screen-shot-2014-06-26-at-13-33-35

Earlier today Apple made a significant change to the iPod touch lineup. Aside from a few small hardware improvements to the lowest-end model, the company has—for the first time—started to close the price gap between storage tiers.

When the iPod touch first launched, there was a $70 gap between the 8 GB and 16 GB models. Jumping from 16 GB to 32 GB would cost an extra $100. However, with the launch of the second-generation iPod touch, the gap between the lowest two tiers increased to $100, and it’s stayed there ever since.

Until today, that is. Now, for the first time since the debut of the first iPhone in 2007, there is a mere $50 gap between all three capacities of an iOS device. Is this a sign that Apple is ready to give in and drop the ridiculous $100 pricing tiers on future big ticket premium devices when the actual Flash storage and controllers only cost Apple a few bucks? Or will we continue to see a $100 price gap between iPhones when the next-gen model is revealed this fall?

Premium Price

The first and most obvious point that comes to mind in this debate is that Apple has now admitted that there is no real need for the $100 gap other than to pad profits. There’s no technical reason that doubling the storage capacity of an iPhone should cost $100, and Apple, one could argue, is now willing to concede the issue.

That’s a fair point, to an extent, but let’s be realistic. No one has ever truly believed that the additional capacity costs $100. If the extra storage cost that much, wouldn’t the jump from 32 GB to 64 GB cost twice as much as the jump from 16 to 32? In fact, the additional storage costs Apple somewhere in the range of $5-10.

Apple has never shied away from charging a premium price for its products—what some call the “Apple tax” and others call healthy margins. No one at Apple has ever attempted to justify the $100 price gap, nor should you expect anyone to ever do so. Aside from increasing profit margins, there is no justification, and we all know it. We always have, and Apple understands that.

So today’s “admission” is more or less irrelevant to the future of iPhone and iPad pricing. Let’s consider for a moment why Apple decided to cut the price gap in the iPod line.

Life Support

The current iPod touch is not a fantastic device by today’s standards. With its now-outdated A5 processor (as found in the iPad 2 and iPhone 4s) and limited RAM, users can expect to see a few hiccups when running the latest software.

As if the limited hardware capability wasn’t enough, the whole iPod lineup is being overtaken by the smartphone industry. The iPod touch just isn’t as popular as it once was. Pair that with lagging hardware specs and you can probably understand why cutting the price was necessary to keep moving units.

It’s the same reason we’re now seeing a camera added to the 16 GB model. An iPod with only a front-facing camera isn’t going to sell nearly as well as the same device with a rear-facing camera, and Apple needs to keep these things moving.

So if the iPod price change is less about no longer being able to justify the price gap and more about trying to keep a dying product category breathing a little longer, what does this mean for the iPhone 6 pricing scheme?

Premium Product

Unfortunately, it may not mean much at all.

It’s possible that Apple will keep the $100 gap on the iPhone line for several reasons. The hardware is brand new and people are going to be lining up to buy this thing no matter how much it costs. It would be much easier to justify a “premium” price for a next-generation smartphone than to justify such a price for a two-year old music player.

It’s not all bad news though. Apple might find that people will more willingly go along with the $199/$299/$399 pricing if the $199 gets users more than a measly 16 GB of storage. With the iPad having recently been bumped up to 128 GB, it’s not hard to imagine that the iPhone 6 could get the same treatment. A 32/64/128 setup could help stem consumer complaints about the $100 gap between tiers while protecting Apple’s profit margins.

There’s also a second party to consider where the iPhone is involved. Apple has to account to cellular carriers when pricing the iPhone. Those companies are going to want some say in the on-contract price, and it would be a bit of a surprise if they were willing to go along with $50 pricing tiers.

Of course, Apple will always want to keep a cheaper, low-end iPhone around for those who aren’t willing to hit the $199 price point. Usually this is a lower-capacity version of the previous model. In this case, it could be a 16 GB iPhone 5s for $99.

What about the iPhone 5c? Couldn’t that maintain its position as the low end of the iPhone lineup? As has previously been rumored, the iPhone 5c is expected to disappear with the next upgrade cycle. It’s no secret that the device has not been embraced nearly as enthusiastically as Apple had hoped. While it’s been marketed as a new device, it’s actually nothing more than a slightly modified iPhone 5 with a plastic back.

It’s not likely, then, that Apple will keep around a phone that’s technically two generations old over what is currently the latest model.

Screen Shot 2014-06-26 at 7.04.49 PM

Low cost carriers can discount the bigger capacities more because there is much more margin in the bigger sizes – This is Virgin’s current scheme

Recap

So let’s go over all of this one more time. Apple has finally admitted what we all knew from the beginning: the $100 gap between iOS device capacities is artificial and serves only to inflate profits. Eliminating that gap on the iPod touch line will help keep sales moving despite that outdated hardware’s obvious impending expiration date.

Given that the apparent reasons for the iPod price reduction don’t necessarily apply to the iPhone 6, it seems logical to conclude that upcoming smartphone will retain the $100 price gap we’ve all come to know and hate. However, to offset potential public dissatisfaction with the idea of still getting only 16 GB of storage for $199, Apple could give the whole iPhone 6 lineup a capacity bump to 32, 64, and 128 GB.

Finally, to appeal to the low end of the market, a 16 GB iPhone 5s could replace the 16 GB iPhone 5c at the same $99 price point.

Or maybe nothing will change and we’ll all go spend $399 on a 64 GB iPhone. Again.

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48 Responses to “Opinion: Why the new $50 iPod pricing tiers probably won’t make it to Apple’s lucrative iPhones and iPads”

  1. jpatel330 says:

    if the iPhone rumors are true, sadly we won’t be seeing this because the base model will start at 32GB, which means Apple will keep the $100 price bump for 64GB and hopefully a 128GB model.

    • Mike Beasley says:

      Honestly I’m totally OK with that. I’m expecting to spend $299 on a 32 GB phone this upgrade cycle, so if I can get the same phone for $199, I’m more than happy to take that deal.

      • jpatel330 says:

        yeah i am with u on that one, but is it worth it for Apple to see customers leave for other carriers that are not willing to pay $100 per bump and much rather pay $50. not only are they losing those customers, but could be losing a lot of revenue with it through itunes (i am not sure if there is a study for this, but it sort of makes sense that the people buying the higher end memory devices are likely to spend more on itunes). i mean they must be buying the high end storage devices to store something off itunes and not just pictures and personal videos.

    • PMZanetti says:

      That’s not “sad” at all. It would be a MIRACLE if Apple dropped the 16 GB model and 32 GB flew in at $199.

      People are not leaving iOS for storage reasons. They also don’t leave for price reasons.

      • jpatel330 says:

        really? must be nice to believe that. everything comes down to price eventually. try charging $200 per bump on those storage devices and see how many people still stick around.

  2. I think it will carry over to the iPhone for one simple reason: Nobody buys the higher capacity models, and this would increase the amount of people who do. And in the end this would lead to more profits for Apple since, like you said, it only costs Apple $5-$10 more to increase the capacity. That’s up to an additional $80 or $90 of extra profit for each 16 GB user that jumped to 64 GB. To me, it would make it a lot of sense.

    • PMZanetti says:

      OH REALLY? Why you don’t stop making up shit, and don’t comment unless you know what you’re talking about.

      Apple’s numbers indicate people opting for higher capacity (AKA MORE EXPENSIVE) models at an impressive rate. During iPhone launches, the highest capacity 64 GB models have always been the fastest to sell out.

  3. It’s too soon to write off the 5c. When (if?) Apple decides to go sub-$400, that plastic chassis will help maintain margins. I agree the $100 pricing tiers with 32/64/128GB will likely hold. Demand for iPhone 6 is going to be high as it is without giving folks more price incentive to increase storage capacity.

    • bb1111116 says:

      @Drew Zhang; I would also be surprised if the iPhone 5C disappeared.
      Apple usually has 3 price levels of phones in the US starting ON CONTRACT.
      1. A new model(s)-$199. 2. A one year old model-$99. 3. A two year old model-$0.
      In September the cheapest, third option should be the 5C.
      I can’t imagine that Apple would keep the 4S around for another year.

  4. rogifan says:

    There was stuff announced at WWDC that many people would never have expected Apple to announce. We have no idea what Apple 3.0 under Cook will do next.

  5. Ryan Pesso says:

    32/64gb black white and gold iPhone 6 (4.7”), 36,64,128 iPhone 6 (5.5”) same colors.

    • muttathil says:

      iPhone 5c(4.0”) 16GB $FREE
      iPhone 5s(4.0”) 16GB $99 / 32GB $149 / 64GB $199
      iPhone 6(4.7”) 32GB $199 / 64GB $249 / 128GB $299
      iPhone 6(5.5″) 32GB $299 / 64GB $349 / 128GB $399

      This is all contract pricing.
      Currently their contract pricing ranges from FREE-$399.
      This scheme maintains that exact same range.

      • PMZanetti says:

        Quite simply, no. Its not going to happen.

        One of two possibilities might occur. But not both. Either the storage capacities and entry level price are maintained, and they go for $249 for 32 GB, and $299 for 64 GB…..OR……they simply start at 32 GB for $199 and move up $100 per model from there.

        NOT both.

      • alvinguzman says:

        This sounds possible but that would be too many production lines open – I am thinking more

        iPhone 5c(4.0”) 16GB $FREE
        iPhone 5s(4.0”) 16GB $99
        iPhone 6(4.7”) 32GB $199 / 64GB $249
        iPhone 6(5.5″) 32GB $299 / 64GB $349 / 128GB $399

        How’s that?

  6. ron837192 says:

    There is a $50 gap between the 32/64 touches, so I think Apple will do the same for the iPhones. Apple is generally pretty consistent about these things. If they want to keep the $100 gap for iPhones, a crazy idea is maybe the baseline will use gorilla glass and the more expensive will use sapphire. So the pricing will be 32gb, 64 gb + sapphire for $100 extra, and 128 gb + sapphire for another $100

  7. mikhailt says:

    I’d agree if Apple’ve done this before but as you stated:

    > Aside from a few small hardware improvements to the lowest-end model, the company has—for the first time—started to close the price gap between storage tiers.

    They might do the same thing for the first time with iPhones.

    Apple has been dropping prices lately. Macbook Air, iMac, and iPod Touches. It does stand to reason that Apple might apply it to the rest of their line-ups.

    Macbook Air and iMac are premium products as well, you can definitely get much cheaper but better spec for those prices.

    Also, IIRC, it’s also the first time a Mac laptop was being sold for 899$.

    I have a feeling that Apple came up with several breakthroughs in their manufacturing processes that they’re able to produce things cheaper (more than the typical component price drops) than in the past while maintaining the same profits.

  8. Air Burt says:

    The 5C being dropped is dumb and doesn’t acknowledge what that means. Following the same trend as previous years, the 4S will be dropped when the 6 is released. This will complete the transition to an all, Lightning-cable mobile product line (I’m not counting the iPod Classic because it hasn’t been updated in 5 years). The only reason to keep the 4S around would be to offer a total of 3 different screen sizes, but Apple would be foolish to use that as an excuse to keep selling a 3 year old phone when they discontinued the 5 after a year. This will be what’s available come September 19th:

    4.7″ iPhone 6- $199 (I have extreme doubts about the 5.5″ model being real)
    iPhone 5S- $99
    iPhone 5C- $0

    • PMZanetti says:

      That’s not the ONLY reason to keep the 4S around and is not the reason why it is STILL around today.

      The 4S has been purposely kept alive due to some manufacturing benefits and its relative popularity in a few key markets (NOT the US).

      As early as January of 2013, it was reported that despite Apple releasing the 5s and 5c later in the year, the 4S would remain available for a limited time for these exact reasons, and would eventually be replaced sometime in 2014 by a 4″ iPhone with 8 GB capacity Well, a Free 8 GB 5c was introduced only weeks ago, and the 4S is still available in some areas. It has nothing to do with the “lightning connector” and everything to do with serving a purpose. When that purpose is done, the 4S will be discontinued.

  9. patstar5 says:

    Well I am not going back to iphone as long as apple continues to charge so much for extra memory. Apple is so greedy, have over $100 billion in cash and they just keep it. Product red only brought in 75 million. With carriers moving to off contract pricing I am not sure people will want to spend $650-$850 on a phone. How much revenue does apple make from itunes? If they want more money it would make sense to bring it to android. Well I will be sticking with off contract phones that are $400 or less.

    • peterlobl says:

      apple is greedy – thats funny

    • PMZanetti says:

      One delusional sentence after another.
      -It doesn’t matter what the components cost. With each model you’re getting TWICE the local storage. Apple values that at $100 per increment, and so do the people that opt for anything over 16 GB.
      -Apple is greedy. That’s funny.
      -Carriers are moving to monthly installment plans to charge even more for ON contract phones. What rock have you been under?
      -iTunes? Not as much as you would think. But, plenty.
      -How would the vague “iTunes” make sense on Android? That horrible platform is DEVOID of revenue. It makes no money for anyone. That’s what happens when half of the devices sold are never used, and the rest of the devices are used by people that don’t understand why they have smartphone to begin with.
      -You were never in the market for an iPhone if you’re committed to off contract phones (why?), that are below an artificial threshold that you invented.

      • patstar5 says:

        Other companies charge $50 to double storage. I can buy 128gb micro sd card for $100-$125. That gets me more storage than an iphone can hold. If you want to pay more for less then do it. Android is still leading in marketshare. Hopefully google can make something to get apple’s sheep out of the rock. Project ara? http://www.projectara.com/ By targeting low end they will be able to capture customers that apple simply cannot reach.

  10. This whole article is incorrect in that the author doesn’t seem to be aware of the real reason for the $100 price gaps (which Apple *has* talked about before although only indirectly and it was a long time ago). For this reason, the entire analysis is flawed.

    The real reason is that products like the iPhone or the iPod touch are designed as a whole, and priced out as a group of three different sizes of the same product. While this might sound overly obvious at first, this means that the “real” price is NOT the price of the base product. In a sense, the cost of all three products is “spread out” over the entire product line.

    If the price was determined the way people think it is, (with the base product being “X” and the extra memory being “X + Y”, and “X +Y +Y”), then the base product price would have to be much higher. Instead of a $199, $299, $399 scheme, they would have to have a $279, $299, $329 scheme. Yes, the folks that want the giant size might get a better deal, but only at the expense of those that want the small size.

    This is why they price them the way they do, to spread the cost of the product across as large a range as possible and to make the entry level devices cheaper. Since they don’t actually sell the same amount of each size product, the math is more complicated than what I have written, but as far as I understand from following Apple for the last 20 or 30 years, this is the way they always have done pricing. The larger sizes subsidise the smaller sizes.

    They aren’t ripping anyone off, they never have, and there is no basis to think that they ever have.

    • patstar5 says:

      It costs them $300 or less to make, they make $350 off 16gb model. Carriers subsidize $650 to $200. So they rip me off a few hundred and the carriers.

      • Ugh…is it even worth explaining these things to people like you? Raw component costs are NOT the total cost of a product. There’s research and development costs, you know, to CREATE the damn thing. There’s marketing costs. There’s shipping costs, moving millions of products around the globe is not cheap. There’s investment costs associated with procuring the components. And many other costs associated with developing and selling a product. On top of that, Apple should expect to earn money for their trouble and skills. And if you even paid any attention to the person you replied to, you would have understood that the cost is spread across the entire product line, with the higher models subsidizing the lower models, to allow them to hit a lower base price point.

        Besides, you just said a few posts up that you don’t buy iPhones. So Apple isn’t ripping you off anything. I smell a troll…

    • asmi8803 says:

      Spot on!
      And if people didn’t feel there was enough value in the extra storage to pay the extra $100 apple would find a way to add value.

    • PMZanetti says:

      Yes, there is a lot of wisdom in this post. TL;DR version is: The low price model is only low price because the high price model exists to subsidize it.

    • Yes exactly @ Mr Grey. The whole time I was reading this I was thinking “this author has no idea how pricing works.” Apple didn’t “admit” anything, they lowered prices at the same time as upgrading the product, which is unheard of.

  11. I don’t see the iPhone 5c disappearing after the launch of the iPhone 6. Why do you think they still have the iPhone 4s around? They’ve had a 2 year old phone as the $0 option for the past 3 or so releases if I remember correctly.

  12. The iPhone 4S is fairly certain to be discontinued this year and Apple needs a phone to slot into its free-with-contract/$450 upfront price tier. If not the iPhone 5c with a $100 price drop, then it would have to be a replacement model with the same two-year old A6 processor, camera, etc.

    I personally suspect that the iPhone 5s will be completely discontinued, like the iPhone 5 last year, and a new “c” model will be introduced with its A7 processor, camera, TouchID, etc. It could be put in a plastic case and sold as “The new iPhone 5c,” starting at $99, just like the iPhone 5c replaced the iPhone 5, last year. At the free-with-contract/$450 upfront tier Apple could actually bring back the iPhone 5, like they did with the 4th gen iPad when they discontinued the iPad 2, keeping the 5/5s case tooling running. I think it’d be a more attractive phone for buyers at the bottom end than an iPhone 5c, and the margins would be pretty good since the costs of the aluminum case tooling have depreciated over 2 years.

  13. I think Apple will switch to 2 storage sizes for both the 4.7″ and 5.5″ iPhone’s 6’s, 32/64 for the the 4.7″ and 64/128 for the 5.5″. I think they will cut the pricing, not sure hor much but my guess is $199 and $269 for the 4.7″ and $349 and $429 for the 5.5″. I think it will be close to the $70 premium they charge for the cellar iPad’s.

    I wish all the iPad’s were cellular and get rid of that $70 gap in models more then the premium they charge for the storage capacity differences in the iPhones. Maybe one wifi only model for a low capacity iPad Air.

    With Google One Apple has to figure a way to attract customers in the emerging markets so maybe they will get rid of the premium for the capacity differences to attract more customers and still sell the iPhone as a premium phone. I don’t think Apple will release anymore plastic phones, soon they will make liquid metal phones to drive manufacturing costs down.

  14. It’s worth mentioning that the purchase price points you talk about don’t make any sense in many places outside the USA. In the UK I can buy any phone from unsubsidised full price all the way past £0 (free xboxs etc) – the monthly cost varies to make the difference over the 2 year contract. Different amours of data confuse things of course but people should really be looking at total costs over the contract length rather than the phoney ‘upfront / purchase price’

    • The total price isn’t what consumers think of first in most places. Take so a place like Russia for example it’s $749 for iPhone, but $20-$30 a month for service. The high initial entry price keeps people away even if the overall cost of ownership is lower. It’s wah Apple wants providers in India to offer installment plans.

      Other factors are ignored like vat being included in the price of the phones in most countries. Sales tax isn’t ever facored into the US prices even though we have to pay it. High initial entry prices make it hard for some people to k twin phones especially with $100 premium for extra storage on the phone. $950 for a 64GB iPhone is going to keep people away from buying it even if the service is $30 a month.

  15. Tim Jr. says:

    My prediction..

    4.7″ in 32GB and 64GB ($650 and $700 respectively)
    5.5″ in 64GB and 128GB ($750 and $800 respectively)

    I don’t think they’ll will have a 32 GB 5.5″.. I think them dropping the 16GB and sticking with 2 models for the 4.7″ is a move to minimize variations in stock. They will keep 2 version of the 4.7″ and only 2 of the 5.5″ to make it easier to not have overstock in one or another..

    BTW: The above matches perfectly with the rumors of 128GB 5.5″ and $100 more as premium.. makes sense even more now with the release of the iPods kind of confirming the new pricing scheme for space upgrades.

    • They have to reduce from the 15 current versions of the 5s, 5 different radios and 3 storage sizes of each. I think yiu are close on the pricing, will be between $50-$70 difference in stage capacity as opposed to the $100 now.

  16. asmi8803 says:

    The $100 price gap for memory is justifiable in the value it gives you, that’s how apple prices things, not based on the cost, it’s on the value. If people didn’t think the added storage was worth $100 they wouldn’t buy it and apple would reduce the cost. So $100 is justifiable in that sense. It’s value not cost that determines price.

  17. iPhone 4s is surely gonna be discontinued, but just in main markets like the US, Japan.
    It’s totally going to exist in developing countries like India.
    BTW, the iPhone 4s still performs rather fine on iOS 7.

    • puggsly says:

      I disagree, I’d be willing to bet the dual glass and aluminum 4s cost Apple more to make this year than the iPhone 5c. Getting rid of the dock connector is a must and killing off the old screen size to allow developers to focus on new sizes is a secondary benefit. I’m guessing that the 5c (maybe even an updated version with an A7) will take over the free phone market with a 16GB version and the new 6 (or both of the new 6’s) will make up the new 32GB $199 and maybe a 128GB $299 version (depending on if we get 1 or 2 new iPhones).

  18. The 5c isn’t going anywhere. It will drop to the free phone. What is this guy smoking? Does he have no concept of how Apple does its pricing tiers from the last few year???

  19. PMZanetti says:

    The 5c isn’t going anywhere. I hope they rebrand it as iPhone C.

    Same 4″ display and shell, with TouchID and 5s internals. Maybe a few new colors.

    It will be a hell of an offering at $99.

    The 8 GB 5c that was just introduced a few weeks ago will likewise remain in the lineup at $0.

  20. kpom1 says:

    Why wouldn’t Apple keep the iPhone 5c as the “free” phone on contract? My guess is that this Fall, we’ll have a $0/$450 (subsidized/unsubsidized) 16 GB iPhone 5c, a $99/549 32GB iPhone 5s, a $199 32GB iPhone 6, and a $299 32GB iPhone 6+. Apple’s entire mobile lineup will finally be using the Lightning port.