Apple and the Cheap Gear Equation

April 10th, 2013

Over the years, the critics have urged Apple to build less expensive gear, such as a cheaper Mac, and, nowadays, a cheaper iPhone and a cheaper iPad. I suppose you can see the logic, since it’s assumed Apple’s sales and market share would be higher if more people could afford their products. Isn’t a high market share a good thing? And why not have lots and lots of models in all price categories, to give customers a choice?

Now it so happens Apple followed the latter edict in the mid-1990s, when there were so many models, particularly the consumer-based Performa series, that you hardly know which was which. Indeed, one Apple executive told me at the time that they couldn’t separate the models either without a cheat sheet. But that all came at a time when Apple came close to ruin.

Indeed, in those days, Apple even tried licensing the OS to third-party hardware makers. That approach also failed, although some tech pundits still think it’s a good idea, maybe because they figure that if you try something often enough, it’s destined to succeed even though it’s a lame idea.

This doesn’t mean Apple doesn’t build cheap gear. You can buy an iPod for $49. The cheapest Mac, the Mac mini, lists for $599 sans display and mouse, but that’s not necessarily cheap in today’s cutthroat PC market. Indeed, that price is average in the PC space, which makes a Mac seem all the more expensive by comparison.

But think about how the rush to the bottom impacts tech companies. Profits in the TV market are slim, and some companies are quitting the rat race. PC makers aren’t doing so well either. Take a look at the fate of Dell, once a market leader, which opted for market share at any cost. Profits and sales plummeted as the company pushed more and more cheap undistinguished desktops and note-books. Today, founder Michael Dell and his board are struggling to sell off the company to private investors, hoping for a decent payday. But if I were in the market for a cheap PC, I’d just look elsewhere, since there’s nothing about Dell that stands apart from the pack, but that’s the way it’s always been.

So, as one blogger noted, maybe the critics expect Apple to duplicate Dell’s performance, which makes no sense whatever.

Another demand is for Apple to build a cheap iPhone, because people who live in developing countries, and don’t have access to subsidized wireless plans, aren’t going to pay upwards of $400 even for a 2010 iPhone. The critics are talking of a translucent or another sort of plastic iPhone that would list for between $199 and $299. Magic, right?

The argument has always been that Apple is doomed if they don’t have the highest market share in any market. Being number two, trying harder and all that, isn’t good enough. They have to sell more than any other company. This means that Google and the Android platform have won the mobile computer wars, except, of course, when you look at Google’s profits from the Android division.

In the smartphone business, a recent report had it that Apple and Samsung shared 103% of smartphone profits, with the rest distributed among the remaining players? 103%? Well, that’s because some of those companies reported losses from their mobile gadget operations. But shouldn’t Apple be seeking to sell as much gear as possible regardless of cost? If they sell enough, there will still be profits.

Of course, anyone who looks at Apple’s playbook, or even the occasional comments from members of the executive team, would realize that Apple hasn’t sought a number one status. They seek revenue and profits, even at the expense of fewer sales. Indeed, Apple got attacked by the media and financial community because profits in the December 2012 quarter weren’t as high as they expected, or hoped. If Apple sold more gear at lower prices and hence made smaller profits, would that make sense? Not to Apple’s shareholders.

This doesn’t mean I wouldn’t like to pay less for an iPhone, iPad or Mac. It certainly doesn’t mean that Apple really needs to hold $137 billion in the bank, catching dust and earning interest in mostly offshore accounts. Apple could, I suppose, have an across-the-board 10% price cut on everything and still be hugely profitable, still adding to the cash hoard. Would that mean that sales would increase proportionately because of the lower price of admission? I wouldn’t presume to take a guess as to whether it would do anything but reduce profits, although it would seem inevitable that more products would be sold.

Now when it comes to the cheap iPhone, if Apple could build a sexy smartphone with essential features intact that costs $299 unlocked and still yields a decent profit, I’d expect they’d do it in a heartbeat. That Apple plans to return some cash to investors as dividends does seem to indicate that somewhat smaller profit margins won’t be so bad. The plenty of money to go around. So maybe there’s a middle ground solution to the question of more affordable gear from Apple.

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8 Responses to “Apple and the Cheap Gear Equation”

  1. Ted Schroeder says:

    It seems to me that cheap gear soils Apple’s brand.

    Part of what Apple is selling, along with its hardware, is its ecosystem and its reputation. And providing both of these to customers is not inexpensive.

    When a customer buys, let’s say, an iPhone – they’re getting more stuff (expandability and flexibility) because of the App Store and iTunes. They’re also getting Apple’s reputation of great customer service. If -and I realize that for some it’s a big ‘if’- the customer lives near an Apple Store, they can get training, ask questions and usually get some pretty good answers. Many times, if something’s wrong with the phone, they can get it replaced on the spot.

    Plus, the name above the door is the same as the name on the phone. This may also be true for some phones, but no phone company in the US has anywhere near the reputation that Apple has. And no computer or tablet maker has the name above the door.

    And part of the problem from Apple’s point of view is that along with selling cheap gear, you get cheap customers. The recent anti-Apple thing in China points to this. Although I was confused by reports on this story, it seemed like what some Chinese customers wanted was to have their warranty reset when they got their iPhone replaced. So what they are saying is that Apple should put up with possibly millions of iPhone customers deliberately breaking their iPhone just before the warranty expires and replacing them for free AND resetting the warranty because that’s what it takes to keep the customer happy. OK, there’s cheap and then there’s nuts.

    For me, the Facebook phone/Home is an interesting experiment. It undercuts Google’s revenue stream and, at the same time, forces more ads on the user. If I had to guess, I’d say it’s going to be an epic fail. But if it succeeds, it certainly disrupts Google’s plans for Android.

    Either way, it points to a possible directions for the market to go. As David Pogue points out, if a Facebook Home phone is popular, why not a Pepsi phone? Or a Twitter phone? Or a Justin Bieber phone?

    And it begs the question – how many ads are too many? How much BS will customers put up with in order to get cheap?

    ps- I wouldn’t mind seeing Apple lower prices 10% and I wouldn’t mind seeing them increase their dividend. At this point, sitting on all that cash seems pretty pointless.

    • @Ted Schroeder, Gear can be less expensive but not cheap. So an iPhone can list for $100-150 less than an iPhone 4 and still be priced above loads of so-called feature phones.


  2. Articles you should read (April 10) …. says:

    […] “Apple and the Cheap Gear Equation: Over the years, the critics have urged Apple to build less expensive gear, such as a cheaper Mac, and, nowadays, a cheaper iPhone and a cheaper iPad.” — “The Tech Night Owl” ( […]

  3. Kaleberg says:

    Since computer hardware keeps advancing, there is the tradeoff between making a product more capable and making a product cheaper. Sure, Apple could make something like the original iPhone and sell it very cheaply, but it would seem horribly sluggish to most users. Worse, it would only be able to run a subset of modern software. Applications, like voice recognition, 3D games, and real time video processing, would either not work or work so poorly as to be useless. If Apple took that path, they’d be in a trap of their own making. The need to support their bottom level phones would either require a split code base or become a drag on innovation at the high end.

    Apple is using a different model, starting with the price and specifications and meeting the market. We know Apple was working on a phone for years before releasing the iPhone. They obviously had a minimal feature set and target price range. Those two parameters are how they defined the iPhone. As soon as hardware capabilities and hardware costs let them, they started producing and selling it. This is their model. This is how they timed the iPod, the iPhone, the iPad and even the Mac Mini. They are probably developing several other products and watching and waiting for an opportunity to sell them, but at a price they believe the market will bear.

    Personally, I would much rather see Apple remain innovative and keeping giving me more and more for my $500 or $2000 or what ever, rather than fall into a rut and simply produce less and less expensive gadgets.

  4. Ted Schroeder says:

    @ Gene Steinberg – Yeah, I can see them building an iPhone that costs less and is something like the iPad Mini. Plastic back, maybe an slightly older or cheaper chip. It certainly seems to have worked out well as far as the iPad Mini goes.

  5. dfs says:

    I don’t want to disparage the importance of the foreign market, particularly China, to Apple, but let’s not forget that Apple also has a powerful reason to bring out a cheaper iPhone for the domestic market. Under the traditional marketing scheme, the customer has only had to pay down a couple hundred bucks. Sure, he goes on paying for it in his monthly service contract, so that ATT and the others are actually building loan-repayment into that monthly cost (and probably, although I’ve never seen a breakdown concerning this) charging a healthy rate of interest on that loan. Nevertheless, this model has allowed customers to pick up a $600 device even if they only have $200 in their pockets, and probably given many purchasers the feeling, no matter how wrongly, that they’re getting away with something (and maybe some are getting away with something, if they can get their bosses, their parents, or somebody else to help out with those monthly payments). But recently we’ve seen some cracks developing in this ATT scheme, and the day may come when it falls apart completely. Apple’s planners may well be looking forward to that time, and wouldn’t want to be in a position where their only iPhone customers were people who could afford to pony up $600 at any one time. If they could produce a $400 450 iPhone by cutting back on nonessential features and using cheaper materials, future sales wouldn’t take such a serious hit.

    • @dfs, Dana, the iPhone 4 is available for $450 unlocked, and sometimes even below $400. That meets the requirement, and, based on that standard, when the next iPhone is out, the iPhone 4s will be priced the same as the iPhone 4 is now.

      But if Apple moved another model into the lineup at $299, which isn’t a stretch, it could be a great seller. I suppose there might be some cannibalization from more expensive models, which investors may not like, but Apple may, in the end, still come out ahead.


  6. Aardman says:

    Here’s the thing. In the computer business, we have learned that the primary differentiating feature is the OS. i.e. the main feature that differentiates one machine from another is not the industrial design, not the monitor, not peripherals, not anything else but the OS. The implication of this is if you sell a cheap computer and an expensive computer, if they have the same OS and thus do basically the same things in the same way, the cheap computer always wins. Build quality, brand name, bling on the case, neon light on the keyboard, etc. do not matter. If it’s the same OS, the cheapie always outsells the luxury model. That’s why we saw a race to the bottom in the Windows PC market, and that’s why clone Macs hurt Apple.

    So if Apple releases a cheap iPhone running an ungimped iOS I presume, unless they successfully restrict this model to the third world, the cheap iPhone will kill the more profitable original iPhone. And Apple’s profits. And stock price. I’m pretty sure Apple knows this.

    And no, they cannot sell an iPhone with an artificially gimped iOS. That lesson was learned with PC Jr., then Intel had to relearn it with 386SX, and Microsoft had to relearn it again with gimped Windows for the 3rd World, then the PC makers had to relearn it still again with netbooks. You gimp a product and it is rightly perceived as crap. I’m pretty sure Apple knows this too. That’s why iPad mini is a smaller but not gimped iPad.

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