iPhone narrative pivots from low-cost to higher prices

Last year the talk was about a $330 iPhone 5C; now it's about a $749 5.5-in. mega iPhone 6

A year ago, the narrative just before Apple launched the new iPhone 5S and 5C was all about cheaper prices. This year, that's been flipped and the talk is now about higher iPhone prices.

What happened in the last 12 months to change the iPhone plotline so dramatically?

"Last year there was lots of pressure, mostly by Wall Street analysts, that claimed [for Apple] to grow its user base, it had to lower prices," said Ben Bajarin, an analyst at Creative Strategies. "Now that people have realized that lower-priced smartphones are not really that profitable, people in general, but Wall Street specifically, seem to have come back to the recognition that Apple's best strategy is to dominate the high end."

"There was a nugget of truth in the idea of a cheaper iPhone, but people took it too far," said Jan Dawson, chief analyst at Jackdaw Research, in an interview today. "They thought the iPhone would be massively cheaper, but they overstated the case. They overdid it."

Last September, Apple unveiled two new iPhones for the first time, the top-end iPhone 5S and the mid-tier 5C. The latter was a repackaged iPhone 5 in a colorful plastic case that was priced $100 less than the 5S. Unsubsidized, the lowest-priced iPhone 5C cost $549; with a two-year contract, customers could purchase a 16GB iPhone 5C for $99.

In the weeks leading up to the Sept. 10 roll-out of the iPhone 5C, experts pegged the price significantly lower, in the $330 to $400 range, figuring Apple would shoot for market share gains, especially in price-sensitive Asia.

They were proved wrong.

Within days of the price disclosure, some industry analysts pointed out that the expectations of substantial price cuts had been out of order. Ben Thompson, an independent analyst who covers technology at Stratechery.com, put it best: "Apple essentially said, 'We don't need to be cheap, we don't need to be low-end.' Everyone in the tech press and financial press cares, but Apple's contention is that consumers don't care that they're not in the low end."

Thompson argued that Apple's pricing was in accord with its long-term strategy, one put in place decades ago by co-founder Steve Jobs. In fact, it was an emphatic restatement that made plain where Apple stood on the tug between market share and margins.

This year, however, the narrative has steered clear of lower prices, and instead focused on higher prices.

Apple is now expected to unveil at least two new iPhones tomorrow morning: An "iPhone 6" with a 4.7-in. screen -- up from the last two generations' 4-in. -- and a larger model with a 5.5-in. display that could be called "iPhone Plus" or "iPhone Pro" or "iPhone Air" (or an entirely different name).

The developing consensus is that the latter will be priced $100 higher than the stock iPhone 6, which will replace the iPhone 5S. That would put the 5.5-in. iPhone at $749 sans contract, or $299 with a two-year commitment for the model with the smallest amount of storage space.

There have been hints of higher prices for the 5.5-in. model, including a purported screenshot of prices from China Unicom, one of Apple's carrier partners in the People's Republic of China (PRC). In China's currency, the lowest-priced "iPhone 6 Pro" was the equivalent of $163 more than the lowest-priced "iPhone Air," its name for the iPhone 5S's successor.

Because prices in the PRC include the country's national VAT (value added tax), the probable price differential in the U.S. would be $100.

Today, both Bajarin and Dawson said they expected a higher price for the larger iPhone.

"Apple has a history of screens with different sizes, and bigger ones are more expensive," said Dawson, pointing to the iPad and MacBook lines. In the latter, the 13-in. MacBook Air, for example, costs $100 more than a similarly-configured 11-in. Air; the difference between the 9.7-in. iPad Air and the 7.9-in iPad Mini with Retina is also $100. "Once you take for granted that there will be a larger screen, it's reasonable to expect it to cost more."

"As the most-premium product, it will cost more," Bajarin concurred. "Because it's a bigger screen, it makes sense for Apple to price it higher."

Apple will webcast its launch event tomorrow starting at 10 a.m. PT (1 p.m. ET). Users must be running Safari on OS X or iOS, or the Apple TV to view the live broadcast.


Copyright © 2014 IDG Communications, Inc.

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