So you might have heard that the iPhone 3G was going to retail for $199 from AT&T. I’ve already covered how it isn’t technically $199 for current iPhone users. And you heard Rene tell you that $199 is less than the notorious price DROP of the iPhone. Well TiPb has been wondering how Apple settled on dropping the price so dramatically.
And we settled on a story, kind of—more like a collection of reasons. We’ve analyzed the outcome back and forth, from reverse and from the beginning. And we think we have come to a conclusion (or at the very least, a conspiracy theory). In a purely speculative story, I’ll give you my opinion on how we reached $199.
Read on for Apple’s Path to $199
Apple Wanted to Revolutionize the Phone Industry
I believe that when Apple was analyzing the cell phone industry, they realized the problem with the current model resides with the carriers. The carriers were too powerful, they controlled too many avenues. Therefore when Verizon denied them the freedom they desired, they needed AT&T to give them that freedom. Making data plans more affordable and creating an Apple experience was a decision in attacking the carriers.
They were hoping that the iPhone was going to be ridiculously popular (it was) and that foreign carriers would see such popularity and ask for it on their network as well. Therefore in that case, Apple could then leverage the iPhone’s popularity into folding the carriers into having the same relationship with Apple as AT&T ‘enjoys’. Essentially making the carrier powerless to Apple’s demands and eventually change the way carriers work.
Do you guys remember the uniqueness of the original iPhone? This was a phone that toyed with AT&T, basically ignoring everything that the Death Star Company wanted. When AT&T asked for prototypes pre-iPhone launch, Apple reportedly created fake models to placate them. Apple created a new iPhone-specific data plan that AT&T had to abide by—$20 for unlimited data and 200 SMS. Apple created a new activation process that essentially cut AT&T out of the loop. You activate via iTunes, not with AT&T. Apple created a new business model for the iPhone that included revenue sharing—AT&T is paying Apple for users using AT&T’s service, just simply brilliant business. Phone Carriers don’t typically get thrown around like this.
It almost worked
Do you know what I think changed Apple’s desire to revolutionize the cell phone industry through the carriers? Jailbreaking and Unlocking. Entrepreneurs who wanted to make a buck and technological savants that wanted to utilize all of the iPhone’s features prevented Apple from having the ultimate leverage in negotiations because everyone knew that the iPhone could be unlocked. And used with ANY GSM SIM.
With the gray market in full affect, Apple lost their leverage. Foreign Carriers had no desire to bend to Apple’s unprecedented demands because anyone who really wanted an iPhone could easily get an iPhone through the gray market. And those using unlocked iPhone on a foreign carrier's network would HAVE to work with the current data plans in play. Therefore we have iPhone users across the world using the iPhone on network’s aimed to rip every dollar from the consumer.
What could Apple offer the carriers now? From the carrier’s standpoint, the money gained by having unlocked iPhones on their pricey data network was worth more than agreeing to revenue sharing models and affordable data plans. Not to mention the fact that when a foreign carrier introduced the iPhone to their country's market per ‘exclusivity contract’ it would only give unlockers a chance to use OTHER networks in the same country. So much for exclusivity, right. The money spent paying Apple for ‘exclusive’ rights was better not spent at all.
Apple still needed to increase marketshare
One of the first promises that Steve Jobs gave to his investors, Apple users, and iPhone doubters across the world was the 10 million unit promise. Apple doesn’t set such goals lightly and especially one so bold considering the original cost of the iPhone.
Back then, the idea was that foreign carriers would see the benefits of having an exclusive relationship with Apple and that would offset the costs that they would have to pay in a revenue sharing model. But with the gray market, all the foreign carriers had to do was stand pat and wait for Apple to come around because everyone knew they NEEDED to sell 10 million units in 2008. And that meant expanding to more countries.
So when the clock started ticking and Apple realized they had little to no leverage, they folded to the carriers demands. The carriers were too entrenched in their markets, they had too much power and Apple’s only leverage was lost. Nothing about the carriers was going to change.
AT&T demanded change
When AT&T saw that no other carrier was going to carry the iPhone and have the same ‘relationship’ with Apple that AT&T had, AT&T realized they were getting the short end of the global stick. They needed to make sure their company was going to get a fair shake and they had just reasons, Apple wasn’t agreeing with any deal that looked like Apple’s deal with AT&T.
So the revenue sharing disappeared. So did the activation process. So did the iPhone-specific plan. AT&T isn’t going to do it Apple’s way anymore because Apple folded to the demands of foreign carriers, thus giving AT&T a loophole to subsidize, raise data prices, and basically conform the iPhone to any phone in AT&T’s lineup.
So Apple needed to re-strategize
So the avenue of revolutionizing the cell phone industry through the root problem (the carriers) closed because of the iPhone’s availability on the gray market.
So how else could Apple revolutionize the cell phone industry? By aiming their attack at the other party. Cell phone makers. A $199 price point for the iPhone 3G will force people to notice and overhaul the system from the device end. In fact, the Samsung Instinct dropped to $199 after the Apple announcement. I’m sure RIM and other companies will have to follow suit. How could a company justify charging so much for such feature-strapped phones?
So Why $199?
Seriously, if Apple offered the iPhone 3G at the same price point of $399 who would complain? Many users were already prepared to pay the same amount; I mean that’s how Apple typically does business. They offer new features and keep the same price. What about at $299? That’s plenty good, people would have been happy enough.
But to be bold enough to declare it at $199. That’s a direct challenge to RIM, to Palm, to HTC, to Sony. $199 is the price point you have to hit and if you don’t, consumers are going to wonder why is a phone that’s not as full featured as the iPhone cost more than the iPhone? They are forcing cell phone makers to change their strategies and not simply rely on the carriers doing all the work for them.
A $199 price point can realistically put the iPhone in the hands of a lot of potential customers. They’re attacking the situation in reverse of what they originally intended. Putting it in the hands of the most customers possible and gaining market share to create change. With a larger install base, the App Store and iTunes Wi-Fi store become instant money makers. With users falling in love with the iPhone's usability, Apple gets their leverage back. Apple believes that when people finally get to own the iPhone, they'll always own an iPhone. Cell phone makers, you're going to have to catch up fast. Cell phone carriers, Apple is still going to come after you.
This plan actually makes more sense than Apple's original business model, when people fall in love with the iPhone, Apple would have a dedicated user base ready to follow Apple and the iPhone wherever they go, to whomever carrier it happens to be.
What does the future hold then?
This is an extremely tricky question that only Apple probably knows the answer to. A $199 iPhone not only puts cell phone makers on notice but it will also cannibalize some sales of the iPod. I was about to purchase an iPod nano yesterday for an upcoming trip and on my way to putting it into my cart, I realized it was the same price as the iPhone 3G. I quickly stopped my purchase. What will happen to the market of iPod touches? The iPhone used to have the premium on the iPod Touch, now it’s the other way around?
And what about expanding the iPhone platform, which is a natural progression in creating cell phones. What will an iPhone nano retail at? $99? Can Apple deal with the PR-nightmare it would have if they were to raise prices in the next editions?
Or could Apple simply put the iPhone in the most hands possible and then prep themselves to go completely unlocked? Could they manage to offer a $199 price point without carrier subsidies?
Apple couldn’t manage to revolutionize the industry through the carriers which is saddening to say the least. We here at TiPb would almost always trust Apple over AT&T, Rogers, Fido, etc. But its setting it sights on market share now and creating a worldwide army of iPhone users. In this way, Apple can achieve its wish to revolutionize the phone industry by leveraging their millions of users. Like Apple once famously said, they’re not married to any business model. It looks like they had already divorced the old one and married a brand new, better-looking new model in only one year's time.
Or maybe I'm just a conspiracy theorist. Remember this is all speculation and opinion. Apple simply just could have realized they couldn't keep pace with the hype of the iPhone 3G and determined the best way to have conversation was to significantly drop the price. Shock and awe. Or maybe not.
What do you think? Why do you think Apple priced it at $199 and do you think the iPhone will ever go completely unlocked? Comment on this Wait-a-Thon post for a chance to win a $100 iTunes Gift Card!