Saturday, 26 January 2008

Are Apple shifting focus from iPhone to iPod Touch?

A few weeks ago, Mac Predictions speculated that iPhone wasn’t doing so well in the UK. That was based upon anecdotal observations at the time. Since then, more tangible evidence has emerged that iPhone sales are not meeting expectations. Admittedly, falling short of target by 10k isn’t the end of the world, but the discrepancy between Apple’s figures for units sold and AT&T’s numbers seems to indicate mounting channel inventory - another bad sign.

It feels counterintuitive that a such a popular device is not selling as well as expected. How can this be? The answer probably lies in Apple’s pricing model - by preventing the networks from subsidizing the handset, whilst taking a share of the networks' billing revenue, Apple is effectively double-dipping. The result is both a high up-front cost for the handset itself, and an expensive ongoing cost for the contract. Apple have chosen higher margins over higher unit sales - an unusual strategy for a company trying to launch an entirely new platform.

More typically, companies launching new platforms will initially sell the product at a loss, in order to gain market penetration. Then, as the component costs come down over time, their margins increase, and, providing that the platform is a success, they ultimately are rewarded with higher volume and higher margins in the longer term. By pursuing a high margin at the beginning of the platform’s life cycle, Apple may be compromising the iPhone’s potential to achieve critical mass.

As any economist will tell you, where supply is unlimited and demand is elastic, a business should set price to marginal cost in order to maximize sales. In other words if lower prices will result in more sales, and Apple has plenty of iPhones to sell, they should price each iPhone at the cost to them of making the next one. As it stands, supply does not appear to be limited (since channel inventory seems to be on the increase) and elasticity must surely be there (after all, iPhone is the most hyped handset in history). This leaves Mac Predictions suspecting that Apple is missing a trick in not going for all-out market domination of their new platform. By allowing their rate of sales to be artificially slow, they’re giving their competitors precious time to copy the iPhone’s innovations and catch up.

There is, of course, one problem with all this. Apple appears to have misjudged the market, believing that they could start off at a high price only to drop it later if it proved to be deterring sales. Sounds good in theory, but this didn’t take into account the PR damage that could be inflicted by vocal early adopters who felt betrayed. After the negative response to Apple’s previous price drop, their room for maneuver is limited. In the light of this, it’s unfortunate that Apple chose to price the UK iPhone at a 10% premium over the newly dropped US price. (The difference is even greater when you factor in the UK’s sales tax).

Apple seems pretty sanguine about the situation - willing, perhaps, to ride-out the lower than expected sales in the short term, in anticipation of the opportunity to drop prices and introduce a 16GB model when the iPhone reaches it’s one year anniversary this summer. After a year, early adopters’ moans will be easier to ignore. In the meantime, press coverage arising from the launch of 3rd party apps in February should add a bit of short-term sales sizzle.

Where iPhone sales did not meet expectations, iPod Touch sales appear to have exceeded them. So what started out as something of a baby brother to iPhone has now become the “first Mainstream WiFi Mobile Platform”. Or so Peter Oppenheimer, Apple’s CFO, dubbed it in a recent Quarterly Earnings Call. What’s all the more remarkable, is that Oppenheimer argued that iPod Touch is more than “just a music and video player”. This is a very significant shift, since in the past, Steve Jobs has stressed that whatever new features they add to iPod, it’s really all about the music. Also indicative of a shift in direction for iPod Touch, is the introduction of the new “January Software Upgrade”, which adds key applications previously only available to iPhone users, such as Mail and Maps. Since early adopter moaning and contractual commitments to the networks are limiting Apple’s room for maneuver in aggressive iPhone pricing, could they now be focusing on iPod Touch instead as their vehicle for early market domination? If so, we can expect to see iPod Touch increasingly positioned as a competitor to iPhone - maybe even with its own iChat application. Time will tell.


  1. I hope the ipod touch does better and redeems Apple for it's bad iphone sales.

    -Free iPod Touch

  2. An iPod Touch with iChat and a built in iSight.... I'd buy that!

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