Enough Noise About Apple!

Lately my RSS News Feed reader is bursting with news and opinion about Apple (AAPL), the iPhone price cut, and who did what to whom and why. If you don’t know what I am talking about then consider yourself lucky because it is all meaningless noise.

The explanation is simple. There is a consumer slowdown. Apple is at the very knife edge of discretionary consumer spending. $600 Phones don’t sell in an environment like this. The price had to be cut more rapidly than planned to ensure market penetration. It is not some masterful marketing plan by Steve Jobs.

Apple is a great company. The iPhone is a killer product. I am not alone in that opinion.

What is unseen is that Apple has evolved from being a computer company to a consumer products company with a highly elastic relationship to discretionary consumer spending. People who are paying $500 more a month on their ARM mortgage aren’t going to be buying $599 iPhones.

We can debate the presence and depth of a consumer slowdown, but can anyone debate with a straight face that the iPod and iPhone are at the extreme margin when it comes to consumer discretionary spending? Why doesn’t anyone else see this? Am I mad? Discuss.

Comments

[Oh Blah Dee Blah Dah]

Steve Jobs got it right. Apple replaces models with a similar price and more features or capability. I believe this is EXACTLY what it is doing in this case. The European iPhone will probably have 3G and more memory, and it will take the place of the original U.S. iPhone at a comparable price. The original U.S. iPhone will be repositioned as a second, and lower-end model, in terms of features and capability, than the new flagship European model. This new European model may also be available in the U.S. as a higher-end U.S. model.

If Apple lowered the iPhone priced AFTER the holidays, very few buyers would have complained. Being that all of the iPhone components are available from suppliers, and the the U.S. iPhone roll-out showed few product defects and service problems, Apple realized that it could ramp up production of a reliable product BEFORE the holidays.

Mobile phone purchases are now a big holiday purchase. By lowering the price now, Apple will be getting customers beyond its normal user base. If Apple did not do this now, these customers could have purchased another mobile manufacturer's product during the holidays, and Apple would not get another chance at these customers until their one or two years service contract expired.

The lower price of the iPhone would have come ANYWAY! The only difference here is that it came sooner rather than later.

2007 Sep 09 07:59 AM

[Turley Muller]

I totally agree, it makes sense. Hi-tech products are almost always marketed with a price skimming strategy. Since these type products are unique and differentiated, there is no direct competition on the onset as it takes time for other firms to respond with a competing product. A High Initial price and accompanying profit margins aid in recovering up front development costs and other fixed costs. Lowering the price in increments to "skim" drives volume which lowers variable costs helping maintain profit margins on a lower selling price. Think of any new tech based product when it was released- the original price versus now. An example: the Razr, or Blackberries, or DVD players etc. Firms have to keep reducing the selling price to stave off potential competition and drive economies of scale.

The handset industry is brutally competitive, Instead of getting to the new reduced- price by skimming two or three layers, Apple just went ahead and knocked it one swoop. The economy looks if its on shaky ground. Consumers need some inducement, and so many were waiting to the price to come down. Maintaining a high selling price doesn't due anybody any good when consumers are waiting on the company. So sooner or later, Apple would but the price. If Apple were to gradually reduce the SP, then people may get the idea the price continue to go lower if Apple made a habit of frequent but smaller reductions. I am of the camp, "do it and be done with it" The Telephone market isn't conducive to implementing a price skimming strategy for a long time period. Things move quick. Thus, there is a need to switch to a penetration strategy. With consumers pulling back and focusing on paying down debt. (especially those option-arm borrowers who have been making the minimum payment), adoption will be slow, and that's a big invitation for competitors to rush in an offer a price consumers are willing to pay. Additionally, Apple receives service revenue from ATT, especially on new accounts, so driving volume will increase the service revenue even though product revenue is lower. With the shared costs of the iPod touch, increases in unit volume will achieve economies of scale thus increasing margins.

Essentially, the path that Apple took, happens with every new product. Except Apple was quicker and more aggressive because of a tiring consumer and plenty of pent-up demand at a fairly lower SP. I don't understand what the uproar is about. I bought an iPhone, and I could care less about the rebate. I know how the tech industry operates especially during a slowing economy. What Apple did was the normal course of business for any firm reacting to the economic climate and potential buyers' price they are willing to pay. I am looking at a computer monitor I paid nearly 3k and then a year or so later it was selling for less than a grand. My old man bought a TV for nearly 10k that my younger brother bought 2 or so years later somewhere around 3k. Yeah, it sucks but that;s how the industry operates. You can't tell me that there are people that bought an iPhone and didn't expect the price to drop later. Enough of the noise ! Enough of the ranting of about how this will hurt Apple's image. It's not. If a consumer paid 600, then that's what it was worth to him or her. Apple didn't take that money from them, they gave it to Apple. And if they didn't want to pay 5-600 then they are idiots for paying it. For all of those saying Apple didn't care about their customers and mistreated them, that;s hardly the case when Jobs is giving 100 back, Not just that, he is now making the iPhone more affordable for those who have been wanting them. We have all experienced buying a good that right after drops in price. Most of the time we don't know about it. But in the times we do, I wish i got a rebate on my DVD player, or my Dell HDTV monitor.... or my old blackberry... Inkjet printer... Like i have been saying, quick and drastic price reduction are inherent to new technology products especially under circumstances of increasing competition and lower discretionary spending.

Here are my comments regarding the benefits from the price reduction: financial-alchemist.bl...

2007 Sep 09 09:10 AM

[User 106126]

Just go and check the apple store or att store and you will see for yourself! It's massive! it's insane.... people are buying.... it's crasy... I felt it on myself. I was looking at it for a 100 time and suddenly realized that i can own one. Guess, what happened next? I was making loops around the store trying to figure out if I really needed one or not. And I don't. I don't really need one, but man i'd enjoy very much having one. So... spent all evening thinking and I'm going today there to buy it. Price cut really helped.

Another thought that I had is that with the price cut now many people can now afford to pay early termination fees to other carriers and switch to att. seems that many people didn't think about it.

So, concluding this, stop sitting on your rear side and theoretisize. Get up and check the stores and see for yourself :)

2007 Sep 09 01:51 PM

[StreetSweeper]

We won't know until the next quarterly, but I'm kinda bettin' that sales weren't hurt much if at all by the ARM, bloodsucking, subprime mortgages. Wrong crowd and way too small a sampling. Besides, for many responsible, bill-payin', right as rain people, yup, fundamentals first, then the fads. But for a whole lot of folks, it's fads first, then fundamentals. Nope, ol' Stevie had this one pegged before the release of the iPhone as a possible scenario, maybe though, a plan B if there were any signs of less consumer spending.

2007 Sep 09 04:29 PM

[Gautier Gator]

The price is not a factor, sorry. I have been in the car stereo business for over 30 years and people have often said, How can you make a living in that business? We only did close to 3 million in sales in the poorest state in the nation in 2006 of nothing but pure car audio, no home audio sales, no phone sales, in 2 stores in a Katrina affected Mississippi Gulf Coast . The point being people will buy the "cool factor" and it really does not matter the income level of the consumer. We have customers who need a transmission for their vehicle who live in a double wide that come in our store to purchase a $2000 car audio system. That is a consumer who will buy the coolest phone on the market. After all we must have our priorities straight. Also the proffessional who makes over 6 figures a year will purchase one, not to listen to the i-pod, but because it is the easiest phone to use on the market period. The guy who has bought a blackberry and still does not know how to use it will give it to his kid and buy the i-phone. By the way, I thought you mentioned the price has dropped in the beginning of the article, but then you reference a $600 phone. They now sale for only 399.99, which is what I paid for my last i-pod. I predict the i-phone will be the dominate cell phone in 3 years. I have made a lot of money since June buying and selling Apple in the dips and peaks and I really believe it will break the $200 a share in the next 12 months. I love my i-phone, and cannot wait until a new model is out so I can give mine to my wife, and get the new model. I suspect Steve Jobs, is often asked, can you make living selling $600 phones. He probably
say's, yeah, but we are dropping the price to $400 because we only
sold a million in a little over a month.

2007 Sep 11 01:25 AM