Why the iphone is more ex­pen­sive

The change in cus­tomer’s buy­ing pat­terns af­fects Ap­ple, which makes its own changes to com­pen­sate.

Macworld (USA) - - Contents - BY JA­SON SNELL

In the af­ter­math of Ap­ple’s re­cent an­nounce­ments ( go.mac­world.com/ apan), it’s so easy to re­fer to the $749 iphone XR as a low-price, bar­gain model, in con­trast to the $999 iphone XS and the $1,099 iphone XS Max. But just three years ago, $749 was what Ap­ple charged for the most ex­pen­sive new iphone in its prod­uct line, the iphone 6s Plus.

It’s never been more ex­pen­sive to walk into an Ap­ple Store and walk out with an iphone. Changes in the way wire­less car­ri­ers ap­proach their cus­tomers have led, un­sur­pris­ingly, to changes in the buy­ing be­hav­ior of those same smart­phone users. The change in buy­ing

pat­terns then af­fects Ap­ple, which makes its own changes to com­pen­sate.

There’s a lot go­ing on here, and while the end re­sult is that Ap­ple is very slowly crank­ing up the aver­age sell­ing price of the iphone, it doesn’t nec­es­sar­ily mean that most peo­ple are spend­ing more money on iphones than they used to.

THE SUB­SIDY IS DEAD, SORT OF

Back in the day, at least in the United States, most peo­ple didn’t pay full price when they bought an iphone. In­stead, they paid a lump sum that was sold along with a 24-month con­tract to a wire­less com­pany. The wire­less com­pany was es­sen­tially sub­si­diz­ing the over­all pur­chase price of the phone by lock­ing you in to a two-year con­tract, with part of your monthly bill go­ing to­ward pay­ing off your phone.

Even if the over­all amount of money you spent on the phone was ac­tu­ally quite high, a lot of it was de­ferred into monthly pay­ments, which eased the pain. How­ever, it was of­ten a very bad deal for con­sumers, be­cause in most plans, af­ter two years your bill wouldn’t go down. Which, in turn, was a mo­ti­va­tion to get a new phone ev­ery two years so you could get your money’s worth.

Times have changed. Th­ese days both car­ri­ers and Ap­ple it­self of­fer monthly iphone plans with built-in up­grades, struc­tured as loans rather than as wire­less con­tracts. It’s a more trans­par­ent sys­tem and once you pay off your phone, it’s yours. It’s also led to in­no­va­tive pro­grams like Ap­ple’s own iphone Up­grade Pro­gram,

which gives you a monthly fee in ex­change for us­ing an iphone for a year, turn­ing it in for re­sale, and get­ting a newer model.

You can also just walk in to an Ap­ple Store and buy an un­locked phone for full price. No monthly plans, no com­pli­ca­tions, just a flat fee. That price is not cheap, es­pe­cially com­pared to the old sub­si­dized prices, but it comes with­out strings.

The net re­sult of this is a change in how peo­ple buy phones. If you spend $1,000 for a phone, you’re more likely to hang on to it for longer than the old two-year cy­cle. (Or per­haps you’ll hand it down to a fam­ily mem­ber. My son is still us­ing an iphone 5!) Sure, there are some peo­ple—in­clud­ing many of you—who get a new phone ev­ery year. But I’d wa­ger that the change in how we buy phones has length­ened the phone buy­ing cy­cle.

Fewer new phones be­ing bought ev­ery year is bad for Ap­ple? What’s a com­pany to do?

IPHONE UNIT GROWTH AP­PROACHES ZERO

Given the rosy quar­terly re­sults re­ported by Ap­ple the last few years, you may be un­der the im­pres­sion that iphone sales are grow­ing. That’s not ac­tu­ally true: Year-

over-year iphone sales growth has been 5 per­cent or less for the last 11 quar­ters.

Not good, right? If there is iphone sales growth out there, it’s very slow growth—in the realm of a cou­ple per­cent­age points. So why is Ap­ple’s iphone busi­ness per­ceived as be­ing so strong?

One rea­son is its out­right size and prof­itabil­ity. Even with­out mas­sive growth, the iphone re­mains an enor­mous busi­ness that makes Ap­ple one of the most suc­cess­ful and prof­itable com­pa­nies in the world.

An­other rea­son is that while iphone sales aren’t ris­ing much, iphone rev­enues are do­ing much, much bet­ter. Rev­enue has been up the last seven straight quar­ters, and the last three quar­ters have shown dou­ble-digit rev­enue growth ver­sus the year-ago quar­ter.

What’s go­ing on here only re­quires ba­sic math to un­der­stand. Take the amount of iphone rev­enue Ap­ple re­ports and di­vide it by the num­ber of iphones sold. The num­ber you get back will be a mea­sure of dol­lars per iphone—what’s com­monly called aver­age sell­ing price, or ASP.

THE ASP KEEPS ON RIS­ING

Since late 2016 and the in­tro­duc­tion of the iphone 7 and iphone 7 Plus, Ap­ple has been crank­ing up iphone prices—and the ASP has fol­lowed.

In 2017, the iphone 8 ($699) and 8 Plus ($799) were both priced $50 higher than their pre­de­ces­sors were a year be­fore— and a new $999 slot was in­tro­duced for the iphone X.

That brings us to this year. Ap­ple has elim­i­nated the $649/699 price slot for a new iphone model al­to­gether, re­plac­ing it with a new phone at the very top of the price list. In­stead of of­fer­ing $699, $799, and $999 mod­els, it’s of­fer­ing $749, $999, and $1,099 mod­els. Un­less Ap­ple starts

sell­ing a much larger per­cent­age of dis­counted past-year mod­els as a part of its to­tal, the ASPS can only go up.

Above is a chart (thanks to Kirk Mcpike for the data) that shows, his­tor­i­cally, the sticker prices of iphone mod­els ad­justed to 2018 dol­lars. I will ad­mit that it’s an over­sim­pli­fi­ca­tion of things, be­cause it doesn’t fac­tor in the long-term cost of sub­si­dies. But it’s still use­ful, if only as a rough gauge of how Ap­ple shapes its iphone prod­uct line.

The top line is the price of the most ex­pen­sive iphone you can buy. This line has sky­rock­eted in the past two years, thanks to the iphone X and XS. This is Ap­ple cap­tur­ing money from cus­tomers who were pre­sum­ably al­ways will­ing to pay more for a top-of-the-line iphone.

The mid­dle line is the price of the base model of the low­est-priced new iphone model. Viewed through the chart’s ad­just­ment to 2018 dol­lars, it seems like Ap­ple is ac­tu­ally be­ing fairly con­sis­tent with the size of the price tag it wants to see on its base-level iphone.

The bot­tom line is the price of the cheap­est iphone model be­ing sold di­rectly from Ap­ple—gen­er­ally a past-year model or the iphone SE. Again, this ac­tu­ally shows some con­sis­tency on Ap­ple’s part—and it makes the dis­con­tin­u­a­tion of the iphone SE seem a lit­tle more like a cor­rec­tion to a trend that had gone too far down­ward.

I read the widen­ing gap be­tween the top and bot­tom lines of this chart as Ap­ple’s pulling apart of the iphone prod­uct line to widen the ap­peal of the prod­uct. Ap­ple wants to sell as many $1,449 511GB iphone XS Max units as it can; it’s also happy to sell the iphone 7 to some­one for $449—a full thou­sand dol­lars less.

HIGHER PRICES FOR LONGER CY­CLES

One of the most in­ter­est­ing state­ments at Ap­ple’s iphone event was Lisa Jack­son’s claim that Ap­ple is very much ded­i­cated to length­en­ing the us­able life of iphones ( go. mac­world.com/lsln). Of course, IOS 12 is also fo­cused on im­prov­ing per­for­mance on older de­vices.

This is not just mar­ket­ing talk. (It’s mar­ket­ing talk, sure, but it’s not just mar­ket­ing talk.) This is part of the same pic­ture, of a changed global smart­phone mar­ket. In this new world, phones cost more up front, but they are us­able longer, and re­tain more of their value if re-sold (or re­claimed by a sub­scrip­tion pro­gram in ex­change for a new phone) af­ter a year or two.

When peo­ple keep their phones longer, what do phone­mak­ers do? Make more ex­pen­sive phones, ideally ones that last longer. That’s ex­actly what Ap­ple’s do­ing. If you’re some­one who buys the most ex­pen­sive iphone ev­ery year, there’s no deny­ing that you’ll be pay­ing a lot more. But maybe you can get a good deal by sell­ing last year’s model to make up for it. ■

Are peo­ple re­ally spend­ing more money on iphones than they used to?

Ap­ple VP Lisa Jack­son at the Septem­ber 12 Ap­ple iphone event.

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