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By Paris Marx
Apple’s new corporate strategy is clear: raise prices on everything. The new iPad Pro and MacBook Air it announced on October 30 came with respective price hikes of $150 and $200 — even the Smart Keyboard and Apple Pencil weren’t spared. But sticker shock isn’t new for Apple customers — they’ve been feeling it since this year’s three new iPhones were announced in September.
The high-end iPhone XS and XS Max start at $999 and $1,099, respectively, but can cost as much as $1,449 for versions with 512 GB of internal storage. Positioned next to these premium options, the iPhone XR seems like a bargain. Its $749 starting price is far more palatable for the average consumer, but it’s still pricey.
Back in 2014, Apple launched the iPhone 6 at $649 and 6 Plus at $749 — the latter being its first large-screen phone. Now the large-screen price has become the new baseline, with premium models positioned far above it.
Cook ditched Apple’s streamlined product strategy in favor of more options across higher price points in a clear response to two important trends.
Why the rapid escalation of iPhone prices in such a short span of years? Under CEO Tim Cook’s leadership, Apple’s focus has shifted markedly toward boosting its share price to keep its investors happy. Cook ditched Apple’s streamlined product strategy in favor of more options across higher price points in a clear response to two important trends: the saturation of the smartphone market and growing economic inequality.
In 2016, iPhone sales growth fell off a cliff, even slipping into negative territory in some quarters, as the American and Chinese smartphone markets hit saturation. Given the importance of the iPhone to Apple’s bottom line — it accounted for 62 percent of the company’s revenue in fiscal 2017 — it had to formulate a new strategy to keep revenue and profits growing, even if sales growth continued to stall. The first step in its plan came last year.
Apple’s September 2017 keynote introduced three new iPhones: 8, 8 Plus, and X. The iPhone 8 models got a $50 price bump over their predecessors, while the iPhone X established the $1,000 premium category. As a result, the average selling price of an iPhone jumped to $796 in the first quarter of 2018 — its first time above $700 — and has remained above $700 through the second and third quarters. It’s expected to increase again now that even pricier iPhones have hit the market.
Splitting the iPhone line into consumer and premium tiers is essential to Apple’s new strategy. The executive team seems to want to slowly push up the base iPhone price — it also got rid of the budget iPhone SE — while offering much more expensive models, and for very good reason: The global rich are getting richer and have more money to throw around.
A lot of people accept that income inequality in the U.S. is at its highest level since 1928 and that four decades of stagnant real wages for average workers are creating problems in American society, yet the concrete impact of these trends on the wider economy are often ignored. Cook successfully campaigned for his corporate tax cut, which accompanied Trump’s additional tax cuts that predominantly benefited the richest Americans, while 40 percent of people can’t even cover a $400 expensive in an emergency.
The reality is that as income and wealth have increasingly shifted to the top end of the income distribution, the rich have become responsible for a larger share of consumer spending and companies have started to change their strategies to more explicitly target that demographic.
A study by economists Steven Fazzari of Washington University in St. Louis and Barry Cynamon of the Federal Reserve Bank of St. Louis showed that the bottom 80 percent of earners were responsible for 46.6 percent of personal consumption spending in 1992, but by 2012 that portion had dropped to 39 percent. Meanwhile, the share of spending by the top five percent of earners jumped from 27 percent to 38 percent over the same period, and they were responsible for nearly all spending growth from 2009 to 2012. Companies still want the business of the bottom 80 percent, but given that the top five percent spend nearly as much, they clearly want to get more out of them.
Higher priced iPhones also mean more profitable iPhones. An initial assessment of the 256 GB iPhone XS Max by TechInsights suggests it costs about $450 to build but is being sold for $1,249 — that’s a profit margin of about 175 percent. Meanwhile, the iPhone XS Max is outselling the iPhone XS by three to four times, according to Apple analyst Ming-Chi Kuo, as Apple’s more well-off customers upgrade to its large-screen premium offering. (The 256 GB option is proving to be the most popular iPhone XS Max storage choice.) Apple’s per-share profitability jumped 40 percent after the release of the iPhone X last year, and it will likely jump again thanks to the iPhone XS Max.
However, the expansion of the product line has made it more confusing. Reviews suggested the iPhone XR is so good that, for most customers, it isn’t worth dropping an extra $250 for the iPhone XS or XS Max — the inferior screen is hardly noticeable and most people have little need for the missing telephoto lens. This is a change from previous divisions in Apple’s product line: MacBook and iPad customers pay more money for upgraded performance options, but iPhone XS and XS Max customers are paying a premium for what are essentially higher quality materials.
And for people who prefer smaller screen sizes, the only option in the new lineup is the iPhone XS since the iPhone XR is nearly the same size as Apple’s Plus models. Is the push to bigger screens really about a better user experience, or about getting more money out of customers? These big-screen phones certainly aren’t easier to hold.
Is the push to bigger screens really about a better user experience, or about getting more money out of customers?
And as the iPhone line has expanded, so too have the issues affecting it. Last year, Apple had to admit it was slowing down older iPhones without telling customers, and iOS 11 has proven to be even more buggy than previous releases. iOS 12, released just last month, has had a number of problems that the company should have fixed before releasing its new phones: charging issues, poor reception and a bug that excessively smoothed photos taken with the selfie camera. Apple eventually fixed these problems, but the number of bugs slipping through its quality control seems to keep growing.
Bugs may, however, be the consequences of Apple’s new strategy. The company is focused less on making every aspect of its products perfect, and more on hitting different market segments with a wide range of products to keep profits and revenue growing — even as iPhone sales slow. The new iPhones are great phones, but their prices will cause many to balk, especially its international customers who will be paying even more due to taxes, import fees and currency conversion.
Even though the iPhone XR could be positioned as the base iPhone, it’s hard to pinpoint which model is the iPhone. When there was a primary iPhone as the baseline, there wasn’t confusion when Apple added the Plus models. But now that the company is releasing three iPhones a year, with less to differentiate them, the notion that there’s a single iPhone has been cast aside to keep shareholders happy (by making them even richer).
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