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This may surprise many people, but data show that Apple's (AAPL) pricing power in the market is questionable. Apple is, after all, subject to laws of economics. Consumers are price insensitive only to a certain point. Above that, Apple has problem achieving high sales figures.

I came up with this conclusion based on the sales records of Apple's successful products over the past ten years. First, let's examine the sales history of iPod, iPhone, iPad, and MacBook. I pay particular attention to the lowest price point of each product.

iPod

iPod is a product category with one single function: music. Video and games came later with iPod touch, which is basically a low end iPhone that cannot make calls. iPod sold 54 million units during its peak year. Besides the sleek design, this sales figure has to give thanks largely to iPod's affordable price. In particular, sales didn't pick up until the $199 price level was reached in 2005.

Year

Unit Sales

Lowest Price

2001

-

$399

2002

376,000

$299

2003

937,000

$299

2004

4,416,000

$249 -mini

2005

22,497,000

$199 , $99 -shuffle

2006

39,409,000

$149 , $69 -shuffle

2007

51,630,000

(iPhone Introduced)

2008

54,828,000

$199 -touch

2009

54,132,000

$99 -traditional $299 -touch

2010

50,315,000

$179

2011

42,628,000

$179

Source: Apple's 10-K Annual Reports (Sales) and Wikipedia (Price)

iPhone

iPhone clearly had larger potential than iPod, because of its multi-functionality. But consumers familiar with its history should remember that Apple dropped the 8GB iPhone model from $599 to $399 within two months of its launch. Why? Obviously Apple realized at that point that $599 was not going to make the product popular. The sales really picked up with newer model introduced, but most importantly with Apple dropping the price of the cheapest iPhone model to $199 (with subsidy). It is not hard to imagine that without subsidy from AT&T (T), and later Verizon (VZ) and Sprint (S), iPhone at $600+ (as in China and some European countries) will never have the kind of success as it found in the United States.

So for both iPod and iPhone, the sweet spot came at $199. Above that level, Apple would have difficulty convincing a large enough number of consumers to buy the product no matter how fantastic design is.

Year

Unit Sales

Lowest Price
(subsidized)

2007

1,844,000

$399

2008

6,754,000

$199

2009

13,033,000

$199

2010

25,179,000

$199

2011

47,057,000

$199

2012

?

$199

Source: Apple's 10-K Annual Reports (Sales) and Wikipedia (Price)

iPad

Then iPad came. Since it is essentially a computer and appears more like one than the iPhone, it's priced higher. One thing Apple got it right in the beginning was pricing. The $500 price level occupied an empty pricing spot between those ugly netbooks and real laptops. But at $400-$500, iPad is much more vulnerable than iPhone. Consumers are much more sensitive to prices at this level, which might explain why Amazon (AMZN) with Kindle Fire and then Google (GOOG) with Nexus 7 both went after this market at the sweet pricing spot of $200. Microsoft's Surface will likely take the $400-$500 pricing range to start a head-to-head competition with Apple. If Microsoft (MSFT) and Google (rumored Nexus 10) comes up with a few more tablets taking the pricing spots around $300-$400, the whole pricing spectrum will be occupied. And with comparable products, iPad will have little advantage over its competitors.

Year

Unit Sales

Lowest Price

2010

4,958,000

$499

2011

20,358,000

$499

2012

?

$399

Source: Apple's 10-K Annual Reports (Sales) and Wikipedia (Price)

MacBook

MacBook never had huge sales. Its growth has been nice for its category, but never stellar by Apple standard. It will likely stay that way given its price level of at least $1,000.

Year

Unit Sales

Lowest Price

2007

6,294

$1,099

2008

8,673

$1,099

2009

9,535

$999

2010

11,278

$999

2011

15,344

$999

2012

?

$999

Source: Apple's 10-K Annual Reports (Sales) and Wikipedia (Price)

To summarize the tables above, we have the following information:

Product

Peak Annual Sales (million units)

Lowest Pricing

Current Life Cycle

iPod

54

$149

declining sales

iPhone

47

$199

growing

iPad

20

$399

growing

MacBook

15

$999

slow growth

You see, Apple's pricing power is indeed very questionable. It can sell electronics better than its competitors. But it is not selling better at higher price levels. Based on this observation, I can draw a few conclusions.

1. iPhone is Apple's strongest product, mainly because its subsidized price has reached a sweet spot. With much better name recognition, it will be very hard for Apple's competitors to breach Apple's lead, even with free phones. After all, the difference between a free phone and iPhone can only be as much as $200. In that sense, also considering the competition from Samsung, Nokia (NOK) perhaps would never get close to its peak size even if its turnaround were successful.

2. iPad is very vulnerable. Both Amazon and Google have spotted this weak pricing point. Since the experience of using an iPad is much more like using a computer, Apple's (well perhaps Steve Jobs by himself) stubbornness to reject flash and not support many standard web widgets makes the experience on iPad inferior to a computer, bar portability. This is not the case for Android (and likely Windows 8). Many websites have problem displaying with full functionality on an iPad (Seeking Alpha is one example). Android doesn't have this problem at all. This is the main reason (and a somewhat stupid one) why iPad users have to use apps instead of the browser, the better option, to access many websites. Apple's stiff control of iTunes also ensures its apps store is much more restrictive and many interesting apps available at Android are missing from iTunes. Apple fans perhaps will never realize this until they try Android.

Since there is a large gap between 0 and $400-$500, there is enough space for competitive entry. Google and Amazon are already in the $200 spot. Microsoft likely will take the same pricing range as Apple with its new tablet Surface coming this fall. From the somewhat buggy Kindle Fire (largely caused by Amazon's customized Android, as Kindle Fire works beautifully with a full version Android), to the much better polished Nexus 7, the kind of competition iPad faces will pose a big challenge, not to mention Microsoft's Surface.

3. MacBook will retain non-essential, not for Apple's size anyway. Air already doesn't have much advantage over the ultrabooks, actually. Toshiba's ultrabook is as thin as Air, similar in battery life, but much lighter. In my opinion, it already beats Air. Given the above analysis on pricing, MacBook will never become a major product in the market. It is simply too expensive.

4. The rumored iTV is a not going to happen. To be priced at above $1000? After seeing the data in this article, people should realize it's an unrealistic dream. I'm sure Apple understands such price elasticity issues perfectly fine, which is why I believe it will not produce such a product. Its little $99 experiment, Apple TV, never really picked up in sales. That's sufficient for Apple in this category, at least for now.

Following these conclusions, my prediction of the second half of this year is as follows:

1. iPhone 5 still leads the market, in a fairly big way.

2. iPad's growth is seriously challenged and the growth rate drops sharply.

3. Sales of MacBook stay not-so-exciting.

What are the implications for Apple investors or potential investors?

1. Apple's stock, if there is any hope, is all on iPhone 5. Replacement sales will be good, but facing a slowdown of growth in the United States, Apple may have to rely on emerging markets such as China for sustained growth. Since the Chinese new year, equivalent to Thanksgiving and Christmas in gadget sales, will not happen until February 2013, Apple's holiday season is unlikely to surprise us again. iPhone sales may even live up to the elevated expectations. But Apple's stock might stay deflated, going nowhere.

2. iPad's growth will hit a big barrier unless Apple comes up with another new iPad prior to the end of the year. But that seems to go again Apple's annual product introduction cycle. In a way, I believe iPad sales will disappoint.

The real problem in Apple stock price is not valuation, which has been cheap for a while, but expectations on long term future growth. Apple's P/E ratio might drop to single digit by the end of this year, if investors don't see revolutionary new products on the horizon. That, unfortunately, is the current market mentality on Apple.

Source: Apple's Pricing Power? Questionable