I argued a couple of months ago that ‘peak iPhone’ was likely a temporary phenomenon, but that Apple might have to be willing to accept lower margins if it is to continue to grow its sales.
Yesterday, the company indicated its willingness to do just that. For the first time, Apple’s entry-level phone is a brand-new device that offers close to flagship specs at a price level close to the previous-generation phone. That will hit Apple’s margins on the device for sure, but the company is looking to the long-term …
I think it will also need to learn to be a little more flexible when it comes to its profit margins, especially in growth markets. That ~40% markup has served it well for a great many years, but I don’t think it can necessarily expect to maintain it indefinitely.
The iPhone SE still isn’t a cheap device, of course. Apple is still targeting the premium end of the market, but it is acknowledging that ‘premium’ is a relative term. There are those willing to pay significantly more than the average price for a smartphone, but who are not able or willing to reach quite as high as its flagship prices – especially now that the move away from ‘subsidized’ pricing by carriers has made the true retail cost much more visible.
And just as much of what Apple has been doing in recent years has been driven by China – the gold finishes being the most obvious example – the company is now looking to new growth markets like India. It can only start to make serious in-roads into less wealthy markets if it is willing to settle for a reduced profit margin, at least in the medium-term.
There are those who would question the need for Apple to do that, and urge it to stick with its tried-and-trusted strategy of targeting only the most profitable slice of the market. That’s a strategy that has, after all, been wildly successful, Apple reportedly taking home 94% of the profits from the entire smartphone industry.
But there are two reasons Apple’s first move into somewhat more affordable territory makes sense.
First, as I outlined last time, the competitive landscape is changing. Long gone are the days when Apple was competing only against one or two other flagship smartphones, and everything else was cheap-and-nasty. Chinese brands like Huawei, Xiaomi and Lenovo are now offering credible competition in terms of both design and performance, and will continue to do so. Apple cannot afford to stick its head in the sand and imagine that fast-growing competitors won’t impact its own market.
Second, Apple is slowly monetizing its ecosystem. Sure, services have in the past never merited anything beyond inclusion in the ‘Other’ category in Apple’s accounts, but that situation will change over time. Apple currently has over a billion active iOS devices, and has so far sold Apple Music to only around 1% of them. That’s a massive potential regular monthly income stream that Apple has barely started to tap.
Apple Pay, too, is generating rather small sums of money as yet, but again the long-term potential is enormous – and again Apple has demonstrated a willingness to accept a smaller margin in the short-term to build a market share that will drive serious revenue in the long-term.
The company’s long-awaited streaming TV service is another example of how the company can leverage its existing customer base to generate income from services. For a company whose income is deeply cyclical, tied to new product releases and holiday purchases, regular monthly income is a valuable commodity – and one for which the company will be willing to make some sacrifices.
What will be really interesting to me is what happens next time around. Apple has typically held onto earlier iPhone models, lopping $100 off the price when new ones are introduced. If it did this with the iPhone SE, we could potentially see a brand new iPhone available direct for Apple for just $299! That’s something that would have been unimaginable not that long ago.
Of course, Apple may not do that. It may consider the specs of the iPhone SE good enough to maintain current pricing for longer than a year. One possibility I could see is Apple viewing the SE as having an 18-month shelf-life at its current pricing, taking it through to the launch of the iPhone 7S. That would bring it into line with existing iPhone cycles.
At that stage, it could then simply withdraw it from sale, replacing it with a newer model. But it could also retain it and drop the price, giving us that $299 price-point.
Apple does, of course, risk cannibalizing some of the iPhone 6 market. I must say that even I am considering the small downgrade, as I prefer the greater pocketability of a 4-inch phone and actually prefer the design. But the company has presumably done its research carefully in choosing the few goodies it has withheld from the SE.
As an aside, I said last week that I thought it was crunch-time for iPhone storage tiers. Just a few days later, Apple went ahead and launched a brand new iPhone starting at, yep, 16GB. But it was also notable that the new 9.7-inch iPad Pro was introduced with 32/128/256GB tiers, in contrast to the 16/64/128GB of the iPad Air 2. (Apple has now removed the 128GB tier from the older model, presumably aiming to drive premium buyers to the new one.)
That gives me some hope that the message is getting through. Given that Apple will need to ensure that the iPhone 7 is clearly distinguished from the iPhone SE by more than just size, I’d love to think that could mean at least 32/128/256GB tiers next time around.
Is Apple right to sacrifice margin in the short- to medium-term to ensure its long-term growth? Please take our poll, and share your thoughts in the comments.
