Apple's Puzzling iPhone Moves

Posted by: Olga Kharif on September 05, 2007

Apple made several surprising announcements relating to the iPhone today. The company said it will cut the price on the 8 Gigabyte device by $200, to $399. At the same time, it announced it will phase out the lower-memory, 4 Gigabyte model costing $499.

It’s surprising to see Apple cutting the iPhone’s price just two months since the phone’s introduction — particularly since the device has been selling so well. According to consultancy iSuppli, the iPhone was the best-selling smartphone in the U.S. in July. In fact, Apple’s two iPhone models had sold as many units that month as the best-selling LG Chocoloate. That’s amazing, considering that Verizon Wireless has been promoting Chocolate in TV ads and in stores for a year.

What I don’t understand is, If the iPhone is selling so well, why the price cut? Apple says it simply wants to ramp up sales, but I don’t buy that, as the phone is selling very well as it is.

I don’t understand why Apple chose to cut the 8 Gigabyte iPhone’s price now, instead of, say, waiting a few months and slashing the price when it introduces a new iPhone model. Most manufacturers discount older models when they introduce new ones. That way, users understand why prices have dropped (The way Apple did it, it seems to me that a lot of Apple fans who’ve just purchased the 8 Gigabyte model for full price will be miffed, and rightly so.).

Another reason for waiting to cut prices until manufacturers introduce new models: Manufacturers get to keep their place in the high-end of the market while also moving down stream a little bit.

What I am also puzzled by is Apple’s decision to discontinue the lower-memory model instead of discounting it as well. By today’s standards, 4 Gigabytes of memory is still far more than what most phones offer (most new phones come with a slot accepting a 2 Gigabyte memory card). If Apple is afraid to cheapen its brand, it shouldn’t be: To my mind, a $299 phone would still have been a pretty expensive phone. I can get a BlackBerry for less than that from AT&T.

How do you explain Apple’s moves?

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Reader Comments

Jesse

September 5, 2007 05:55 PM

if people get the ipod instead of the iphone it doesn't matter much to apple, but it hurts at&t. maybe they're using this for negotiation leverage?

PXLated

September 5, 2007 06:04 PM

The competition was in a world of hurt on the interface front, now they're in a world of hurt on the price front also. Instead of death through a thousand cuts, maybe Apple decided to just make it a quick judo chop. If Apple has the margins, why not give the competitors a giant wedgie.

Sameer

September 5, 2007 06:10 PM

It could well be that ATT and Apple have a deal to push 'x' number of phones or partner exclusively for 2 years, which ever comes first. Given the great response, Apple would rather open this up to other carriers fast if its beginning to feel like its exhausted the growth potential via ATT subscribers.

Regardless, it's disappointing behavior by Apple towards early adopters that took a gamble on Apple as a cell phone manufacturer.

John

September 5, 2007 08:54 PM

Maybe they just wanted to drop the price in anticipation of the rumored Google Phone...

J

September 6, 2007 01:20 AM

I think apple's contract with AT&T would
have a minimum revenue guarantee for AT&T
through the new iphone sales, and penalities if
if they are not met, So apple wants to increase
the sales by reducing cost,

Joost

September 6, 2007 03:32 AM

If you have to ask, you're clearly not a great investigator. I seems evedent to me that the price difference of $200 for just the phone part of the iPhone compared to the iPod Touch is just to much.

Paul

September 6, 2007 04:09 AM

Apple probably would've been able to maintain the old price and market share for another few months. However, despite its sale success (so far) and the overall excellence of the product, Apple would've been well aware that at $599 the iphone's price was very steep and difficult to maintain once the hype had died down.

Nevertheless, the early purchasers of the iphone will certainly feel peeved.

Tom

September 6, 2007 04:28 AM

Why do you care? This is good news for anyone that hasn't already purchased the phone, which includes me and a lot of people I know who avoided it due to the high price. As to those who complain because they purchased it before the price cut-- if you were willing to drop $600 for a phone before yesterday, then you obviously thought it was worth that money. If the price cut makes you think you paid too much, what were you doing spending that much money on the phone in the first place?

Jon T

September 6, 2007 06:54 AM

Work it out for yourself can't you?

Apple is now selling the iPod Touch...

vasilisck

September 6, 2007 07:29 AM

I think Apple dropped the ball on that one in a big time. Cause, they looked at the sales after "Back to school" and none of the kids wanted to drop their old numbers just to get a nice phone. It is all about money in this case. Apple was loosing money from the day one; they will have no chance to bring prices back up with existing model. Another possibility: they got another innovation in phone industry and they will be ready to introduce it by, say, christmas, and that's how they wanna bring the price back up, through new model.

Dan Mosqueda

September 6, 2007 09:02 AM

There's not much to understand. The iPod Touch offers 16GB - that means there will be a 16GB iPhone soon. The 4GB model will be phased out and they want to empty their inventory.

I firmly believe you will see a 16GB iPhone with 3G within 8 weeks. Probably an 8GB version also, so you've got to clear the inventory and get it rolling. Apple knows it cannot offer EDGE to the rest of the world.

Analsysts who poo-pooed the stock will be laughing-stocks for their lack of insight. Apple doesn't do anything without a plan. The next big get together between Apple and the media will intro the new iPhone models and upgraded MacBooks, along with Leopard.

This isn't rocket science. Most American firms don't move this quickly, but Apple has the agility to carry this out. They are serious about their hardware. They will be a key player in the cell phone industry and they're sneaking up on Vista's dominance.

Jamil

September 6, 2007 09:18 AM

The iPod and the iPhone are mobile computing platforms of the future. Each of these devices are money making devices for Apple in the future. Apple could introduce applications on these mobile devices and charge for it. It will more than make up for any price cuts.
Games is an area Apple has not used much on the Touch platforms. Right now the goal is market penetration. The biggest drawback to the iPhone is AT&T. Apple would have been better off with an operator-less phone without the visual voice-mail feature. The feature was not worth the commitment with ATT.
It figures the best way to deal with it is introduce another mobile platform with the trimmings of the iPhone without the commitment. It reduces the price on the iPhone anyways to increase sales. There is more money to be made.

All those buying the Apple touch devices... you will get hooked to those sweet devices and prepare to spend more for future apps.

I dont mind... I am going to get myself one :)

Jason

September 6, 2007 09:29 AM

I think since the iPod Touch is $399 they didn't want to basically be competing against themselves. I'd take an iPod touch and some other cell phone before paying $200 more for the iPhone. Now with the price cut I'm more likely to just get the iPhone.

joseph

September 6, 2007 10:06 AM

Suck..i feel like some one stab me from behind..being a loyalty customer of APPLE and i get returned..getting a phone just for 2 months and the the pricde of the phone drop like $200.00 just can't believe it..this i think a lot of people got pissed off by APPLE i think Apple should compensate us for paying the high price.

1,000,000,000 Dollars

September 6, 2007 10:40 AM

1. Apple sold a good 500,000 units at $200 bucks extra. Ain't so good at math but that looks like one billion.

2. Our research shows that many non-smart phone buyers are interested in the iPhone. So lowering the price would move the device into the range of other high end phones.

3. Apple makes a percentage of every phone bill. At 10% Apple will make the $200 back in less than 24 months.

4. Apple will introduce a more expensive model before Xmas.

William
www.Reflecture.com

Cui

September 6, 2007 11:06 AM

Personally I do think taking a step like this to such a hot new product is a very tough decision for Apple executives.
Anyway, the key to Apple's success in business is to increase the number of songs purchased via iTunes by device owners. To achieve that, cutting price will definitely push more people to apple store for the cool devices.

rob

September 6, 2007 11:32 AM

they cut the prize because the new iphone is coming out at apple expo end of Sept. Duh! Get ready for 3g.

September 6, 2007 12:59 PM

Hasn't the iPhone been a complete fallacy since its introduction? Have you ever seen someone in person in possession of one, much less enjoying it?

jim

September 6, 2007 01:45 PM

Jeez, I dunno Olga? Maybe they are trying to do something no phone manufacturer has done before?
Maybe they are trying to go beyond niche?
Maybe they are trying to boost volume?
Increase AT&T's subscribers?
Maybe they are doing what other mobile manufacturers should have done for more than a decade?

This isn’t that puzzling.
This kind of open ended speculating is not journalism, Tech or otherwise.
And as far as you guys who HAD to have the PHONE in June and feel burned, well this is the market, this is retail. Welcome to America and Marketing and capitalism. Merry Christmas, get one for your wife, you know she wants one.
Come on, you're definitely leaning more towards accountant than Tech Journalist.
Stick with that.

GC

September 6, 2007 01:48 PM

Apple is indeed closing out the 4GB iPhone for $299 even though this wasn't mentioned by Steve Jobs during his talk. Very cool, agressive design and marketing going on here.

RickB

September 6, 2007 01:51 PM

It's a first step towards renegotiating the AT&T deal.

Jobs knows from his iPod experience that if he controls the market on the hardware side, then content providers have to play by his rules. At $600, an iPhone is too high a price to take over the market. But at $400, a lot more people will buy it.

Now, let's pretend that the current iPhone has 1% of AT&T's business. AT&T has so much other business it can stand its ground against Jobs' demands. But, if the lower priced iPhone gives Apple say, 35% of AT&T's business, then he can tell AT&T that at the end of the exclusive 2 year period of his contract, Apple will go elsewhere and take all those customers with him. That's when AT&T will deal.

nv

September 6, 2007 09:36 PM

Reflecture William: 500000 x 200 is actually 100,000,000 not "one billion"

Kenny

September 7, 2007 01:50 AM

First of all, I think Apple is still to young to compete with establish phone manufacturer such as Nokia, and Sony Ericsson in the HP industry. If in any chance that Apple will win is with lower price and good quality in contrast with the major player in the industry as mention before. In addition, with iPhone launching, Nokia and others will not stay put and wait to see, they will come out with a model to compete, in which news releases says they are developing one. So between Nokia and iPhone, establish or major consumers will choose Nokia instead of iPhone. In fact those who purchase iPhone are those die hard Apple fans. My guess is that iPhone 1st generation will not be a hit yet, maybe 2nd or 3rd generations then we can see the differences and how slowly people will change to iPhone, currently, there will be no major shift in the industry.

Tom Hayes

September 7, 2007 12:19 PM

Apple is not used to whiners: the culture of Apple's customers--if not Apple itself--changed yesterday and the implications are huge.

Chris

September 8, 2007 07:39 AM

Couple things going on here.

Everyone's reaction at the initial price point (back in May) was WHAT? THAT MUCH? It's clear that Apple wanted to restrict demand (using pricing as the tool) so they could ensure the phones got out to a small customer base and test all their new processes (iPhone manufacturing, iTunes activation, etc.) would work. You could say the initial buyers were all beta testers.

Apple probably saw demand easing in the last month, which meant they exhausted most of the buyers willing to purchase at $600. So what do they do...drop price! This way they pick up the next group of users willing to buy at a lower price. And they've tested the systems and know they work, so bring on the masses!

Here's the other REALLY INTERESTING THING about the pricing. When initial iPhone pricing was originally announced, Steve justified the $500 price tag by saying it was a smartphone ($250) plus an ipod ($250). NOW, when you compare an 8GB iPod touch ($300) to an 8GB iPhone ($400), the price difference is ONLY $100. And the only things different between the two products are the phone and the camera. So Apple's suggesting through its pricing that the phone and camera are worth ONLY $100, while the iPod is worth $300 ($50 ***MORE*** than before)!!! This is a deft and brilliant move to commoditize the phone and maintain the value of the iPod w/ the touch interface. Competitors probably can never copy the iPod+touch combination due to patents and design challenges, so Apple maintains its advantage. Brilliant, brilliant move....via pricing.

I love being an Apple shareholder!!!!!

Enrique

September 10, 2007 09:51 AM

iPhone owners who bought an iPhone for $600 stop whyning! You bought the best phone there is and you love it. It's 2 months! you already earned that money back already! What are you so mad about, that you spended 200 dollars more. Really you've got to stop with all that criticism. I live in Puerto Rico and I would pay 600 dollars now even for the price drop just to get one to work over here! I wish Apple knew we're part of the United States...of course we're not a state but WE ARE territory.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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