Saturday, September 08, 2007

The Economy of the iPhone, or How Apple is Going to Take Over the World Part I

I have to admit that I was really puzzled by Apple's Sept. 5 media event.

At first, I was mostly curious about Steve's decision to cut the iPhone's price by 200 bucks. So soon? So much? What? Now a 100$ credit for the whiners that bought it then but suddenly can't afford it? What the hell is going on here?

Then I was really interested in why Apple would release a product so similar, the iPod Touch. It does everything but make phone calls. Why? Won't Apple and ATT lose money that should be going to the iPhone?

I am now going to answer these questions and provide a lot of complete speculation about Steve's grand strategy here. Since this is my first lengthy, analytical, post on my very own blog, I will remind you dear readers that I don't provide citations or links (except when necessary to avoid plagiarism accusations) because that's not the point. My point is to provide commentary on other people's reports of current affairs. If any of my ideas come directly from other sources, I will cite them. If you think I am wrong, by all means, let me know.

Ahh. The iPhone price drop. So welcome to me, since I was waiting for Rev. B and (let's face it) a price cut. Actually, I was hoping for an iPhone Nano. Something in the $200 range without the WiFI, coverflow, multi-touch, etc., but I was also fairly certain that it wouldn't happen. At least not so soon. I was right. It didn't.

I am not interested in provoking a flamewar with the fucktards that paid 600 greenbacks the iPhone cost when it was released who are now pissed because *gasp* technology gets cheaper over time. Oops. Maybe I just did. I don't care. Don't even bother posting comments because I will nosefuck your comments to make you sound even dumber than your really are. Why? Because you fall into that category of increasingly irritating jizzbrains who have (or think you have) more money than smarts.

I swear. It's as though any idiot with 200 bucks can go buy a Dell and suddenly you are a tech expert writing for some newsrag or tech blog and you shill for anything that isn't Apple, and we (the public) are supposed to believe you because you get paid 2 dollars an inch to write stuff that makes MicroSlut look better.

God. I want to go on a Bill Hicks-style rant about the media whores right now, but it will distract me from my point.

Speaking of points and having all that out of the way, here goes:

The iPhone Price Drop (for real)

Everything that I have read so far makes me believe that no one really knows exactly what the iPhone cost Apple. The estimates that call it at around 300 bucks are probably bogus. Even if they are right in terms of components, they don't take into account R&D costs.

It has been speculated (for good reason) that the price cut is simple economics. The phones weren't selling quite well enough, so you drop the price to increase demand.

In most cases, I would agree. But the known facts of this situation contradict simple economics. The iPhone has been selling as wildly as expected; Apple is on track to sell the predicted million units by the end of the fiscal quarter, and that was before the price cut. Therefore, it is tough to argue that there is a scarcity of demand that justifies a decrease in price.

Even if that were the case, a cut of 33%? After less than 3 months? What is Apple smoking? Microsoft and Sony have been selling game platforms at a loss for 1.5 and about .5 years, respectively. It took Sony 6 months to cut prices, and MS responded with a 50-dollar cut.

So what else could do it? Why do you decrease profit margins on an item that is selling just fine?

I'll tell you why. Apple did it for the same reason that Sony and MS sell game systems at a loss: Market Share. Installed User Base. Platform Supremacy. Whatever you want to call it. But Apple did it far better than either of the other two. Apple did/is doing it without losing money.

(As a quick aside, I want to point out that products and prices and feature-sets don't just happen overnight. They are planned ahead. Apple knows just as well as any decently informed consumer (by the way, that includes, ahem, ALL OF EUROPE AND THE REST OF THE WORLD knows that the costs of contracts far outweigh the initial cost of XYZ smartphone. If anyone ever told you with a straight face that the MOTO Q or BB or whatever was only $99, and the iPhone was way overpriced, I hope you had the good sense to shoot him or her in the face with a good magnum round. Our gene pool can't afford that kind of idiocy. The total cost of ownership for an iPhone is not just less, but MUCH less than other smartphones.)

Anyway, the iPhone is about market share. Steve even made that clear in the Jan. announcement. It was even more clear from CFO Oppenheimer's remarks that iPhone profits are being treated as a subscription and profits will be amortized over 2 years. It's not about windfall Apple profits. It's not about margin. It's about breaking into a new market and taking over. Apple sold just enough iPhones at 600 bucks a pop to cover R&D, plus whatever else he needed to cover the anticipated "rebate." Then he cut the price because he wants everyone to have an iPhone.

Do you hear me, people? The Apple iPhone is selling like women at the chicken shack! The simple economic model of supply and demand does not apply.

The Economy of the iPhone, or How Apple is Going to Take Over the World Part II

I left you with the notion that basic economic principals do not apply to Apple.

Hmm. The first thought is, of course, that Steve's Reality Distortion Field has affected me.

No. Not at All.

Let's have a bit of a history lesson. It's good for the soul. Or something.

The iPhone is a long-awaited dream of Steve's that's taken years to bear fruit. Why?

Well, why not indulge in a bunch of fanciful speculation? At least my speculation is better than

Or whatever passes for a tech blog/news site/rumor mill/ these days.

Steve got his start with the infamous cracking of Ma Bell's phone network. He has, for his entire life, bucked the system that says, "Go forth and multiply Corporate Domination." Steve never wanted a part of that. When he had his own companies, he didn't want that. When he saw kids his age doing that kind of thing, he didn't like that. Steve is, among other things, anti-corporate.

It's practically inarguable that he saw the potential in the music player market of the late 90s/early 00s. Now, he owns it. Fast-forward to today. Steve identified another ripe market just waiting for his solution. His goal is to own it.

But how do you truly own a market? Ma Bell thought it owned a market . . . every time a company thinks it owns a market, someone complains about monopoly.

What happens? The government takes privately-owned property and forces the owner to "compete on equal terms" with the competition. The companies that laid down that cable networks we all use had their cables removed from them. They were forced to rent their own wire from themselves and pay fees for infrastructure they built. Because that's fair. Or something.

Of course, a company that that gains a huge market share and then rapes consumers is no better than the government solution. It's probably worse. Which is why we let the government "fix" the problems that we consumer-sheep create for ourselves.

What does this have to do with the iPod or the iPhone? It has a lot to do with them. Steve has a chip on his shoulder. He is on a mission to prove that market dominance is not the same as monopoly. How? Why? Because dominance is accomplished by merit; monopoly is not. One is a good that is so good that everyone buys it by choice, the other is a bad that is so bad that people only buy it because they have no other choice.

Steve hates monopolies, but he loves dominance. And, for the reason above, this is not the paradox it seems to be. Steve is on a mission to destroy monopolies by beating all of them at their own shitty games. And in the process, he is doing it without hurting consumers. He is using Apple's market dominance to lean on companies that were, until recently, impossible to bargain with. Apple is negotiating with all the major players in content, and Apple is winning.

But Steve is responsible for the company. So when Apple launched the iPhone after years of costly R&D, Apple knew that it could command a hefty pricetag. Apple knew that the early adopters with money to burn would subsidize the cost of development. When sales numbers hit X, the price was dropped to a price point that fell in line with normal iPod offerings. Apple did what no other tech company I know of has ever done: they got consumers to pay for the total cost of a product in less than 3 months.

Apple is doing what it has done before, and what few companies have ever done: turn a profit while pwning the market.

The Economy of the iPhone, or How Apple is Going to Take Over the World Part III

So. Following up on the heels of my last bit, how, specifically, does Apple Inc. avoid the stigma of monopoly?

The answer to this is not that difficult, so long as you are able to accurately answer the question: what does Apple do, anyway?

To be fair, it took Apple itself a long time to figure this out.

Apple delivers content.

It does so by delivering its content with hardware that is specifically taylored to make its content easily accessible to the people who want the content. In some cases, Apple creates its own content (OS X, iLife, etc.), but in most other cases, Apple is delivering other people's content the way they want it: easy.

Apple is in some ways analogous to Ma Bell or Time Warner, in that it has created a means of moving data from one place to another, but it has outsmarted the monopoly bitches by ensuring that the means of delivery is an object that the individual owns rather than something a they own.

So long as individuals buy a computer or an iPod or an iPhone and use it as they see fit, there is no chance that Apple will have to take the hard knocks of monopolist corps. People cheer and applaud when invisible cables buried underneath the ground are taken from companies by the government and are then used by by other people to give you lower prices.

Are you going to cheer if the government takes your iPod from you and forces you to let your neighbor rent it to someone else and pay you a dollar a month after you spent 400 bucks on it?

No. You won't let that happen. That iPod is yours, dammit. Apple has changed the economy of content delivery. Apple has taken the large, abstract, cloud out of the equation and put the pipe in your hands.

So that's how it goes with the iPod. Who gives a shit about that anyway? iPods have been around for years, and only a few people complain. What does this have to do with the iPhone, Ma Bell, monopolies, or THE GODDAMM PRICE CUT?!

Friday, September 07, 2007

The Economy of the iPhone, or How Apple is Going to Take Over the World Part IV

Well, now it comes down to it, and I'd better have a spectacular point after 4 posts on the same (sort-of) topic, right?

Actually, it's my blog, and I can just leave you hanging here if I want.

Based on the number of idiotic comments I've gotten so far (and deleted, after a sound nosefucking, as promised), there probably isn't much point in continuing this.

But there are a few out there who deserve, I suppose.

I am going to assume that all of you still reading can remember a few points at a time. The point I am referencing is that the iPhone maneuver is all about market share. Steve wants all of it for the iPhone. Why? Very simple: he wants everyone in the world to have an iPhone on the day that he gives the big middle finger to ATT, Verizon, Sprint, T-Mobile . . . pretty much every player in that market.

What is going to happen? Duh! The iPhone is an internet appliance + music player that happens to place calls on the remains of one of Steve's most hated monopolistic enemies. Why partner with ATT? Is it only poetic justice?

No. He tried to go with Verizon because they have a better data network (and don't be fooled, moo-cow, the iPhone is all about data), but V stiffed him.

In all, that's ok. It's almost better. VoIP is gaining ground. WiFi is gaining ground. It won't be long before SIP-based VoIP solutions are readily available for iPhone, and wireless data networks are ubiquitous. Our spineless consumer society will demand that every square inch of the US be covered in "free" 802.11 wireless bliss. Of course, we'll pay ten times what it's worth in taxes, and the solution will lack any semblance of security, but that's what we will want: nothing at the cost of everything.

In the mean time, cell-cos will still be gouging our bums with contracts. Then one day, Steve will get up on the stage at the Moscone Center and tell everyone to cancel their service. The iPhone is a fully functional VoIP phone. All you need to do is update iTunes and sync your phone. Unlimited voice and data on the network of your choice.

The cell-cos will be brought to their financial knees in a matter of hours. Service contracts will die in a flash. You will pay only for the minutes you use (emergency, most likely), and the prices will be dirt cheap. One more thing: those iPod Touches? Sync those. They are now phones.

Apple has been screwing with every cell-co it touched. ATT was the first one desperate enough to bite. Apple's taking a cut of the subscription, mandating policy, requiring system upgrades, basically doing everything Apple can to make them miserable.

Now this price cut has flooded ATT with support calls, service rebates, everything to keep dumbasses from cancelling service contracts that they can still get out of. You think Steve doesn't know this? Apple isn't repaying ATT's losses. Apple doesn't give a shit about credit card companies that offer price protection plans (AMEX is bitching really loud right now. No comment from Cupertino). Apple has its money from the only remaining child of the company that Steve has hated for 30 years. And Apple has it for the next 2-5 years (depending on which unreliable corporate shill you happen to believe about the secret details of Apple's deal with ATT).

In the mean time, while Apple makes millions of ATT contracts, the iPod Touch canabalizes iPhone sales, adding an extra shame to ATT and giving excellent market penetration to Apple.

That's the reason for the price drop on the iPhones, people. It wasn't to screw over the Apple faithful, it wasn't just to see if El Jobso could get away with it, it damn sure wasn't because iPhones weren't selling well enough. This is about obtaining a critical mass of market share so that Apple can bring down another unethical, ass-raping, monopolistic bunch of thugs that call themselves businessmen. And it was about doing so while making a profit, like any sensible company does.

This is no hobby. Steve is trying to take over the cell world just like he did the music world. Unless I miss my guess, he is going to succeed.