Cupertino, we have a problem

by Volker Weber

I think Apple has a problem with the iPhone. Here are some indications:

  1. Apple just dropped the 4 GB iPhone, selling off existing stock.
  2. Apple lowered the price of the 8 GB iPhone after only eight weeks by a third.
  3. Early iPhone buyers got angry and Apple has promised a $100 gift certificate.

No matter how Jobs spins it, a price cut by one third after only eight weeks is not a deliberate decision. It clearly indicates that the market research prior to launch was overly optimistic. You cannot fleece your most devoted customers and then cut the price to sell to more people. The gift certificate clearly shows how this is not working.

On the same token, dropping one of the two available models — especially in the light of the rest of your portfolio having always at least two models — shows again that the research was poorly done. Not enough people wanted the smaller device, not even for less money. Which is unusual because the smaller model usually outsells the larger one. And that is why you create three products with the middle one as the best selling.

Why didn't they want the smaller device? It's underpowered. Even the 8 GB iPhone is underpowered. Watch Jobs demoing how you listen to your music, watch movies and TV shows, look at your pictures, etc. Here is a brief overview of what is on my iPod:

ipod capacity

"Other" is a backup, so let's not even look at that. Both my audio and photos would overload the iPhone. And that's just 2000 songs, and I don't carry the full resolution photos. There is also very little video on the machine. I would need at least 30 GB to use the iPhone as Steve demos it.

So Apple had an underpowered phone, with a very high price, hitting a price sensitive market. They had to make a decision. And they did. And I think they are in better shape now.

I'd also not be surprised to see a 16 GB iPhone real soon now.


It seems Apple agrees with you:
Open iPhone letter

Ed Brill, 2007-09-06

Ed, your comment reposts the only link in this story. :-)

Volker Weber, 2007-09-06

In my perusal of the Apple finances, I was intrigued to see that in Q3 2006 they had massive prepayments relating to flash memory, not mirrored this year. Everyone I’ve discussed the iPhone with laments its capacity. And the same comments are popping up about the iPod touch.

This is clearly down to flash technology. Does anyone have any insight as to how this technology area is progressing? Because as you point out, iPhone / iPod touch and co. can only get so far without clear developments in that space.

Ben Poole, 2007-09-06

There will be a 16GB iPhone very soon...

However, I think you're analysis isnt up to your usual standards Volker. The changes to the iPhone were essential for a number of reasons:
1) The existing price did not fit with the new price model of the rest of the range. An iPod touch at $299 with the base model iPhone at $499 would not have made any sense
2) The iPhone has been a sales success, however to continue this success in the US, it needs to reach more than the early adoptors and those with ridiculously large wallets. As the iPhone makes approx 50% margin, there is plenty to play with. In addition, the greater the sales success and share of the market, the more developers will be writing websites for the platform, the more ringtones etc. will be sold, and the more revenue will be taken from the relationship with AT&T etc.
3) The price model for the US mobile market has always been different to the EU - phones have always been expensive, and locked to carriers for a far longer period than elsewhere. With the existing fragmented mobile phone marketplace it has been easy for the telecomms providers and manufacturers to hide this. With Apple's branding and distribution model, it would have been very difficult to either sell the iPhone much cheaper in the EU, or else to sell here at the €599 price.
4) The 4GB model was taking a very small share of sales. With previous iPods the smaller models have been dropped pretty quickly too (the 1GB Nano being a prime example). Also, the price of 4GB Flash modules has dropped quickly over the past 3 months (there are two in the iPhone 8GB) so there is little point in selling the smaller model...

I think it makes a lot of sense, especially when the 16GB model hits the shelves...

Stuart McIntyre, 2007-09-06

Stuart, I do not agree with your #2 point. If that were the case, Apple would have started to sell at 499 or immediately at 399. It just does not make any sense to make a couple of hundred thousand customers angry.

Significantly dropping the price for an existing product is unusual for Apple. Normally they'd come out with a better product for the same or lower price. Witness the iPod classic 160 replacing the iPod 80 and the iPod classic 80 replacing the iPod 30.

They simply did not see this wall coming so quickly.

Volker Weber, 2007-09-06

@Ben - I've been keeping up with some of the more recent developments in flash memory. Samsung announced a new process about a year ago that allows them to produce a faster, longer-life flash memory at a much lower cost. IBM and a group of other companies have also been working on similar technologies. However, these have been slow to enter the market due to the cost of retrofitting existing plants and products to make use of them.

Charles Robinson, 2007-09-07

I have a friend who bought the 8 GB iPhone a month ago. He called Apple and said that after the price drop he was very unhappy and was inclined to return his phone. They gave him a $200 rebate on the spot. Apple's playing customer service defense on this one.

Rob McDonagh, 2007-09-07

If there's anything we know about Apple, it's that they defy convention. I think this was a deliberate move, planned from even before they released the iPhone in the first place. They've just guaranteed another couple of months of people talking about the iPhone. And they've thrown their potential competitors a major curve, forcing any of them who are readying their answers to the iPhone to go back to the drawing board on their own pricing, with not a lot of time left to nail it down before the holiday season. And they've managed to collect invaluable information about demand levels at a price point that's above what they really intended to sell the phone for in the first place. And what does it cost them? Rebates of store credits -- not even cash, so also another opportunity to put more product into the hands of the true believers.

Well... maybe not. But I really wouldn't be that surprised if I'm right.

Richard Schwartz, 2007-09-07

Hi Volker,

I am totally with you in your analysis. But added to the major mistake in market research Steve was just about to make an even bigger mistake in his behaviour towards his (and Apple's) most loyal customers. With potentially dangerous effects in the company's future success.

Such a sharp price cut after such a short time must have disappointed the almost religiously addicted Apple loyalists. I would have expected Apple to be aware of that issue and to have a contingency plan ready.

Guess what euphoria Steve had caused amongst his groupies if he had offered the gift certificate right at the presentation of the price cut - as some kind of acknowledgment of gratitude towards the early adopters ...

Obviously Steve and Apple didn't anticipate the turmoil - and didn't have that plan ready. That is - from my perspective - even more dangerous for a company that is so highly dependent on sensing the needs of its customers.

Maybe its just a fault - but maybe the first sign of a loss of sensitivity. One of Apple's most valuable assets.


Thomas Kuhn, 2007-09-07

The bigger new iPod Classic with 160 GB hard disc should be upgradable to 200 and 250 GB :) Anyone interested?

Sebastian Grötsch, 2007-09-07

I think flash memory or a similar technology with majorly improved capabilities is going to be the way to go. 48GB would be a good start, but after having two iPod hard disks fail on my with a ridiculously short lifetime, I have significant doubts concerning hard disks in devices which are by design used in mobile or even shocky environments.

Ragnar Schierholz, 2007-09-07

Sony made the same experience with their two models of the PS3. Nobody wanted the smaller one. Unfortunately there's no WiiPhone on the horizon ;-)

Yves Luther, 2007-09-07

What would you do wit a WiiPhone? Waving your message? Shaking your SMS?

Frank Mueller, 2007-09-07

There a lot of examples from phones dropping in price after a couple of months. So there is a definite lack of "uniqueness" to this price-drop. What is unique is that Apple has never sold phones before. So actually they are following along with the other phone companies.

Lars Berntrop-Bos, 2007-09-07

Another view of the iPhone controversy from Bob Cringely. His take:

So Steve does things like this because he can. It reaffirms his iron grip over both Apple and Apple’s customers. It’s a lot about ego and a little about business, though with Steve Jobs they are hard to differentiate.

Link: The Puppet Master

Gregg Eldred, 2007-09-07

Thanks, Gregg, that was a good read!

Ragnar Schierholz, 2007-09-07

I heard some people are calling the Touch, the iPhone just without the phone, but I read they have removed a lot more, including:
- The hardware volume buttons, odd for a music player.
- The camera, odd for a device that handles photos so well.
- The mail app, even though it can connect via wifi.
- The Maps, Stocks, and Weather widgets.

My Mac fanboy friends are not happy.

Alan Lepofsky, 2007-09-07

Apple must love all this. Every move scrutinised to the nth degree, no such thing as bad publicity, etc., etc. I think Richard S has something you know ;o)

Ben Poole, 2007-09-07

Alan, it will also be interesting to see what they did to the calendar and contacts. I believe Apple wants to make sure the touch does not play in the PDA space.

Volker Weber, 2007-09-07

@Ben -- I think Cringely (link from Gregg, above) has the same idea I have. But he said it much better. And he's much more sure of himself than I am. Which, I have to admit, is a rarity ;-)

Richard Schwartz, 2007-09-07

I think the Google phone is aroound the corner, so the price drop is meant to widen the market share as soon as possible and to be able to compete after the introduction ;-)

Jan Fuellemann, 2007-09-07

Seen on daring Fireball:

Saul Hansell, writing for The New York Times’s Bits weblog:
Another thought on why the price drop doesn’t mean sales have been slow. The central rule of technology is that the unit price drops sharply with volume. If Apple sold more than it hoped, then it would achieve scale faster and would be able to drop prices sooner. Apple’s introduction of the iPod Touch, using many of the same components as the iPhone, gives it an even bigger checkbook to brandish in Taiwan to secure good supplies at good prices.

Stuart McIntyre, 2007-09-07

I have not seen customers got harrased so much by any company. Admitted, the hype worked. But that has been seen more with Apple products. Really nice is the website of Apple. You have to look very carefully for a Mac or Operating System.

Boudewijn Kiljan, 2007-09-09

It’s hard to see how Apple has any problem getting rid of its iPhones: they just sold their one millionth (depending on how you spin it they just fulfilled their own predictions or were even a bit better).

Even so I don’t normally will believe everything some CEO says – this time I believe Jobs. Apple wants to sell truckloads of iPhones in the holiday season. And after these first two test months they know that they can do it.

Michael Kaltenecker, 2007-09-10

It clearly indicates that the market research prior to launch was overly optimistic.
If today's press information is true (and i think so) your evaluation was wrong.

Martin Hiegl, 2007-09-10

Martin, Nokia sells a million phones every single day. Apple wants to sell 10 million by the end of 2008. If they need to slash the price by one third within two months, my evaluation was certainly not wrong.

Volker Weber, 2007-09-10

Mh, well if you go that far in the future your evaluation is nothing but a guess (ok, their 10 million as well). Their first aim were the 1 million by end of September - they made it. All the analysts saying they are behind their schedule were proven wrong. That says as well, that their pricing and their schedule fit.
Now the better explanation for the price drop is the alignment with the new iPods and a new top model coming up - ok, who knows, perhaps they had that price drop already in mind with their 2008-goal.

Martin Hiegl, 2007-09-10

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