The 3G iPhone duly made its debut at Apple’s WWDC developer event on Monday, but while the impact of its 2G predecessor was all about brand, marketing and design, in the 3G case, the buzz was all about pricing. Apple has significantly reduced the cost of owning an iPhone, with the 8Gb model being offered in the US for $199. This clearly shows that the company is now chasing volume at the expense of exclusivity and margin. What is less clear is whether it will be Apple itself, or the carriers, that lose most of that margin and exclusivity.
Like its 2G predecessor, the new iPhone does not actually offer any major features that are not available elsewhere, but will fly off the shelves on the back of its brand, design and desirability nonetheless. However, Apple needs to spread its net wider. Not even the iPhone will retain its mystique forever, and while some power users will remain forever faithful to the Apple brand, others will already be moving on to the next cool thing in handsets. So Apple has timed it well to reduce prices and extend its flagship device to a wider range of cellco partners, enabling it to trawl in a far larger pool and start to target the sort of market share that a mass market smartphone like the Nokia N95 might assume.
So the iPhone is now priced far closer to the wave of ‘iPhone killers’ that have been appearing from Samsung, LG, Nokia and others, at $199 from AT&T in the US. This also brings it in line with business devices like the RIM Blackberry, as Apple starts to target the enterprise user base, adding essential features like synchronization with Exchange. Good for volume, but much of the price cut seems to be coming from operator subsidy, in the US at least. European carriers are likely to follow suit, though in parts of Asia Apple may be forced to shoulder the impact of the price cut itself, in countries where subsidies are banned. Jobs said it was possible the iPhone would be free to consumers in some territories if the operator believed this was the most viable approach.
Analysts speculate that AT&T is still paying Apple $499 per handset, which would represent a respectable margin on a unit whose raw cost of materials, according to a teardown analysis by Portelligent, could be almost half that of the original iPhone. The first phone had a bill of materials estimated at $170 at launch, but the iPhone 2’s bill could be as low as $100, said David Carey, president of Portelligent. Despite all that, though, Apple’s gross profit (based just on cost of hardware, not development, software, IPR and marketing costs) may have fallen from $229 on the first iPhone (at its initial price tags, later slashed) to $99 now, Carey estimates. Of course it’s considerably more if the operators are actually paying $499.
Ralph de Vega, head of wireless at AT&T, the iPhone’s original partner and exclusive US carrier, commented: ‘We’ve gone back to a basic subsidy model that we use for all our other manufacturers.’ This means that US consumers will pay $199 for the handset when attached to a two-year contract, though they will pay more for their monthly service fees, at $30 a month for an unlimited data plan, instead of the previous rate of $20. The voice plan starts at $39.99 as before. European carriers have not yet announced their pricing but are expected to take a similar approach, and it is their power that is largely credited with pushing Apple away from the no-subsidy model.
Apart from subsidies, there are other major changes in the business model that Apple aggressively imposed on its first carrier partners last year ‘ a model that drove Vodafone away from being an initial operator for the first generation of the iconic handset. Under these arrangements, Apple signed exclusive deals with a single carrier per region; did not brook any operator subsidy of the handsets (though it did make major price reductions a few months into the iPhone’s life); and insisted on a revenue sharing deal on subscriber fees as well as content and services, which Vodafone sources described as over-favorable to the phonemaker.
Apple has already moved away from exclusivity in all territories, as it chases mass market, and Vodafone itself has come on board for the 2G and (presumably) 3G models, on more generous terms, and in some cases in territories where there is a second source of the product. Combined with subsidies and lower base prices, this broader reach could see the product penetrating high growth, lower income markets such as India, by giving carriers greater flexibility on how they price the unit. There is currently no carrier announced for China or Russia, but Jobs expects a deal in these two key territories by year end. Also, the arrangements under which Apple received an (undisclosed) percentage of the carrier’s monthly subscriber fees now come to an end for the new models, though they remain in place for the 2G products. This seems to be largely because of hostility to this approach from carriers in parts of Europe and in some high growth economies, which Apple is now keen to penetrate, and where its brand may be less influential than in the US.
On the positive side for Apple (and the consumer), all these changes show the company pushing its flagship product into the affordable mainstream, and taking a shot at achieving volume. Unlike the original iPhone, the 3G version will quickly be available, after it ships on July 11 in the US, from as many as 70 carriers worldwide, and at an affordable price. Jobs told the audience at Apple’s WWDC developer conference that an Apple survey found that more than half of those people who had not purchased iPhones had made their decision based on price. “We need to make iPhone more affordable,” he said.
On the negative side, the change in pricing suggests that, while the iPhone will remain a sought-after handset, its day of being well ahead of the field may be over, and Apple is having to sacrifice margin and its famous iPhone business model in the interests of remaining competitive with rejuvenated challenges, not just from giants like Nokia, but also other players in the high end niches, such as HTC. HTC’s latest Touch model is considered one of the most effective alternatives to the iPhone in terms of functionality and desirability, and has more room to move on pricing as it is built on an advanced single-chip architecture, rather than requiring the additional cost and power consumption of a dedicated applications processor.
Apple is never one to balk at a new challenger, however, and it has delivered what the market expected with the new iPhone, in terms of features and look and feel. The new phone looks very much like the 2G version externally, except for a black or white plastic shell on the rear of the device. The $199 model will come with 8Gb of storage, while one with double that capacity will sell for $299. Apple has filled some gaps that had attracted criticism to the older model ‘ 3G support of course, but also the addition of GPS. Battery life is good for a phone of this power – 300 hours of standby time, five hours of talk time on a 3G network, 5-6 hours of browsing, seven hours of video or 24 hours of audio.
Apple also unveiled MobileMe, which allows home users to do email, calendars, contacts and to sync photos between the iPhone and computers. The service, which comes with 20Gb of storage, costs $99 a year and is typical of the way Apple will look to keep its revenues and margins up in the handset world, even where it is cutting hardware prices, by relying on well branded services (as well as using the iPhone to leverage sales of Macs and other Apple products).
On the negative side, critics are complaining about the lack of video recording, MMS and the relatively low spec 2 megapixel camera ‘ also that the phone cannot be used as a modem, as many smartphones can.
While the pricing changes are geared to expansion in mass markets and in new territories, they are also important to Apple’s goal of pushing the iPhone into the business market. Its pricing is now similar to that of the RIM Blackberry and Palm Treo, and many of the new applications and software features rolled out for the 3G iPhone were geared to business functions such as push email, including all-important synchronization with Microsoft Exchange. The conference kicked off with a glimpse of some of the applications being created by independent developers. About 250,000 programmers have downloaded the tools Apple offered in March and new apps on show ranged from games to social mapping services and almost-real time sports updates. The applications will be available on Apple’s App Store, which is expected to go live on July 11 and will be structured similarly to the Apple iTunes music and video store. The store will be included on every new iPhone and on older iPhone models once users download the iPhone 2.0 software update, available soon.
The chip suppliers:
The lucky chipmakers with a stake in the iPhone real estate are, according to teardown analysts:
Component Supplier
Digital baseband Infineon
Applications processor Samsung
Memory Samsung
RF transceiver Infineon
Power management Infineon, NXP
WLan Marvell
Touchscreen display components Epson, Sharp, Toshiba, Balda, TPK, Broadcom
Bluetooth CSR
Imager Micron
Accelerometer STMicro
Battery Amperex
GPS Infineon, Broadcom
Infineon seems to have kept the baseband contract, despite intense speculation that it would be ousted by Broadcom. The GPS chip will be based on GlobalLocate’s technology, but this could be acquired via Infineon’s license for the design, or through Broadcom, which took over the start-up last year.
Samsung, which accounted for 30.5% of the hardware cost of the original iPhone, probably has a little less than that now, because of the increase in cost of the baseband and the addition of GPS, both probably benefiting Infineon. Portelligent believes the additional cost of an HSDPA chipset would be $15, plus $5 for GPS.
Contributing to the lower BOM is a fall in the cost of the touchscreen components because of volume and engineering changes ‘ this is now estimated to total about $30, half the original figure. Memory has also fallen in price, at about $20 per 8Gbytes, compared to $50 a year ago. This factor is important to Apple’s margins, since the 16Gb model is retailing at $100 more than the 8Gb version, at only $20 more in cost of materials.
Nokia may stay loftily aloof from the temptation to indulge in direct response to the iPhone, but Samsung and LG are less proud. Samsung chose Monday to try to upstage the 3G iPhone announcement with the launch of its i900 or Omnia, which outdoes the Apple device on various fronts, including its display ‘ a 3.2-inch haptic-enabled touchscreen.
The i900 is a quad-band GSM/W-CDMA handset that supports 7.2Mbps HSDPA and comes with a 5 megapixel camera, as well as GPS, Wi-Fi, Bluetooth and either 8Gb or 16Gb of storage. However, at 240 x 400 pixels, it has lower resolution than the new iPhone or the HTC Touch.
The phone will be available in Asia next week and Europe in July, but no US date is set.