September 13, 2017

Breakingviews: Apples iPhone Pricing Goes Out on a Tech Limb

by Breakingviews

Apple is going out on a limb with its latest iPhone. Amid all the fanfare about the 10th anniversary iteration of its revolutionary device was news that the top-of-the-line X will start selling at $999, the most expensive one ever. That defies convention in an industry where products typically get cheaper.

The newest iPhone, unveiled from the company’s new circular campus on Tuesday, comes with plenty of eye-catching upgrades. Its screen is bigger – running from edge to edge – and brighter. Processors are more powerful, the camera is sharper and facial recognition will unlock it.

Even so, it does not quite live up to Apple boss Tim Cook’s hype of being the “biggest leap forward since the original iPhone.” After a decade of producing inventive handsets, the pace of technological improvements is slowing down, not accelerating.

The market is also maturing. Total shipments globally are expected to rise by less than 5 percent this year, research outfit IDC estimates This sort of growth usually marks a painful point in a product’s life cycle. Companies turn from trying to win new customers to stealing market share from rivals by slashing prices, which in turns reduces profitability. Yet Apple shows no signs of resembling, say, a PC maker.

In fact, Apple has kept the average iPhone price relatively steady, roughly between $600 and $700. Old phones have their prices cut, new ones fetch a premium and Apple convinces some customers to shell out extra for more memory. At the top of the line, though, the price tag is now going up. Two years ago, Apple’s flashiest model started at about $150 less than the X.

Apple’s design obsession helps. The most impressive function of surgical-grade stainless steel against an all-glass finish may be to help shoppers justify a whopping price tag. An operating system that integrates well, for the most part, with the company’s other products adds to the appeal. And many customers by now have settled into either Apple or Android. A comparable Samsung phone isn’t much cheaper, and most people can’t be bothered to switch.

Tom Siebel, who used to run software maker Siebel Systems, told CNBC that the amount of computing in an iPhone would have cost about $1 billion in 1970. By that standard, that helps people live with Apple’s uncommon pricing power.

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