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iPhone Price Cut? Here is My Objective View on This!

I noticed that Apple is no longer going to make any more 4GB iPhones

So yesterday I was happily catching up on my RSS feeds when I noticed that there was some Apple buzz. I took a look and saw some photos of the new iPod Touch, which is basically an iPhone that can only use WiFi instead of EDGE and obviously has no phone in it. It's quite impressive-looking. Then I noticed that Apple is no longer going to make any more 4GB iPhones, they're selling off their remaining stock at discount. Then I noticed that Apple has dropped the price of the 8GB iPhones by $200.

I shrugged and kept skimming through my RSS feeds and then went back and noticed that a tremendous crapstorm had started brewing about the price drop in the iPhone. There are two clear and distinct camps. One camp is complaining that they bought the iPhone before the price drop and they're stomping mad and want some kind of discount, refund, or other compensation (store credit is one option I've seen bandied about). The other camp accepts the price drop as a force of nature and is calling the other camp whiners. In fact, this has turned into somewhat of a war between the two camps. What you don't see much of are objective people sitting in the middle. That's where I come in.

I bought an iPhone. I didn't wait in line overnight so I could be among the first to get one. I think I got mine 3 weeks after launch, but I'm not sure (might've been 2 weeks...). Yes, I knew getting into it that I was buying a generation 1 product, but I also knew that Apple was software updating these things, so I had very little to worry about on that front. Everyone also accepts the "rule of 1 year", which means basically that your iPod/iPhone/iMac/iThingamajig is going to be obsoleted by new hardware from Apple in roughly one year. It's a given.

So I was pretty shocked when I saw that Apple was dropping the price on the iPhones and making a product line change only about 2 months after the product launch. When approached about the subject, Steve Jobs had this to say:

"If they bought it a month ago, well, that's what happens in technology,"

Yes, technology does work this way. Everyone knows it. A year after you buy any new consumer electronics gizmo, there will either be a better one available for the same price, or your model will be cheaper than you bought it for, or both. Here's what doesn't happen in technology: a manufacturer drops the price of a fairly expensive piece of connected consumer electronics by 33% 2 months after that piece of electronics comes out. Its unprecedented, but not for the reasons you think.

Let's take a look at this purely from a logistics and financial standpoint - let's not talk about how raging pissed off people are that they "lost" $200 on this deal. Assume every single component required to make the iPhone suddenly became 33% less expensive to the wholesale market, Apple would have to re-inject its supply chain with the new components. It would then potentially have to do re-tooling in manufacturing plants and, while these plants are in China and operate quite cheaply, they don't operate that quickly. In other words, while Steve Jobs may be claiming that the price drop is due to technology, it has absolutely, positively, nothing to do with technology.

If the technology had suddenly become cheaper, we would see the after-effects of such a price drop in technology somewhere around the December time frame, maybe November if the drop happened while the first roll of iPhones was coming off the lines. We would not be seeing the price drop now.

What this shows is that when the iPhone was released, it was released with a price tag that was at least $200 higher than the margin at which Apple could remain profitable on the device, because you know full well that the current price is still going to make Apple money on each sale. So what? you might be thinking. I was originally thinking that as well - it is the job of a company to make money, and if Apple can charge $200 more than a profitable margin on a device and people will still buy it - then more power to them.

Here's where it gets bad for Apple. This particular price drop at this particular time is a marketing blunder. If people see that Apple can drop prices on a brand spanking new hardware product by 33% 2 months after it was released without it being technology/hardware-influenced (despite what Steve claims) then people are going to come to a single conclusion that will be bad for Apple:

 Apple's hardware pricing is completely arbitrary

Whether you believe that the reason Apple's hardware costs more than other competetive devices is due to their obsession with quality and industrial design, the general public (general public does not include fans or zealots) at this point is going to think two things right now that are bad for Apple:

  1.  From now on, I will not buy any hardware from Apple until several months after it is released, or possibly even second generation.
  2. If Apple can drop their prices by 33% without it being caused by a reduction in their cost, then why am I paying a premium for their hardware to begin with? If the iPhone was priced 33% higher than it could have been, how much is their markup on the iMacs or the Macbook Pros?

In short, some of the shiny gleam on the Apple name picked up a little dust with this marketing maneuver. Sure, Apple will recover, and certainly people will forget about this price drop and its not going to do long-term damage to the company.

However, it has probably created a lot of skeptics who might otherwise have remained fervent supporters. It might have turned a few zealots into downgraded fanatics, and returned a couple fanatics to normalcy.

So to put my giant rambling to an end, here's my thinking: No, I am not demanding my money back for my no-longer-manufactured 4B iPhone. I love my iPhone, it's the best freaking device I have ever owned hands down. Nothing Apple does will change that. Yes, Apple will sell a flaming truckload of iPhones and iPod Touches this coming holiday season - it could be the biggest iPod season EVER for the holidays. Am I ever going to buy an Apple product again without first waiting 2-3 months after its release? hell no. Is some of the mystique about Apple's "quality-based" higher price point gone? Yes. Is my next computer going to be a PC because of this marketing blunder? Hell no. :)

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More Stories By Kevin Hoffman

Kevin Hoffman, editor-in-chief of SYS-CON's iPhone Developer's Journal, has been programming since he was 10 and has written everything from DOS shareware to n-tier, enterprise web applications in VB, C++, Delphi, and C. Hoffman is coauthor of Professional .NET Framework (Wrox Press) and co-author with Robert Foster of Microsoft SharePoint 2007 Development Unleashed. He authors The .NET Addict's Blog at .NET Developer's Journal.

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