Four iPhones Would Be Game Changing
Analysis. I believe rumors that Apple is preparing to launch not one, not two but four new iPhone models. If not, something is seriously wrong down One Infinite Loop. Such a move would lower the entry price to $99 and to free, if AT&T has any sense about rebates. Apple could unveil new iPhones as early as Monday, during its Worldwide Developer Conference.
Companies, like people, have personalities. It’s not rocket science predicting what a company might do, even super secretive Apple, based on corporate personality, which, after all, reflects the people who run the company and/or put corporate policies in place.
Four iPhones would be consistent with Apple’s past behavior, and the timing is right to expand the line. The rumors put the new models at 4GB, 8GB, 16GB and 32GB capacities. If you look at how Apple expanded iPod, the company started with one model and moved to two and more. Now Apple has four distinct iPod brands—shuffle, nano, classic and touch, in order of pricing—ranging from $79 to $399. The first iPod was pricey, $399, like the original iPhone. But as Apple expanded the number of iPod models, the price ranges spread downward, too.
This kind of pricing strategy has worked well for Apple. The company typically starts high, scooping up big margins from sales of people willing to pay more. The entry price for the original iPhone was $499. Each newer model—and expansion of the iPod family—lowered entry pricing. Apple scooped up new buyers at each lower price point, while keeping higher-pricing in place; Apple still sells a $399 iPod model, as it did nearly eight years ago.
Understanding the approach isn’t rocket science: Apple offers new features that command higher-priced SKUs. For example, the touchscreen is a real differentiator for iPod touch, something for which Apple charges more. But not too much more. Apple is very selective, and predictable, about pricing. The 16GB iPod nano is $199. But for $30 more, someone could buy the 8GB iPod touch. The upsell is tempting. Apple spreads prices to encourage shoppers to buy up to a better iPod across a range that also covers over competitor pricing.
I remember when Apple launched the iPod shuffle and competitors laughed. Shuffle offered so much less than competing MP3 players for so much more. Right, but it was an iPod. These competitors didn’t understand iPod’s brand success or Apple’s upsell pricing strategy. I’m convinced that Apple is ready to apply the same pricing approach to iPhone.
$99 is the Golden Ticket
My prediction: Apple is just days away from announcing a $99 iPhone. Conceptually, the lower-priced phone would hurt the brand and suck down margins. But four phones would mitigate such risk—a proven strategy with iPod—and create volume Apple needs for App Store. Apple’s best strategy now is to extend the iPhone/iPod touch hardware platform as far as humanly possible. My iPhone pricing prediction:
- 4GB: $99
- 8GB: $199
- 16GB: $299
- 32GB: $399
Such a pricing strategy would preserve 8GB and 16GB model pricing, while extending the range up and down by $100. Apple is sure to differentiate the hardware, particularly at $99 and $399—as in less or more features and capabilities. Differentiated features and larger capacity will draw a smaller number of 32GB buyers, but Apple might turn some sales from 32GB iPod touch, which also is $399.
How does Apple benefit?
1. At $99, Apple could rapidly scale sales volumes, increasing the likelihood that iPhone and supporting App Store would emerge as the preeminent mobile platform. Multitouch defined the original iPhone. App Store redefines its successors. The platform’s appeal is rapidly becoming applications, not the device. In the United States, a smart AT&T would use rebates to initially offer the $99 iPhone for free. The carrier would gain subscribers without loads of extra expense; rebate redemption is typically less than 40 percent.
2. Tiered pricing strategy would begin Apple’s exit from the iPod business. Two years from now, Apple shouldn’t want to sell any handheld computer without a 3G radio. Apple needs to move iPod volumes to iPhone. The media player business has passed its peak.
3. Lower pricing would help Apple overcome its biggest problem in the United States: Distribution. BlackBerry is iPhone’s biggest competitor, and Research in Motion has got all major carriers. Apple has AT&T. The breadth of available BlackBerry models at so many price points is good for sales, if for no other reason than pricing competition among the wireless carriers. Typically, many BlackBerries sell for much less than either the existing 8GB or 16GB iPhone 3Gs.
Apple assumes some hardware margin risk, which will pay off later should App Store become the preeminent mobile applications platform. Apple needs to make a volume play, grab as much marketshare now as possible. App Store has huge application distribution and development momentum. It’s the right time for a $99 iPhone and using a tried-and-true strategy for spreading out pricing while preserving brand value and better margins at the high end of the line.
Perhaps rumors are false and my prediction wrong. But I’m right about what Apple should do with iPhone that worked so well with iPod.
Do you have an iPhone story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.
Right or wrong, it’s going to be an interesting Monday.
More likely just 8, 16 and 32GB models. Apple doesn\\\’t play well in the bargain basement segments of any market and doesn\\\’t need to as yet in mobiles, especially smartphones.
My expectation is better battery life first, then add-on features second – video support, MMS, cut\\\’n\\\’paste, etc.
I think most of Apple\\\’s margin on the iPhone comes from AT&T\\\’s sharing of service revenue.
I doubt lowering the phone cost to $99 would have much impact on Apple\\\’s per phone margin. It certainly wouldn\\\’t suck it down.
And just as the Shuffle did not hurt the iPod brand, I doubt a less expensive iPhone would the iPhone brand either.
\"I think most of Apple’s margin on the iPhone comes from AT&T’s sharing of service revenue.\"
That agreement was killed when iPhone2G was released. I don\’t see why AT&T would enter back into that agreement…
I dunno, $79 iPod shuffle seems pretty basement to me and Apple sits quite well there.