out iPhones at the door of the Apple Store. But I do expect to see more price drops, and I am guessing that within a year, AT&T will be offering a rebate that makes the iPhone free from their stores.
Yes, Apple has no incentive to make the iPhone free. But AT&T is making so much on the service plans (and they'll be making more as the iPhones get cheaper) that very soon, it'll be worth their while to pay for the iPhones themselves, and offer them to subscribers for free.
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Darryl Yee said 12:28AM on 9-20-2007
since they will also be able to recoup some of the R&D costs through the iPod Touch, it should be easier for apple to 'eat the cost' of the iphone.
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Deven said 12:34AM on 9-20-2007
I'd say it is unlikely we would see a free iPhone, but instead a relatively cheap last of stock ones when 2G arrives.
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Roberto Guerra said 1:05AM on 9-20-2007
I'd rather see the iPhone keeping up with Moore's law and becoming exponentially more awesome until every cellphone store is forced to become a mini iPhone store.
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Leonard Nimrod said 2:12AM on 9-24-2007
What an irresponsible and incorrect article.
The original article off of Erica's blog points to an estimated parts list. That is not the same as manufacturing costs.
The only chance the iPhone would ever be free, and this is a long shot, is if it becomes its own carrier. Still, Apple has no history of selling hardware at a loss. It's making money from the customer on the iPhone sale and from the carrier in monthly dues. This put it in a unique position where it is the one manufacturer committed to adding new software features to their phones to expand the "User experience". Otherwise it risks losing it's monthly dues if you switched to another brand phone, even if under contract.
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artifex said 3:37AM on 9-20-2007
I'm reminded of the famous idea that "we lose a little on each one, but we make it up in quantity."
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Al Willis said 4:22AM on 9-20-2007
I'll keep it short and sweet: there will not be a free iPhone from Apple within a year--and probably never.
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sam said 4:44AM on 9-20-2007
If Apple makes a free phone I will eat my hat.
Apple is a premium brand, always has been always will be. It's their business model, and while they will enter the non-premium market they will only do so if they can trick people into thinking they are a premium brand.
Apple will charge because people will pay. Could they do a free iPhone? Sure, if they wanted to ruin the iPhone.
Look at the "Moto Razr" - it was introduced as a premium high-end phone - and people paid far out the ass for it. Now it is the Honda civic of phones. Worst ever. No brand loyalty, nobody cares.
iPhone will cost money not because its worth it, but because if you pay for it then you will think its worth it.
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Gilbert Tang said 5:20AM on 9-20-2007
@ #3. I couldn't agree more. Apple would never, ever subsidize the iPhone to sell subscriptions. The Apple brand would take a major hit if it decided to "cheapen" its products by doing that.
If they really wanted to do something like this, they would find a way to subsidize their .Mac service. Instead, Apple relies on superior design and a value proposition above and beyond anything else.
We will NEVER see a free iPhone through either major channels (AT&T or Apple).
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