Blog Post

Apple Could Drop iPhone to $99, Destroy Competition

Stay on Top of Emerging Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

Oh those crazy analysts. Always making predictions and playing fast and loose with our emotions. Consider, for instance, the latest tidbit from Needham Research’s Charlie Wolf. According to Wolf, it is well within Apple’s power to offer the 8GB iPhone at the very attractive price point of $99, after contract subsidy.

This would see iPhone pricing on par with Blackberry’s Pearl and Curve, favorite handsets of first-time smartphone owners. Were Apple to offer its own “gateway drug,” so to speak, they could expect to see their sales double or even triple, according to Wolf. Considering the numbers they put up in their most recently disclosed financial reports, this would obviously amount to a substantial market share grab.

The numbers, says Wolf, would enable Apple to still make a 42.3% profit on each handset hold at the $99 price point, owing to the heavy subsidy provided by AT&T in the U.S. and the manufacturing cost of each device as of this past summer. Not to mention the fact that Apple has some breathing room in terms of their cash on hand, as disclosed at the conference call last Tuesday.

$99 dollars enters into impulse buy territory for many consumers, and would also help prepare the company to weather economic woes. Combined with an aggressive promotional campaign, the sub-$100 price point could give traditional handsets like the RAZR a run for their money, as long as consumers are aware of the significant feature upgrade they’re getting for the extra cash. Getting people to turn away from free devices and towards the iPhone would also likely require more decreases in data subscription rates. Or they could market the phone without the data option, and wait for consumers to decide on their own to upgrade their subscription once they realize how much functionality they stand to gain.

If you haven’t already, would you take the plunge for $99?

18 Responses to “Apple Could Drop iPhone to $99, Destroy Competition”

  1. Kudos to Apple for opposing Prop 8! I wouldn’t have known but for reading this. And I bet the contribution was good business for them, too, not to mention good for attracting talent; the computer business thrives on a sort of libertarian ethic. Apple won’t lose too many high-tech sales to the crowd that’s thinks dinosaurs are a hoax. Oh wait, wasn’t this about the iPhone????

  2. Pustoolio

    @ Jeff,

    So how did that call to Apple regarding “no on 8” go?
    Hello, I’m a bigot who wants different rules for different groups of people. And can I get segregated fries with that? ^_^

  3. I don’t personally think they will sport a lower price point. Apple loves to thrive on the mysterious and keep their customer base happy. They would have to sell 2 iphones instead of 1 iphone to achieve the same effect. So they are introducing scarcity of their product to keep the price point high but at the same time they are keeping it rare enough that people still crave it and want it.

    It’s just an idea but then again they have the App Store to back up some of the loss of profits by decreasing the price so it wouldn’t be nearly as crazy if they decided to drop the price without that 30% community income.

    And finally I think it would label the phone as cheap and diminish the overall technology advancements the iphone has made, which is exactly what Apple tries to avoid. You buy a shiny Mac and you feel like a hero in disguise, even if it set you back 2,000 bones versus an equivalent PC at half the price. Again these are just some ideas I’ve thrown around. Take it with a grain of salt on your flamer wounds.

  4. You both make good points. Smartphone tech certainly has a lot more ingenuity left. And it’s already been proven (with the switch to subsidized pricing) that the smartphone arena is more competitive than the iPod one, so Apple will be nimble when needed. Maybe part of the marketing is that you’re also selling extra services with these phones, and cheaper phones means cheaper people unwilling to pay for them.

  5. Darrell,

    It’s not just the rates, but the fact that the base rate doesn’t even include text messaging. If you were close to switching and then felt like you were being gouged you might change your mind. Not pointing the finger at AT&T any more than other carriers (they all do it).

    Then there’s AT&T itself. Some people will simply not use them. Period. Others can’t use them since they’re not in coverage areas. And others may be in voice/EDGE coverage but out of 3G coverage and not want them for that reason as well.

    In other countries, the above can apply to whatever local carrier(s) Apple chose to deal with.

    And for some it’s more psychological. That is, it’s a barrier of wondering whether they really need (or want) their phone to do all those things in the first place. It’s a lot of commitment for two years to find out whether you’ll use it much.

    And I think for some people adding a smartphone to a family plan makes the rate plan change more noticeable, and harder to justify. Sometimes the feeling is that a family must add two, and the expense goes up accordingly.

    In all the above, I don’t think a $99 price will change the landscape much. I think Apple grabbed most of that low-hanging fruit with the drop to $199.

  6. Joecab,

    I’m not sure that they would need to go back to a higher price. I do agree that they could charge more for more functionality, but the original cell phone cost $4,000 and no one would pay that for the same tech now, so who’s to say today’s smart phone won’t become tomorrow’s “regular cheap phone”? Unless you think mobile communications tech has crested, or maybe that consumer spending on said tech has reached its peak, which is possibly more conceivable.

  7. Yeah but the problem is once you drop the price that low, there’s no going back to a higher price once the economy improves, unless you add new iPhones with more functionality along with the cheaper ones. Sorry analysts wishing for the impossible, but a smartphone is not in the same league as a regular cheap phone.

  8. @ Jeff,

    Apple is hardly the only company that uses its income for political purposes. Many companies do it. For example, Google contributed to the no on 8 campaign as well. LArge companies contribute their income to political campaigns all the time. That is simply the nature of the beast. If you’re going to scrutinize Apple’s political contributions–their prop 8 contribution is a tiny drop in the bucket compared to their quarterly sales, profit, and cash on hand, mind you–then you better start putting every business you buy from under the microscope.

  9. If it weren’t made by Apple, I’d certainly buy it for $99, as long as I could keep my current pay-as-you-go plan. I spend $26.50/quarter for my cell phone plan and have never come anywhere near using all the minutes, so a $80/month plan would be ridiculous.

    Being that it’s made by Apple, I’m waiting to see how this whole “No on Proposition 8” thing turns out. I called customer relations on Friday and let them know that I refuse to give my hard-earned money to a company that’s going to turn around and use it for political reasons. (Yes, I know a lot of companies probably do this kind of thing, but I don’t know about it and am enjoying my ignorance, thankyouverymuch.) Even if I agreed with their position, who’s to say I’ll agree with the next political measure they decide to use my money to back?

    If Steve Jobs had donated the same $100K—or even $100M!—I’d applaud him for putting his money behind a cause he believes in. If they’d asked every Apple Store customer, “Would you like $10 of this purchase to go towards ‘No on Proposition 8’?” I could even deal with that. But an unqualified donation from Apple is an unqualified donation from its customers, and I for one refuse to be a part of that.

  10. Keep in mind that any drop in subscription costs would likely be passed along to buyers with reduced subsidies. It’s that 80+ a month (~1.5x the APRU of non smart phones) that affords at&t the ability to sell a $599 phone for $199, or $400 off, roughly $18 a month over a 2 year contract..

    Now, Apple dropping the wholesale cost of an 8gb by 100, combined with releasing a new 32gb model, would let them notch into the lower price point while giving “more at the same prices” like they typically like to.

    I’d put a VERY low chance of having a $99 phone with lower subscription costs. But a “refresh” sometime mid Nov to introduce a 32gb model, is entirely possible.

  11. Tom,

    Good points all. Especially when you factor in how much money replacement units must’ve cost Apple, since it seems like every other person who owns an iPhone has swapped one out at their local Apple store as well.

    What do you see as the other barriers to smartphone purchase? I mention data subscription costs in the post, and I think this is a biggie. Other ideas? Maybe the lack of connectivity is appealing to a lot of people?

    The only thing I’ll say about market share and profit is that Apple has traditionally been a growth stock, so they depend upon increasing their market share to keep up their performance. Of course, that might be changing.

  12. Wolf seems like another analyst who thinks warranties, support, and R&D are free. They’re not. Having by far the best support (and customer satisfaction scores to prove it) in the industry is far from being free.

    Besides, every analyst on the planet wants Apple to go down the low-price road for computers, too. Now they want to apply that same strategy to phones? It’s not clear to me what Apple would gain by this. Market share? Some, but keep in mind purchase price is not the only barrier for a smartphone purchase (for many, I suspect it’s the smallest barrier).

    Besides, Market Share is nothing but a number and, as Apple has proven in computers, it’s a number that doesn’t really mean much to the bottom line.