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.