Ap­ple’s risky bal­anc­ing act with the next iPhone

The idea Ap­ple might make an high-end phone with a huge price tag has rubbed many up the wrong way, ar­gues Ja­son Snell

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As there al­ways are at this time of year, there are lots of ru­mours out there about what the next iPhone will be. This year we’re hear­ing that Ap­ple is go­ing to re­lease a high-priced, next-gen­er­a­tion phone in ad­di­tion to the ex­pected iPhone 8 mod­els. The

idea that Ap­ple might make an ul­tra-high-end phone with a huge price tag has rubbed many peo­ple the wrong way. Dar­ing Fire­ball’s John Gru­ber did the math, and while this po­ten­tial move makes a lot of sense, it’s also a gam­ble on Ap­ple’s part. But if Ap­ple didn’t re­lease a next-gen­er­a­tion phone this fall, it would also be risk­ing the for­tunes of both its brand and its most im­por­tant prod­uct.

The trou­ble with the cut­ting edge

In the early days of the smart­phone mar­ket, ev­ery new phone model brought huge leaps for­ward in func­tion­al­ity. But these days it’s tougher to make ma­jor ad­vances that mo­ti­vate users of older phones to up­grade. Still, Ap­ple’s got to sell new iPhones – so in se­cret prod­uct labs in Cu­per­tino, Ap­ple’s de­sign­ers and engi­neers are al­ways try­ing to fig­ure out what’s next. Ap­ple’s well-earned rep­u­ta­tion for bring­ing cut­ting-edge tech­nol­ogy to the masses is on the line with ev­ery re­lease.

While Ap­ple made some ma­jor im­prove­ments be­tween 2014’s iPhone 6 and 2016’s iPhone 7 – dual cam­eras on the plus model and huge pro­ces­sor and graph­ics up­dates un­der the hood, just to name a few – the fact is that the out­side de­sign of the iPhone hasn’t changed in nearly three years. Mean­while, Ap­ple’s com­peti­tors are re­leas­ing new de­signs with big screens and re­duced bezels that make the front of the phone ap­pear to be al­most en­tirely taken up by a screen.

By most ac­counts, Ap­ple’s next-gen­er­a­tion iPhone will of­fer a sim­i­lar de­sign. But also, by many ac­counts, Ap­ple is strug­gling to cre­ate that prod­uct – and when

it ar­rives, it may be ex­pen­sive, late to ship, and sup­ply con­strained.

This is one of those ar­eas where Ap­ple may be the vic­tim of its own suc­cess. The iPhone is so pop­u­lar a prod­uct that Ap­ple can’t in­clude any tech­nol­ogy or source any part if it can’t be made more than 200 mil­lion times a year. If the sup­plier of a cut­ting-edge part Ap­ple wants can only pro­vide the com­pany with 50 mil­lion per year, it sim­ply can’t be used in the iPhone. Ap­ple sells too many, too fast.

Con­trast that to Ap­ple’s com­pe­ti­tion. On the smaller end, for­mer An­droid chief Andy Ru­bin an­nounced the Es­sen­tial phone, but even Ru­bin ad­mit­ted that he’d only be able to sell in thou­sands, not mil­lions. Same for the RED Hy­dro­gen One – ground­break­ing phone, hardly likely to sell in any vol­ume. The Google Pixel looks like it’s in the one mil­lion range. Ap­ple’s big­gest com­peti­tor, Sam­sung, has to deal with a scale more sim­i­lar to Ap­ple’s – but it’s still only ex­pected to sell 50 or 60 mil­lion units of the flag­ship Galaxy S8.

Now, it’s en­tirely pos­si­ble that Ap­ple’s ap­par­ent dif­fi­cul­ties with its next-gen­er­a­tion phone model are in part the fault of de­sign­ers and engi­neers who bet that new tech­nol­ogy would be avail­able – at scale and at the prices nec­es­sary for Ap­ple to main­tain its profit mar­gins – in order to ship this new phone in the fall of 2017. But it’s also true that most cut­ting-edge tech­nolo­gies are go­ing to cost more and ini­tially be avail­able in lim­ited quan­ti­ties, un­less Ap­ple makes huge in­vest­ments in equip­ment and man­u­fac­tur­ing and cor­ners the world’s sup­ply of those parts, which it has done on more than one oc­ca­sion.

One way to work around the chal­lenge of the iPhone’s scale is to add a new, high-end model that’s not ex­pected to carry the bur­den of the en­tire iPhone mar­ket – some­thing more likely to sell 30 or 50 mil­lion units, rather than 200 mil­lion. (Even the iPhone SE prob­a­bly sells in greater quan­ti­ties than any smart­phone not made by Ap­ple or Sam­sung. Ap­ple is big.) If you’re Ap­ple, you raise the price – to limit de­mand, yes, but pos­si­bly also to off­set the ex­pense of the new cut­ting-edge tech be­ing used in the prod­uct.

So that’s the spec­u­la­tion for this fall: that Ap­ple will re­lease the iPhone 7s and 7s Plus, with mod­est im­prove­ments in func­tion­al­ity and lit­tle to no change in ex­ter­nal de­sign, and ex­pect those phones to soak up most of the de­mand, while the new high-end phone sells in smaller num­bers up at the high end.

That sce­nario makes sense, more or less. It’s still a risky move for Ap­ple to make.

Why buy the rest when you can buy the best?

The iPhone is Ap­ple’s most im­por­tant prod­uct, by far. iPhone rev­enue made up 63 per­cent of over­all Ap­ple rev­enue dur­ing its last fi­nan­cial quar­ter. The risk Ap­ple takes in mon­key­ing with the iPhone prod­uct mix is that it will do some­thing to sup­press iPhone sales.

It’s worth ask­ing the ques­tion, then: If Ap­ple re­leased mi­nor iPhone 7s and iPhone 7s Plus up­dates and si­mul­ta­ne­ously re­leased a sent-from-the-fu­ture iPhone Pro with a bunch of great new fea­tures for a high price, what would you do? Some peo­ple will buy that ex­pen­sive cool phone, to be sure – no mat­ter how Ap­ple prices that de­vice, I sus­pect they’ll sell them as fast as they can make them. But if you’re ready for an up­grade and ei­ther can’t get one of those high-end iPhones or sim­ply don’t want to spend that much on a phone, then what?

The risk Ap­ple is tak­ing is that the mere ex­is­tence of a top-of-the-line iPhone will make the iPhone 7s and 7s Plus look dull, bor­ing, and un­wor­thy of de­sire. Up un­til now, pretty much ev­ery­one who buys a new iPhone has re­ceived the same model, ex­cept­ing some colour and stor­age vari­a­tions. Even the iPhone Plus line is largely a scaled-up ver­sion with an im­proved cam­era. But in a world where there’s an amaz­ingly cool iPhone, will peo­ple stop buy­ing the ‘bor­ing’ mod­els?

If that hap­pens, Ap­ple could end up with long waits for the ex­pen­sive phone and a glut of iPhone 7s and 7s Plus mod­els... and a drop in over­all iPhone sales. That would not be good.

So why would Ap­ple take the risk to change its iPhone prod­uct mix and re­lease an ex­pen­sive topof-the-line model that could po­ten­tially sup­press sales of its most im­por­tant prod­uct? The risk of do­ing noth­ing is that Ap­ple will, for the third con­sec­u­tive year, have re­leased iPhone mod­els that look more or less like the pre­vi­ous year’s model, and all the while, its com­peti­tors are re­leas­ing new phones with ex­cit­ing new fea­tures, in­clud­ing edge-to-edge dis­plays and bright OLED screens. I am not one of those peo­ple who be­lieves that Ap­ple’s en­tire prod­uct strat­egy is about be­ing cool, and that peo­ple only value Ap­ple stuff for the ca­chet it brings its users. And yet, I can’t deny that one of the defin­ing as­pects of the Ap­ple brand is an ex­pec­ta­tion that the com­pany will bring the masses the coolest, most cut­ting-edge tech­nol­ogy around. The last thing Ap­ple wants is for the iPhone to be per­ceived as a lag­gard, eter­nally be­hind faster movers like Sam­sung and Google.

I can write all about Ap­ple’s is­sues with build­ing prod­ucts at scale all I want, but bil­lions of smart­phone buy­ers don’t care about that. All they care about is the prod­uct it­self. And if Ap­ple can’t make a cool iPhone, for what­ever rea­son, it risks the long-term rep­u­ta­tion of the iPhone and Ap­ple brands.

That’s why (as­sum­ing that the ru­mours are true) Ap­ple is will­ing to make this risky move to of­fer­ing a high-end iPhone that makes the reg­u­lar iPhone pale in com­par­i­son. The com­pany might even see a short­term drop in sales of the cheaper iPhone. But if the new iPhone truly shines, Ap­ple will have re­claimed the high ground in the smart­phone cat­e­gory.

I’m sure Ap­ple would have pre­ferred that it could re­lease a cut­ting-edge phone as the only iPhone this year, but the ru­mours sug­gest that didn’t work out. The com­pany’s choice, then, is to let it all ride an­other year or do some­thing dra­matic – de­spite the risks. The peo­ple who are the mar­ket for a new iPhone this fall will re­veal to us whether Ap­ple’s gam­ble was the right one.

The ti­ta­nium ver­sion of the RED Hy­dro­gen phone is priced at $1,595 (£1,200)

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