Apple Could Also “Figuratively” Take Over the Laptop Market if MacBooks Were Free
by John Paczkowski
Posted on October 28, 2008 at 12:00 AM PT
Let me see if I understand this correctly. Apple, if it so chooses, can halve the subsidized price of the 8GB iPhone 3G, all the while maintaining a tidy 42.3 percent profit margin and extending its dominion over the smartphone market.
And it can do this, because …
… Needham Research analyst Charlie Wolf says it can.
Figuratively speaking, of course.
A $100 price cut could “double or triple” projected sales, Wolf argued in a note to clients Monday. “In short, the iPhone… could figuratively take over the smartphone market leaving only niche players like BlackBerry.”
Really.
Now, leaving aside, for a moment, the fact that AT&T’s (T) subsidies of the iPhone 3G’s current upfront purchase cost–which reduced its third-quarter earnings by approximately $900 million, or 10 cents per share–may have left it with little stomach for further subsidies. And leaving aside, as well, the fact that AT&T’s network might not be able to handle a sudden doubling or tripling of demand on its 3G abilities without some difficulty. When has Apple (AAPL) ever drastically lowered prices or compromised the quality of its products simply to boost market share? What was it CEO Steve Jobs said last week in answer to an earnings call question about a cheap Apple netbook?
We don’t know how to make a $500 computer that’s not a piece of junk, and our DNA will not let us ship that. But we can continue to deliver greater and greater value to those customers that we choose to serve, and there’s a lot of them. And we’ve seen great success by focusing on certain segments of the market and not trying to be everything to everybody.”
Wouldn’t the iPhone at $99 be an example of Apple trying to be everything to everybody? I’d argue it would.
Which is not to say that it will never happen. During that same earnings call I referenced above, Jobs also said Apple must be careful not to leave a price umbrella beneath the iPhone from which a rival can underprice it. And a $99 price point would almost certainly close that umbrella, wouldn’t it?
Comments
I can’t see a carrier wanting to slow down the new subscriber flow because their network isn’t ready for it. Call me cynical…
I’m pretty sure AT&T worked out the math when they agreed to the subsidy – it’s not like there are any surprises in the numbers. A device that pulls subscribers so easily from a competing carrier doesn’t come along every day, or even every year. I’d say AT&T is pretty happy with the relationship.
As far as the $99 phone goes: Apple knows how to protect their brand. This is not a device they want to associate a $99 price tag with, it devalues the brand. The iPhone is their mobile platform for the near future. Apple wants to make sure consumers regard it as the premium product that it is.
Posted by Brendan Walsh at October 28th, 2008 at 5:21 amSubsidized notebooks are coming soon. Why wouldn’t they? Netbooks can be had for less than the price of an iPhone. To the carriers a netbook is just a phone that can drink more data. As soon as they learn to charge for that data they’ll subsidize the computer’s cost.
Posted by Brendan Walsh at October 28th, 2008 at 5:26 amHe doesn’t even offer up how he could possibly claim their profit margin is that big, let alone being able to maintain that by dropping the price $100?
What is his estimate based on? Some geek’s deconstruction of the iPhone and guessing what the parts costs to build the phone? (Ignoring labor and manufacturing costs, shipping, marketing and time spent on shelves, of course.)
I suspect Apple’s profit margin is already closer to 30 percent. A friend of mine who is an insurance underwriter for large construction companies told me (long before this economic downturn), “I’d kill to have a seven percent profit margin.”
Posted by Eric Welch at October 28th, 2008 at 7:59 amThere are people who know so much about what is happening with the pacific-rim electronics fabrication scene that they can take any new device apart and recognize most of the internal components. I’m not one of those, nor is the author of the linked article from what I can tell.
BUT… I think it is fairly well accepted that what is revolutionary about the iPhone doesn’t have all that much to do with the physical hardware. I don’t think it is unreasonable to think that the hardware is really nothing special in terms of the technology (looks good though as is typical of Apple).
I’m glad for the existence of the iPhone because I think it proves that the industry could have been doing a lot more than they were. The existing (pre-iPhone) cell-phone industry was comfortable tinkering with price-plans built around a common set of hardware. Much of THAT hardware was (and still is) overpriced too. My phone (an “ordinary” smart phone from Motorola) was listed at something like $400 when signed up for a two-year plan. That number is ludicrous! Nobody in their right mind (and spending their own money) would pay that much for the hardware alone. But we’ll hold our nose and pay $50 for it with a two year commitment. However it is worked out between Motorola and Sprint (my bargain-basement carrier) I don’t care. But I’m sure neither of them are losing money, and in the mean time I have a crippled (by Sprint) phone that allows me to check my mail while on the road and gives me 10 times more “talk-time” than I typically use.
The carrier’s gimmick is to get you to not think about all the minutes you are not using each month for that fixed fee. The hardware-makers gimmick is to bundle their hardware with a plan so that they get their money up front and the carrier plays the roll of banker.
I think Apple could, and SHOULD take over more of the market, for its own good. The reason is that unlike the vacuum that iTunes moved into, there is already a large (maybe too large) cell-phone infrastructure. They may be putting a hurting on some of the marginal players now, but eventually they are all going to wake up and start responding, whether with Android, Windows, or something else. At that point a lot of the people who jumped to get an iPhone may jump to get something else. Remember, tons of people were not happy with having to go with AT&T here in the US just to get the fun new toy. When there are half a dozen iPhone alternatives (in functionality) and a variety of plans from a variety of carriers we are going to see a re-play of the PC-wars of the 80s. The results will be the same too, and not good for Apple, unless they do something differently this time. Having more of the market locked up at the start of this new competition is one thing they can do now. There are other things they will need to do later as well (like deals with other US carriers for example).
Posted by Mac Beach at October 28th, 2008 at 12:13 pmapple’s plan should be: hardware as loss leader
sell users the apps and services
Posted by Sam Harrison at October 28th, 2008 at 12:32 pmBy the way, I want to add that Apple certainly does know how to make a piece of junk. My second generation PowerPC based MacBook (I think they called the white plastic ones that to differentiate from the metal ones) was certainly a piece of junk. Subject of lawsuits, recalled once and returned to me working for another month or two before clicking itself to death again.
They should have just given everyone that bought one of these beauties a full refund. Apple may TEND to have good product quality, but they have their share of lemons too, and when they do they are just as reluctant to make things right as the next company over.
Posted by Mac Beach at October 28th, 2008 at 6:26 pmI do not want Apple to have larger market share. I like it just the way it is. There is not enough 3G bandwidth for others.
Posted by David Owens at October 28th, 2008 at 6:33 pm