Apple's Pricing Power Defies Natural Laws of Supply and Demand

Apple (AAPL) gets a lot of credit for creating cool technology that is user friendly out of the box. But what the company is really good at is being able to take a product that, even in states of over supply, has pricing power.

When I think about what Apple does in terms of pricing its products, I am reminded of learning about what economists refer to as Giffin goods. A Giffin good actually sees an increase in demand when its price rises. This theory was originally tied to a big potato famine, and is often thought of as more than theory than reality given the natural laws of supply and demand.

Enter Apple, who has proven that high prices will not only not deter customers, but in fact invite people to price points they ordinarily wouldn't consider paying despite highly functional products available for substitution.

I have a lot of thoughts on the iPhone. In fact, I just opened my first Macbook today and was stunned at how easy it was to use out of the box. People have spoken of the Halo Affect before, assuming that sales of iPods would spur growth in demand for Macs. While this has been true, I believe no other product on the market will generate interest in what Macs offer from a software and media center standpoint than the iPhone.

Being Wi-Fi enabled, the phone wont need to be docked or plugged into your Mac in order to sync up contacts. What's more, the iPhone will likely automatically upload and download pictures and movies both ways without much prompting, and highlight the power of the Mac OS.

Here are my estimates:

Cingular customers: ~60 million

New customers for iPhone: ~15 million in first year

Total iPhones sold in 1 year: 30 million

Global market share: 3%

I believe the iPhone will carry higher gross margins than the corporate average and the iPods it will cannibalize. Also, it will drive higher software sales as part of the Halo Effect, further boosting the company's gross margins.

With the amount of hype about an iPhone prior to its unveiling today, it was a real challenge for Apple to surprise to the upside. But the stock's 7% rally and RIMM and Palm's declines are evidence of the threat Apple is to the wireless landscape.

Let's just hope the screen is smudge proof.

Comments

[Tom B:]

"I have a lot of thoughts on the iPhone. In fact, I just opened my first Macbook today and was stunned at how easy it was to use out of the box."

Enjoy. As a scientist, I use Mac Windows, and UNIX workstations. Mac is by far my favorite.

2007 Jan 10 09:43 AM

[rick church:]

I don't believe the entry into mobile is a downhill run for AAPL in that there are some technological shortcomings to iPhone (at first glance) and the competitive set is big and committed. But don't ignore the cool factor (equals pricing power) and that the iPod user base is 100% committed because their investment in their music library (equals pricing power) so the adoption rate should be high. AAPL will iron out the technological shortcomings as new generations are launched. When I think of AAPL I see possibilities (low share but growing at the top of the list), not problems.

2007 Jan 10 03:31 PM