I argued a couple of months ago that ‘peak iPhone’ was likely a temporary phenomenon, but that Apple might have to be willing to accept lower margins if it is to continue to grow its sales.
I think it will also need to learn to be a little more flexible when it comes to its profit margins, especially in growth markets. That ~40% markup has served it well for a great many years, but I don’t think it can necessarily expect to maintain it indefinitely.
Yesterday, the company indicated its willingness to do just that. For the first time, Apple’s entry-level phone is a brand-new device that offers close to flagship specs at a price level close to the previous-generation phone. That will hit Apple’s margins on the device for sure, but the company is looking to the long-term …
The iPhone SE still isn’t a cheap device, of course. Apple is still targeting the premium end of the market, but it is acknowledging that ‘premium’ is a relative term. There are those willing to pay significantly more than the average price for a smartphone, but who are not able or willing to reach quite as high as its flagship prices – especially now that the move away from ‘subsidized’ pricing by carriers has made the true retail cost much more visible.
And just as much of what Apple has been doing in recent years has been driven by China – the gold finishes being the most obvious example – the company is now looking to new growth markets like India. It can only start to make serious in-roads into less wealthy markets if it is willing to settle for a reduced profit margin, at least in the medium-term.
There are those who would question the need for Apple to do that, and urge it to stick with its tried-and-trusted strategy of targeting only the most profitable slice of the market. That’s a strategy that has, after all, been wildly successful, Apple reportedly taking home 94% of the profits from the entire smartphone industry.
But there are two reasons Apple’s first move into somewhat more affordable territory makes sense.
First, as I outlined last time, the competitive landscape is changing. Long gone are the days when Apple was competing only against one or two other flagship smartphones, and everything else was cheap-and-nasty. Chinese brands like Huawei, Xiaomi and Lenovo are now offering credible competition in terms of both design and performance, and will continue to do so. Apple cannot afford to stick its head in the sand and imagine that fast-growing competitors won’t impact its own market.
Second, Apple is slowly monetizing its ecosystem. Sure, services have in the past never merited anything beyond inclusion in the ‘Other’ category in Apple’s accounts, but that situation will change over time. Apple currently has over a billion active iOS devices, and has so far sold Apple Music to only around 1% of them. That’s a massive potential regular monthly income stream that Apple has barely started to tap.
Apple Pay, too, is generating rather small sums of money as yet, but again the long-term potential is enormous – and again Apple has demonstrated a willingness to accept a smaller margin in the short-term to build a market share that will drive serious revenue in the long-term.
The company’s long-awaited streaming TV service is another example of how the company can leverage its existing customer base to generate income from services. For a company whose income is deeply cyclical, tied to new product releases and holiday purchases, regular monthly income is a valuable commodity – and one for which the company will be willing to make some sacrifices.
What will be really interesting to me is what happens next time around. Apple has typically held onto earlier iPhone models, lopping $100 off the price when new ones are introduced. If it did this with the iPhone SE, we could potentially see a brand new iPhone available direct for Apple for just $299! That’s something that would have been unimaginable not that long ago.
Of course, Apple may not do that. It may consider the specs of the iPhone SE good enough to maintain current pricing for longer than a year. One possibility I could see is Apple viewing the SE as having an 18-month shelf-life at its current pricing, taking it through to the launch of the iPhone 7S. That would bring it into line with existing iPhone cycles.
At that stage, it could then simply withdraw it from sale, replacing it with a newer model. But it could also retain it and drop the price, giving us that $299 price-point.
Apple does, of course, risk cannibalizing some of the iPhone 6 market. I must say that even I am considering the small downgrade, as I prefer the greater pocketability of a 4-inch phone and actually prefer the design. But the company has presumably done its research carefully in choosing the few goodies it has withheld from the SE.
As an aside, I said last week that I thought it was crunch-time for iPhone storage tiers. Just a few days later, Apple went ahead and launched a brand new iPhone starting at, yep, 16GB. But it was also notable that the new 9.7-inch iPad Pro was introduced with 32/128/256GB tiers, in contrast to the 16/64/128GB of the iPad Air 2. (Apple has now removed the 128GB tier from the older model, presumably aiming to drive premium buyers to the new one.)
That gives me some hope that the message is getting through. Given that Apple will need to ensure that the iPhone 7 is clearly distinguished from the iPhone SE by more than just size, I’d love to think that could mean at least 32/128/256GB tiers next time around.
Is Apple right to sacrifice margin in the short- to medium-term to ensure its long-term growth? Please take our poll, and share your thoughts in the comments.
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If only they would sacrifice some of those margins in the computer hardware side of things or at least keep their hardware up to date.
Or the new iPad Pro.
Besides taping into the lower end markets, I think Apple is keeping its options open if and when phones get smaller again. There are a lot of articles out now from wired and others about the screen size, that we will see phones shrink again. That we won’t need the extra size anymore and get information other ways like a real Siri, if she would ever learn to understand what I am saying.
I was a little surprised the introduction of the SE didn’t include the introduction of a dual sim option. If this was really a play at India that would have made the SE an instant player. Also lets be real the margins on the SE are still going to be huge, all this is really going to do is lower the average sale price.
They mentioned that most of their new adopters of the smaller model is China… I’m not sure in India – after all they have the $4 lookalike iphone :-P
Also has anyone mentioned that this $399 price point leaves a pretty large gap that could be filled by a 4″ version of the iPhone 7 starting at say $550?
They need to keep their pricing super simple. To me, they have it down. Think of it this way. Last week, a brand new iPhone 5s, 16 GB, off contract, was $450. Today, you can get what is largely a 4″ iPhone 6s (minus a couple of features) for $399. That is a great move. I’d like to see it continue in the fall as such (I’ll ignore the Plus size, assuming everyone knows to add $100 for that)
iPhone SE @ $399 (16GB)/$499 (64GB)
iPhone 6s @ $499 (16GB)/$599 (64GB)
iPhone 7* @ $599 (16GB)/$699 (64GB)/$799 (128GB)
* because who is to day they call it the iPhone 7?
This represents a minor $50 price cut per line. Also, I think we are still 18 months away from the next storage bump, making that a 7s feature. Cutting $50 off the price can somewhat justify that move as well.
Back to keeping pricing simple, they really messed up with the iPad line. I understand dropping the 18 month old iPad Air 2 by $100, but it now makes it the same price as the 6 month old iPad mini 4. Which has slightly less powerful specs. They should have also reduced the mini 4 pricing by $50, and the mini 2 pricing by $20. So it would be $249 for a mini 2, $349 for the mini 4, $399 for the Air 2, and $599 for the Pro (9.7″).
Replace the 16 with 64GB, as-well-as 64 with 128GB and 128 with 256GB. Well, now it’s perfect!
If I was putting a wish list, yes. But I was thinking realistically. 😉
The SE is much like what the macbook air became a bit after replacing the plastic macbooks. It’s the not-cheap, cheap phone that’s all around good.
I think Apple will introduce a really sexy line (multiple sizes) in a year or two that will make it not appealing anymore (aka the macbook of iphones). But for that to happen there has to be a pro line first. The pro has to be there to satisfy the needs of the people who want the best and are willing to pay whatever for it – the elitists I keep seeing on forums like this that say crap like, “stop being cheap, if you can’t afford it than don’t get an iphone.” Apple will happily make a pro phone for them and charge a great markup on it.
The normal consumers will be wowed by an even slimmer, thinner, lighter iphone line that’s in the middle of the SE and Pro.
New hardware is all very well and good. The 6S is great, the SE looks fantastic, Apple TV 4 seems to be working… I’d really like to see the following now:
1) Innovation in software – iOS 9 last year was a good performance update and feels solid now but iOS hasn’t seen much innovation in years. Siri i feel is really lagging behind.
2) Refreshed Macbook range
3) More powerful Apple Watch
With the Pro iPads they need padOS or a yearly iOS update that is tailored to the iPad. Every year at WWDC iOS gets new API’s and mostly iPhone specific feature updates. iPad needs dedicated updates and to me is the main thing that holds iPads back. The OS is still a blown up version of the iPhone and not customized for the larger screen real estate of the iPads.
I think we will see updated MacBook Pros at WWDC and MacBooks before, since the Skylake chips for MacBook are finally shipping.
I think they need a health tracking device more them a powerful Apple Watch. With CareKit, HealthKit and the Health app they have a great backbone for tracking health and changing the medical industry forever, but they lack a device that tracks health functions.
They need to find the Purpose of the Apple Watch instead of just doodles and other things they have marketed. Most importantly they need embedded SIM so they can be stand alone devices instead of $300 iPhone accessories.
The SE will have much more penetration in India then other markets. In China and other parts of Eastren Asia they want 4.7″ and 5.5″ devices, because they need the larger display to draw their characters.
No matter how Apple wants to spin its marketing the SE is for India and parts of Africa. They should went with this pricing with the 5c and got better global penetration instead of waiting until now. Now they will struggle to get those markets to switch from other smartphones to the SE. Apple wanted to put profit margins first and sacrifice market share. Now that the smartphone market is saturated they are willing to give up some profit margins. I think Apple screwed up by not doing this 2 yeas ago with the 5c, now they will have a much harder time getting into India.
Coming from Japan — you can type the characters phonetically…i’m not sure about china, but in japan we use a different keyboard too — we rarely draw the kanji.
The biggest problem with their iPad Memory tiers is that 64gb is a really nice size iPad. 128 is a bit large and pricey. A 64gb iPad Pro would be great.
32 GB is barely adequate on iPads like 16 GB is barely adequate on iPhones. 64 GB should be the base model on iPads like 32 GB should be the base on iPhones. Apple is forcing people to the mid tier models to increase profits. On the new 9.7″ iPads I could take the price increase and 128 being the middle tier if they included LTE on all models.
I really wish they just had it as a + $50 configuration. At some point they’ll have to move away from storage as being the only differentiation between tiers. On the macbooks you have a combo of things like more default ram, faster default processor and higher base storage even within a single laptop size. It’s more like suggested configurations as tier’s vs just feeling like your paying for more storage.
Maybe we’ll see something different with the next iphones.
Ugh why does lower price mean smaller screen?
You have android phones with 5.5 inch screens selling for $200.
that is true… but often with poorer quality build or less features, or not even running the latest OS
I don’t disagree with you Ben, but to me the biggest issue with the event was the piss-poor job of re-pricing and updating the rest of the existing lines. The 6/6 plus really don’t have much to stand on here anymore with the SE having mostly better specs for $150 less. They should’ve dropped the 6, and moved the 6s to 499-549, and the 6s plus to 599-649.
The real disappointment was the lack of upgrades to the 12 in iPad Pro. I would be a little upset if they upgraded the 3-4 month old iPad but I’m actually more upset I can’t return my week old pro for the new one without going down in screen size. I can maybe understand the rear facing camera being on a smaller device but the FaceTime camera & TrueTone/Wide Color display should’ve come over.
Yeah, I think a rear-facing camera on a 12.9-inch device is all but irrelevant. I’m sure the larger device will get the other upgrades (and more) next time.
I wonder just how much lower the SE’s margins are. They already have all the tooling and much of the manufacturing in place; those are huge savings. The only thing that’s really new is the mainboard layout and components. I’m sure the former doesn’t cost much to design these days and given their insane buying power components aren’t a huge portion of the cost of their devices.
I think ApplePay has a lot to do with this offering. I see more an more people using their phones for payment all the time.
Assuming you’re correct, we could be seeing this next year:
299$: iPhone SE (2016) 16/64GB
399$: iPhone SE (2017), 32GB/64GB (Something tells me they could just add 32GB next year for 399$ and drop 16GB to 299$ without refreshing anything)
499$: iPhone 6S, 16/64GB
599$: iPhone 6S Plus, 16/64GB
699$: iPhone 7, 32GB/128GB
799$: iPhone 7 Plus, 32GB/128GB/256GB
The SE benefited from R&D, engineering and tooling already paid for years ago, and adding off the shelf modern components to upgrade it was a great choice that made an already great product to continue to be relevant.
But I think this model was merely a stop-gap product to keep interest in the 4″screen alive. I would guess that next year when a completely redesigned iPhone is released, we will see the comple line redesigned including a modern 4″ with all the features of the flagships.
So why the SE may be around at great prices for a few years to come, we will also see a top of the line version selling along side it.
Apple paid me $200 (apple gift card 3 weeks ago) for an iphone 5. My theory; apples margins are solid because they are simply reusing, already built parts. Hence Liam… Maybe the shinny apple logo on the rear is refinished to appear like new. Beaded edges, on the SE repurposed housing etc. I think its smart and id gladly spend a few hundred dollars every few years to update specs, speed etc. I dont think they are sacraficing too much on margins at all on this build. I bought a 6s and hated the round corners hurt my hand, have the 6s+ (bought a week ago) will gladly return and save $250 from a 6s for the SE. I could care less about a big phone I hated all of them that are larger than the 5s/SE size.
Apple will never release a ‘cheap’ phone, computer, iPad or cable, nothing, never, no way!
Definitely agree.
I dispute the notion that Apple is sacrificing margins. Remember, that they killed off the iPhone 5S. They’re using a lot of the same parts that were already in use, which means that production costs are a lot lower. So while the selling price is also lower, I don’t expect them to be sacrificing margins.
excellent move! Any cheaper cost that will benefit Apple in long run term and more wiser in marketing sales just simply to attract more new customers!!! Yes, it benefits two-way street and only it cost and who cares?
unfortunately i would argue that Apples phones are far from premium… they are missing many key features that other makers offer, and the design quality has gone down compared to previous years… considering a lot of people held out for the iphone 5SE that is technically a 4 year old design, just goes to show that maybe people are getting bored of Apple.
The fact that the excitement surrounding Apple has been falling, that i hear many people grumble and moan about the current design, that Apple keep having issues… The fact the new design could bend in your pocket (and although strengthened, they only slightly strengthened it)…the quality feel of the material has also dropped.
Before i was willing to pay more for Apple — now i feel cheated — i got rid of my ipad when i got my iphone 6plus, i felt my ipad could do less than my phone and so wasnt need — plus, the ipads dont feel as strong as the first ipad — they use so much glue nowadays too.
Personally i feel they probably have the same profit margins, it’s just that they have found ways to cut money in manufacturing — after all, they are now recycling parts and materials from older phones rather than paying for raw materials… they also showed they are very self sufficient in making their own energy to cut costs…they are still making a crap load of money but with very minor upgrades…
I see a lot of people saying that the SE of this year will drop in price next year. I think you’re all hoping for too much. I can see the SE staying around for years. With the iPhone 6, Apple essentially created another “s” iPhone. The 6s was already 50% of what the iPhone 6 should have been. Apple, I believe, caused a problem they knew they could fix with a smaller iPhone speced up to par with the current generation iPhone (for the most part and a full half cycle after the launch of the flagship), but thata’s all they did. And they did it while keeping the beloved 16GB capacity around.
I predict that the iPhone 7 will start at $649.99 and with 32GB. It’s still $150 more than the 32GB SE, and with the SE being a 2-year product, they can continue to bring in the cash. It works for both ends in the short term. Those who’d get a 16GB SE would probably be looking into getting their first iPhone anyway, so they might not need all of the space; however, what’s more important is that the Silicon will outlast the storage. The iPhone SE will always be able to update thanks to the storage management software in iOS 9, so it was at the minimum imperative that Apple build a phone that could last two full years and then some. The A9 was built to last like the A6 and A7 were built to last, and now that it’s confirmed that the SE has 2GB of RAM too, nearly every iPhone now sells with a base of 2GB.
What potentially scares me is that the iPad Pro 9.7 only has 2GB of RAM. Now, this product confuses me. I guess they had to reserve some features for the larger iPad Pro, but why RAM of all things? This leads me to believe that Apple will stick with 2GB of RAM on the iPhone 7 and potentially for the iPhone 7s. Apple stuck with 1GB of RAM for 3 years when it wasn’t at the start of year 3. Two gigabytes is cute for now, but they’re quickly digging new wholes for themselves. Usability over time matters, especially nowadays that the biggest draw to new iPhones is that they have the power to fix iOS’ sluggish performance using pure brute force. Maybe this is Apple’s tactic, but unless iOS updates are more polished from now on (which iOS has been constantly incliuding new issues as older ones are fixed [or not fixed]) we need our devices to be able work passed the bugs. I’ve never had an iPhone utterly fall apart after just one update. And that’s not to say that the device was even stable to begin with. The iPhone 6 felt like an iPhone 4 (new resolution + low RAM and inadequate GPU). Only time will tell what happens next, but I can already see iPhone 7 following the 9.7″ iPad Pro verbatim (aside from the cameras).
Apple is walking again the way from which SJ had rescued it several years ago – building plenty of variants to suit everybody needs. I’ve respected Apple and it’s products for uncompromised attitude – one, great product product for certain usage. Now Apple again want to have products in various sizes, colours, slightly different in terms of specs for everyone to choose. Is it bad you’ll ask? – No. But it makes of Apple another ordinary company – which will make Apple loose the market in the end. Why? Because when it will produce products like every other company, it will become clear that they are ridicullously expensive in comparison to their possibilities (slower performance, less memory, etc.) You need to remember that Apple advantage was great design of both software and hardware, but it takes time to look for every detail. If you’ll divide the same amount of time by more and more products, you’ll get less time to work on every detail of product. You’ll have just another ordinary company.
There is actually more to the story than that… Apple’s next target market is India, where a) most phones sell for US$40 to US $100 and b) Indian law requires companies like Apple to have factories there if they want to sell *new* product there. Imagine the possibility of refurbished SE’s selling for $199 or less, rebuilt-by Apple and by-passing Indian new-product law, in order to open up that market. Win for everyone….
First I’ll state I really like the iPhone SE, I think the iPhone 5 and iPhone 5S created an impression on people, it had remnants of the iPhone 4 / 4S and was arguably the last iPhone that Jobs was significantly influential over. Remember the Motorola Razr? The original flip phone. Nostalgia sells and an affordable iPhone in the form of a 5S but more powerful is a great deal…I remember the iPhone 3GS sold way longer than it should have even when the iPhone 5 was going, the iPhone SE is a great deal for a budget smartphone with very little compromise or for those that value a 4” screen…I know I was hesitant about getting the iPhone 6 because I preferred the iPhone 5 screen size very much.
Second…I don’t understand why Apple feels the need to have all these separate models, every year since the 5 it seams that they find a way to screw certain iPhone models and customers out of international LTE bands…I’ll cut them some slack on the iPhone 5 because internationally that was a disaster for many providers overseas due to Apple’s lack of LTE support. But case in point is the new iPhone SE which lacks Band 28 and Band 7 on the Verizon model but supports Band 12? Meanwhile the other models support all the TD-LTE bands plus B28 and B7. Its all just a mess…if they really cared about making a truly global phone every phone would have the essential bands + all the extras. Seams it would be more expensive to make to models of a phone where one just has a few less bands (likely disabled in the firmware)