Apple Cuts Prices Strategically

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Once it unveils an upgrade to the iPhone software on June 16, developers will also be able to charge customers not only for the program, but also for upgrades or extras—say, new levels to keep gamers hooked on their favorite iPhone title. Many developers say this new capability will help them bring in far more money per customer. Apple's overall gross margins were at 34% in fiscal 2007 and 2008 and are likely to remain close to 35% in 2009, Munster says. "I would be shocked if these price cuts cause their margins to go down," he adds. Apple has forecast margins of 33% in the current quarter and 30% in the next.

The company also lowered prices on laptops, though less dramatically. Despite the rise of inexpensive netbooks based on Microsoft's (MSFT) Windows software costing as little as $200, Apple didn't bring out a cheaper entry-level model. Instead, it lowered the price of various versions of its higher-end MacBook Pro laptops by $300. At the same time, it beefed up the capabilities of one of its more affordable offerings, the MacBook Pro with a 13-inch screen. Now tricked out with more memory, a better screen, and a longer-life battery, the device has been repositioned at the low end of the top-shelf MacBook Pro line. "Yesterday, it cost $2,000 to own a MacBook Pro," says Gartner (IT) analyst Van Baker. "Today, it costs $1,199. This is Apple doing what it's always done: It goes after the higher-end customer."

New iPhone Boasts Speech Advances

Ordinarily a company's refusal to match competitors' price cuts on certain devices might cost it market share. But Apple continues to bring out new innovations that analysts think will continue to entice consumers. The new iPhone 3G S includes a higher-resolution camera, with software tricks such as the ability to focus on your subject by simply tapping on the screen. And it's the first iPhone that can be used to record video.

With the new iPhone, Apple pulls into the lead when it comes to using speech as a way to operate a phone. While other phones let you dial a friend by simply saying their name, iPhone users can now also ask their phone to play all the songs by a given artist in their iTunes library, or even ask it to create a playlist of songs like the one playing at any given moment. "That's fantastic," says Steve Chambers, an executive with speech recognition company Nuance (NUAN). "Apple may be late with some basic features, but it is clearly pioneering the use of speech in other ways." Chambers won't say whether Nuance's technology is used in the new iPhone, but says that Apple has "licensed a broad portfolio of our speech technologies for use in their products."

For the most part, investors seemed comfortable with the announcements of the day. Shares lost less than 1% despite Apple Chief Executive Steve Jobs not making the appearance that some blogs speculated he might make. On medical leave since January due to complications from pancreatic cancer, rumor sites and investors debated whether he would show. Even here, it seems Apple may reject such black-and-white alternatives. "The company is going to take a phased approach" to Jobs' return to work, which the company has said will occur by the end of June, says Tim Bajarin, president of consulting firm Creative Strategies. "There's no reason he would come right back to a 40-hour workweek."

Burrows is a senior writer for BusinessWeek, based in Silicon Valley. With Olga Kharif in Portland, Ore.

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