Quit drooling, fanbois - haven't you SEEN what the iPhone 6 costs?
How keen will buyers be when exposed to the real price?
Worstall on Wednesday Given that I'm writing this before the great unveil and you'll be reading it afterwards, there's much that could go wrong with my prognostications. Tim Cook could stand up this afternoon and announce the iBurger and claim that the days of Maccy D's are over. True, that's unlikely, but in an infinite universe everything will happen at least once.
However, remaining in a resolutely non-Douglas Adams world there is still an interesting economic point to ponder about the latest product hypegasm. Which is, now that iPhone consumers are increasingly exposed to the real prices of their desires, is the lust going to continue?
I am not, of course, suggesting that the sapphirescreen'n'NFC'n'phablet creation is going to fail in any manner: rather, like all economists always do, I wonder what is going to happen at the margin as prices change.
And that's the thing. Prices at that margin have been changing and will continue to do so. For in many developed countries' markets, the mobile network operators stump up a substantial subsidy on the price of an iPhone. Sure, we all know this, but it's worth emphasising. Vodafone (or whoever) pays Apple that full retail price (hmm, maybe a small discount to it) and then we get the shiny-shiny for perhaps £50 upfront. The mobile operator then hopes to make back that subsidy over the life of the contract.
Great, everyone's sorta happy about this... except, of course, the mobile operators. They'd really rather prefer not to have quite such an exorbitant amount of capital tied up in those payments they've already made to Apple and are waiting to get back from us.
On this point it's worth recalling one of the two things that stalled the launch of the iShiny on China Mobile's network. Sure, there was the minor point that earlier generations simply wouldn't work above 2G mode on said network but even when that was solved, there was still a delay as the two parties shouted at each other over what those contract subsidies should be.
The implication of this model is that iTat users have been sheltered from the true price of the iKit. It's well known that we humans don't think about an extra £15 a month in the same way that we do about a lump sum of £600 or whatever. Or perhaps more importantly in this instance, we've been offered, often enough, a £500 piece of kit for the same contract price as a £650 piece of iKit and we've gone for the pricier-to-supply model.
This subsidy model does seem to have had significant effects, as the Wall Street Journal says:
The old system worked well for Apple. In the U.S. and Japan, where carriers have been offering the heaviest iPhone discounts, Apple's smartphone market share exceeds 40%, according to comScore and MM Research Institute. By comparison, iPhone's global market share was 12% in the second quarter, according to research firm IDC.
What's happening now, not entirely and not totally, but at the margins, is that this model is being replaced by two alternatives. The first has always been there: buy the iDamnthing at full price and own it outright, a sector of the market where Apple has been weaker than other handset providers, as compared to its strengths in the subsidised markets.
The second is that the new handset is charged at full price but that purchase is financed over the life of the contract. Sure, this is logically similar to the subsidised model but in terms of human psychology it isn't. The buyer is faced with the full sticker price in a manner that they weren't before. It might be £10 a month to finance a Nokia, £15 a month to finance a Samsung and £20 for an iGabbler (numbers entirely invented as examples) but we'd still expect that to influence purchase decisions in a manner that “have any phone for £200 and make it up on your contract payments” won't.
The point about Apple's incredible financial success (and it is incredible: rarely has the world seen a company manage such success with a manufactured product) is not simply that it's invented (or, perhaps, optimised) a new product category, nor that it's good kit. It's that they've managed to get us to pay premium prices for it leading to really quite gorgeous margins. Yet that ability to get us to part with our cash has been greatly aided by the manner in which we are gently parted from our spondulicks rather than be faced with a demand for £649 or £749 right now. And as that model of gently parting us changes to one where the actual price is made more obvious, how long are those premium prices and thus glorious margins going to last?
I've absolutely no doubt at all that tens of millions are going to buy iPhone6s and that this will continue to the 7uP and beyond. But I think there's a good possibility that we're going to start seeing some margin compression real soon now. Simply because the system is moving to one where we've all got more visibility on what we're actually paying. ®
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