The $999 iPhone, The $300 Apple Phone

This is a Short Note.

According to TechCrunch, Apple plans to unveil an iPhone that will cost $999 or more.

Are smartphones inevitably going to catch up with notebook computers in terms of pricing? It seems that way, as Samsung revealed its Note 8 priced at just under $1K, and rumors are that the forthcoming iPhone 8 (X or whatever it’s called) will also come in at $999.

That’s a lot of money to spend on a device, but smartphones ARE the only computer most people want or need anymore, outside of work. That’s helping justify an increase in the premium market. Also, it kind of fulfills the long-held view that Apple would move into the mid-market – except it did so by adding a new tier above the old definition of “premium.”

The reality is this: no matter how you see it, Apple is making the right move. Apple plans to raise the price of its current iPhone brand and make it super-premium. Yes, only few in this world can afford to spend $1,000 on a phone, which is not a laptop.

This strategy will become very clear in coming quarters. I have noted that Apple must have a phone with price range in the neighborhood of $300-$450. (Note as I explained in LinkedIn, this goes beyond hardware pricing)

The following are the key reasons why Apple Corp must have these two categories:

• Data is Critical. Right now, Apple is not collecting any data from the “poor world” for iOS, its operating system. The rich people will not be enough for the AI-first world. It needs all the data to help it make better products. A cheaper phone will help Appple
• Car infotainment: In the next few years, many car companies will begin the adoption of mobile OS like Android and iOS at scale, as they bridge the gap between mobile and car. Since cars are sold in the emerging world, familiarity with OS will be a huge factor in adoption. Apple needs to ensure it has a cheap phone that will help introduce these citizens to the iOS
• Emerging World is huge: Apple does not have any major strategy to win places like Africa. That is a big mistake because these areas will grow over time. Apple cannot just forget them. It needs a strategy to have them in its ecosystem.
• Other Products/OS: Alexa can possibly become the voice operating system. You will like it to be in your ecosystem. The more the users, the better. If Apple remains the phone of the rich, companies like Amazon and others may not just take it the way they will take Android which remains available for both the rich and poor with its wide range of devices, at different pricing points. So, it makes sense for Apple to expand the customer base.

Yet, Apple has to be very strategic in its pricing. My suggestion is this: increase the price of the highest version of iPhone to $1,200 and make it more premium. And then introduce a phone brand called Apple and make the price $350. Make the design of Apple (the phone brand) to be radically different so that you do not cannibalize the premium iPhone. By having these two brands, Apple can compete in both the upper and lower segments of the markets. We will have Apples in Nigeria while they will sell their iPhones in New York. This is similar to Toyota selling Lexus and Honda selling Acura.

Feedback from LinkedIn Readers

These are selected comments from LinkedIn users when this piece was posted in my feed

The issue with Apple has many complexities. Its mindset is largely for the elites or high networth markets. It owns both the device and the OS (unlike Samsung that only owns the device). Samsung phones aren’t cheap either, the difference is that you still see cheap phones with Android OS. Apple wants everyone to ‘step-up’ to use its products, rather than Apple ‘stepping lower’, so that many more markets can afford its products. But when you throw in data collection into the mix, the dynamics changes, which calls for rethinking of its strategy. Maybe Apple is ‘afraid’ that having its products in the hands of ‘poor’ people could undermine its elitist root and feelings it conveys. A huge market is still out of Apple’s reach at the moment, if they want everyone on board, they know what to do!

Interesting abstract... I think the strategy, if adopted by Apple will result in an expanded premium market in Nigeria. We are peculiar and want to be better than our neighbor whose phone is missing the imperial ‘i’ . Anyways, I think the Apple brand (cheaper version of iPhone) is already in some markets, I stand to be corrected though.

The day Apple bow to the pressure of serving the mass market through low pricing, or segmented pricing, that is when it begins to lose its brand essence. Apple is an aspirational brand. Even for those who can’t afford the phone, some look forward to the day they can hold their iPhone. Apple create a perception of a VIP for its consumers. It has maintain this position for a long time. Now I also understand how difficult it is to maintain this strategy, but Apple has no choice but to maintain their brand essence. It is this same reason that makes Apple unique. The pressure to go for market share is unnecessary. I completely agree with Apple’s latest move. its risky but worth it.

Another one from the same comment feed,

Why Apple appears not have a strategy to address the mobile phone users in emerging /developing economies still baffles me. Going by their 2016 Form 10-K filing to SEC, the company remains a predominantly mono-product comapny with the iPhones accounting for ~63% of net sales.

Their sales by geography also shed some light on markets driving their growth. The Americas (North and South) accounted for ~40% of sales value while Europe (which according to their filing comprises European countries, India, Middle East and Africa) accounted for ~23% of sales while Greater China accounting for ~22% of sales value despite the large size of the middles class in China (which is larger than the entire American population).

For all of Apple’s success, I still believe their achilles heel will be their “over reliance” on the iPhone to drive YoY growth. Quoting a esection of the Form 10-K “The Company’s competitors that sell mobile devices and personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. The Company’s financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins”.

I do think the company needs to drive revenue growth from other income lines especially that of “Services” and “other products” which are not entirely hardware based. How and when this will happen remains to be seen. Till then we can only trust that the strategy currently being executed has taken into context some of these concerns.

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