Times Have Changed

Why charg­ing $1,000 for an iPhone marks a shift in strat­egy for Ap­ple.

iPhone Life Magazine - - Contents - by david aver­bach

when Ap­ple an­nounced the iPhone X, many had sticker shock over the $1,000 price tag. Not only is this the most ex­pen­sive iPhone that Ap­ple has ever cre­ated, but it's also one of six dif­fer­ent iPhones the com­pany now sells. Build­ing such a large (some would ar­gue frag­mented) prod­uct line is one of the big­gest de­par­tures in strat­egy Tim Cook has taken from his pre­de­ces­sor. Un­der Cook, Ap­ple has dab­bled in bud­get mar­kets by of­fer­ing the cheaper iPhone 5c and SE. How­ever, these re­leases were more con­sis­tent with Ap­ple's im­age as be­ing a lux­ury brand for the masses; with the iPhone X, Ap­ple is be­com­ing a lux­ury brand for the rich.

The ef­fects of this de­ci­sion may have pro­found con­se­quences for Ap­ple's busi­ness model and rev­enue.

Be­fore Steve Jobs re­turned to Ap­ple as the in­terim CEO in 1997, Ap­ple's prod­uct lineup had bal­looned un­der pre­vi­ous man­age­ment and in­cluded over a dozen dif­fer­ent ver­sions of the Mac. One of the first things that Jobs did upon tak­ing over op­er­a­tions was to cut Ap­ple's lineup to just four prod­ucts. Jour­nal­ist Wal­ter Isaac­son wrote in his bi­og­ra­phy of Jobs, “[Jobs] drew a hor­i­zon­tal and ver­ti­cal line to make a four-squared chart… Atop the two col­umns he wrote ‘Con­sumer' and ‘Pro'; he la­beled the two rows ‘Desk­top' and ‘Por­ta­ble.'” For each of these quad­rants Ap­ple went on to cre­ate a sin­gle prod­uct. Over the years, Ap­ple's prod­uct ma­trix has ex­panded slightly, but this con­cept of hav­ing just one prod­uct for each cat­e­gory has re­mained at the foun­da­tion of Ap­ple's busi­ness model. This model has guided Ap­ple to be­come one of the most suc­cess­ful com­pa­nies of all time.

Jobs told Isaac­son, “De­cid­ing what not to do is as im­por­tant as de­cid­ing what to do.” The pri­mary rea­son why Jobs pre­ferred to have such a nar­row prod­uct line was that it al­lowed his team to be laser fo­cused on cre­at­ing in­no­va­tive prod­ucts. Jobs and his team would ob­sess over ev­ery de­tail of a prod­uct, and this sim­ply didn't work if he had too many de­vices to think about. He also be­lieved that pro­duc­ing a large num­ber of prod­ucts makes it harder for em­ploy­ees to un­der­stand how their work fits into the com­pany's long-term plans. In de­scrib­ing the ex­pe­ri­ence of trim­ming Ap­ple's prod­uct line, Jobs said, “I came out of the meet­ing with peo­ple who had just got­ten their prod­ucts can­celed and they were three feet off the ground with ex­cite­ment be­cause they fi­nally un­der­stood where in the heck we were go­ing.”

The small range of prod­ucts also helped Ap­ple when it came to mar­ket­ing. It al­lowed Ap­ple to spend its time pro­mot­ing just a few prod­ucts, and it low­ered the cog­ni­tive over­head re­quired to buy an Ap­ple prod­uct. If cus­tomers be­lieved Ap­ple made the best prod­ucts, then de­cid­ing which phone or com­puter to buy was rel­a­tively easy. Con­versely, a cus­tomer who de­cided to go the Win­dows route still had to choose be­tween dozens of com­pa­nies and hun­dreds of com­put­ers. The same is true for An­droid smart­phones to­day.

This strat­egy also matched Jobs's coun­ter­cul­tural in­stincts. As jour­nal­ist Matthew Ygle­sias ex­plored in an ar­ti­cle for Vox fol­low­ing Ap­ple's tenth-an­niver­sary event, Ap­ple risks los­ing its mass pop­u­lar­ity with the iPhone X. Ygle­sias calls this the “Coca-Cola fac­tor,” re­fer­ring to a quote from Andy Warhol on the univer­sal ap­peal of Coke. While the iPhone doesn't have the same uni­ver­sal­ity as Coke, there is a cer­tain al­tru­ism that comes with hav­ing just one prod­uct per cat­e­gory that likely ap­pealed to Jobs. Ap­ple never mar­keted its prod­ucts as a sta­tus sym­bol for the rich and fa­mous, but rather a tool for the artists and cre­ators (as well as the rest of the mid­dle class).

“De­cid­ing what not to do is as im­por­tant as de­cid­ing what to do.” –Steve Jobs The Min­i­mal­ism of Steve Jobs “The se­cret be­hind Ap­ple’s me­te­oric rise is that it has been able to pro­duce a high-mar­gin de­vice with in­dus­try-lead­ing tech­nol­ogy at a price that’s af­ford­able for the mid­dle class.” A New Era: The iPhone Is No Longer for Ev­ery­one

“Ap­ple has cre­ated a phone for the rich and a phone for the rest of us.”

In most in­dus­tries, the best prod­uct is not the most suc­cess­ful prod­uct. Rolex may make the best watches in the world, but most peo­ple wear a Timex or some­thing much cheaper. This is be­cause in or­der to make the best prod­uct on the mar­ket you typ­i­cally have to make that prod­uct too ex­pen­sive for the masses. The se­cret be­hind Ap­ple's me­te­oric rise is that it has been able to pro­duce a high-mar­gin de­vice with in­dus­try-lead­ing tech­nol­ogy at a price that's af­ford­able for the mid­dle class. Walk­ing this tightrope is in­cred­i­bly dif­fi­cult though, and there are a lot of mar­ket forces work­ing against Ap­ple. In or­der to con­tinue to pro­duce the most ad­vanced phone in the world, Ap­ple has to in­clude cut­ting-edge tech­nolo­gies, which are typ­i­cally ex­pen­sive and dif­fi­cult to man­u­fac­ture. Tim Cook has a rep­u­ta­tion for be­ing bril­liant at sup­ply chain man­age­ment. This ex­cel­lence in man­u­fac­tur­ing has al­lowed Ap­ple to re­lease in­no­va­tive new phones ev­ery year with­out hav­ing to raise the price.

The streak fi­nally broke this year, how­ever, when Ap­ple de­cided to switch screens. Many of the top An­droid brands, in­clud­ing LG and Sam­sung, have be­gun to re­lease phones with edge-to-edge OLED screens. In or­der to con­tinue to of­fer a best-in-class de­vice, Ap­ple had no choice but to fol­low suit. OLED screens not only have bet­ter pic­ture qual­ity, but they are more flex­i­ble, which al­lows the man­u­fac­tur­ers to have the edge-to-edge dis­plays. They also use less bat­tery. Un­for­tu­nately, the only com­pany ca­pa­ble of pro­duc­ing OLED screens at the qual­ity and quan­tity that Ap­ple needs is Sam- sung. Ac­cord­ing to KGI Se­cu­ri­ties an­a­lyst Ming-Chi Kuo, Sam­sung is tak­ing ad­van­tage of its tem­po­rary OLED mo­nop­oly by charg­ing Ap­ple be­tween $120 and $130 per unit. This is an enor­mous cost in­crease from the $45 that Ap­ple is ru­mored to be pay­ing for the iPhone 8 Plus dis­play. The iPhone 7 re­port­edly cost around $245 to man­u­fac­ture. At a re­tail price of $650, Ap­ple was able to have a 2.6 times markup. The iPhone X re­port­edly costs $581 to man­u­fac­ture, so even at the in­creased price, Ap­ple is still mak­ing less of a mar­gin than on its pre­vi­ous gen­er­a­tion of de­vices.

When choos­ing be­tween a sim­ple prod­uct line and cre­at­ing the most in­no­va­tive phone on the mar­ket, Ap­ple chose to go with innovation. It's hard to say how all of this will shake out and how this strat­egy will af­fect sales. OLED screen prices will even­tu­ally drop and Ap­ple may even­tu­ally go back to a sim­pli­fied prod­uct line. In the mean­time, Ap­ple has cre­ated a phone for the rich and a phone for the rest of us, and has sac­ri­ficed on its mar­gins in the process. By all ac­counts the iPhone X looks to be the best phone Ap­ple (or any­one else) has ever cre­ated, but the cost of that de­vice might be Ap­ple's suc­cess­ful busi­ness model. David Aver­bach is the CEO and Publisher of iPhone Life magazine. David has an ob­ses­sion with all things Ap­ple. He grew up on Macs and now has a MacBook Pro, iPhone, iPad, Ap­ple TV, and an Ap­ple Watch. David en­joys trav­el­ing and Ul­ti­mate Fris­bee. He has been to over 20 coun­tries. To con­tact David, email him at David@iphonelife.com.

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