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Apple Doesn't Do Cheap

Apple Doesn't Do Cheap

Apple's older-model-at-cheaper-prices strategy seems to be working so well that Apple has little incentive to change it. But, but, but ... isn't Apple losing to Android? Doesn't Apple have to go after all these new smartphone consumers who might otherwise fall to the dark side and never come back? No. Apple is crazy profitable. Apple is not backed into a corner just because everyone else seems to be buying Android.

By Chris Maxcer MacNewsWorld ECT News Network
01/10/13 5:00 AM PT

While I really would like to see an inexpensive new iPhone model, I'm having a hard time seeing this shake out anytime soon, despite the rising tide of rumors.

We've weathered rumors of a cheap iPhone model in years past -- which in retrospect seem to have been more wishful thinking than anything else -- and one of the early kickoffs to this particular rumor cycle came from Digitimes, which is somewhat notorious for spreading rumors that turn out to be dreadfully mistaken.

Then dozens of higher-profile publications jumped on the bandwagon with articles and posts exploring the rumor, making it hard to tell if there's real teeth behind this story or just more iGeek love hoping that Apple will take over the world.

The Key Is China and Emerging Markets

In the United States and more industrialized countries, consumers have been able to get into relatively expensive iPhones, most often through carrier-based subsidies that lock the buyer into two-year contracts in favor of spending as little as US$200 on the latest-generation iPhone at the point of acquisition. To buy an unlocked iPhone, without a carrier contract, though -- which isn't always easily possible -- the cost ramps well past $600.

In some countries of the world, the consumer models for smartphones don't always come with carrier subsidies and long-term contracts; consequently, the cost of acquisition is a very big deal. How many Americans, for example, would buy an iPhone 5 if they had to shell out $649 plus tax at the point of sale?

What if Apple offered similar pricing to 2 billion people who live in areas of the world where the average household income is a number so low it's hard for most iPhone owners to even imagine?

Yeah, ouch.

So how does Apple sell more iPhones, particularly to customers who are less inclined to pay a lot of money? So far the model has been to release a new iPhone, then sell the older iPhones at discounts. So an iPhone 4 might be had for free (with a two-year contract) and an iPhone 4S for $99 (with a two-year contract). If Apple releases a new iPhone 6 this year, presumably the iPhone 5 could travel around the world at a lower price point, too.

Apple could even give the iPhone 5 a new coat of paint -- or many colorful coats -- and still offer it at a lower price.

But that's not really a cheap or inexpensive model, is it? The current thinking is that Apple needs a cheap material to bring the manufacturing cost down (read: some sort of plastic, not aluminum or fancy glass). I don't really think that's the issue here, though. Apple's ability to tool manufacturing facilities and acquire raw materials and components is enviable already. Using polycarbonate cases mostly gives it a consumer impression of a cheaper or inferior product. Apple likes aluminum. Apple likes quality. Apple is not going to go backward in quality in order to satisfy anyone, not even a billion people. It goes against the very core of the company in Cupertino.

Bigger Screens, Please

Meanwhile, Android-based smartphones with very large screens are reportedly selling very well in emerging markets like China. If Apple wanted to compete in this market segment -- the low-end, entry-level space -- that seems to imply that Apple could not simply make a stripped-down iPhone nano and meet with success. Think about it: If you're a struggling new consumer in China and you're looking at a big, bright Samsung Android screen for a device purchase that will likely be your key Internet device -- not a MacBook Pro with Retina Display, mind you -- do you really think you would pick a cute little iPhone nano?

Similarly, Apple's older-model-at-cheaper-prices strategy seems to be working so well that Apple has little incentive to change it.

But, but, but ... isn't Apple losing to Android? Doesn't Apple have to go after all these new smartphone consumers who might otherwise fall to the dark side and never come back?

No. Apple is crazy profitable. Apple is not backed into a corner just because everyone else seems to be buying Android. In fact, I think Apple likes it because it means the company doesn't have a monopoly and can therefore do whatever the heck it wants.

Even when Apple dominated a device segment, it didn't get to the top because it created cheap, entry-level products. The iPod lineup -- all of them were relatively expensive. The iPad -- relatively expensive. Apple's success has come because it produces high-quality products that people are willing to pay for.

Has Apple ever focused on market share to the detriment of producing an insanely great hardware product?

I can't think of a single instance.

Meanwhile, Cheap Is Bad

At the same time, Apple has shown it can split its product lines -- iPad mini is a case in point -- but usually Apple maintains a flagship model leading the lineup in size, with less-expensive models being smaller. Psychologically, this has worked for Apple, despite being profoundly irritating. What MacBook customer hasn't wanted an entry-level (read: a slower processor) MacBook with a 15-inch screen at the 13-inch price? Plenty of consumers don't need the fastest processors but they do appreciate bigger screens.

So how can Apple break from its so-far successful strategy to offer a cheaper iPhone with a big screen? After all, when was the last time Apple tried to sell us anything with a big screen that was offered at an entry-level cost? Oh, right ... never? Ever? I can't remember. For Apple, big screens mean premium pricing.

To make a cheap iPhone work out in a global world, Apple will have to marvel us in three ways:

  1. Blow our minds with the iPhone 6, increasing the perceived value of the premium product;
  2. Create a "cheap" device that maintains an astoundingly high level of craftsmanship and quality while still meeting the needs of entry-level consumers; and
  3. Change how it markets to consumers because the form-factor size will no longer make implicit sense.

Can Apple make an iPhone nano that has a large and usable screen? Does Apple have to create a new form factor iPhone in order to sell hundreds of millions of units in China?

I don't know. Personally, I'd like to see a cheaper iPhone, but only so I can extract myself from carrier-based contracts. To get there, though -- wow: Not only does Tim Cook have manufacturing and marketing challenges here, he runs the risk of deviating from the most successful playbook in modern device history.

Yeah, so, this spring, this summer, this fall: Plan on being happy with a fresh coat of new paint on the iPhone 5.


MacNewsWorld columnist Chris Maxcer has been writing about the tech industry since the birth of the email newsletter, and he still remembers the clacking Mac keyboards from high school -- Apple's seed-planting strategy at work. While he enjoys elegant gear and sublime tech, there's something to be said for turning it all off -- or most of it -- to go outside. To catch him, take a "firstnamelastname" guess at WickedCoolBite.com.


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