One of our first thoughts when the iPhone was announced was, "Have U.S. gadget makers learned nothing from the PS3?" You would think companies would get a hint (hint: the average American consumer gets priced out of the gadget market at around $500), or at least avoid Sony's PS3 price point blunder for karma reasons.
Then we heard that Apple ominously copied the PS3's stellar price point strategy with a $499 iPhone and a $599 model with a bigger hard drive, all before signing your soul over to AT&T. That's it, Steve Jobs jumped the shark, or had some vestigial impulse left over from when he was charging $4,000 for high-end PowerBooks and not considered the iJesus of tech. Remember, Apple was copying the same price poinit strategy that in one product generation singularly relinquished dominance of the home console market.
One teenie difference that sets Apple apart from Sony in this case is that Apple is unloading the iPhone at double production cost. The more expensive iPhone costs $266 to make, with 13 components spread across 9 manufacturers. Samsung provides 3 chips and accounts for 31% of component costs.
The PS3 is a different story with an initial production cost between $800-$850 depending on the hard drive. That means that Sony takes at least a $250 hit per unit. The Wii, on the other hand (is fun?), you can grab for $200 in Japan, and Nintendo turns a per console profit.
The iPhone is selling well and has had a successful opening weekend. Analysts have opening weekend iPhone sales pegged somewhere between 500k-700k units, beating the 200k estimate some predicted. Apple will sell 4.5 million units by year's end and a bajillion (30 million) units by 2011, according to ISuppli estimates (you know it's unbiased because the "I" is capitalized in a totally Apple agnostic way). That's certainly impressive for a new product, but the iPhone is an expensive new product that had an unprecedented marketing push and is trying to break into a completely new market. And it's not clear that the iPhone is a desired substitute for the 100+ million iPods out there. That's why Apple needs to slash prices significantly (which many analysts are expecting fairly soon).
To put things into a mobile telecommunications market perspective, Nokia shipped 91 million units in the first quarter. In order to penetrate the cell phone market in any meaningful way or provide a more digestible iPod replacement for when your Mini breaks, Apple will have to get used to thinner margins (and probably thinner than the 40%+ made on most iPod models).
Pricing items at approximately double production costs seems to be the Apple benchmark for new product launches. The video iPod, for instance, cost $150 to make and started retailing for $299.
Apple's IPhone Sells for Double Costs, ISuppli Says [Bloomberg]
Posted by , Jul 03, 2007 10:10AM
I'm surprised that there's been no coverage of the possibility that the iPhone could cut into Apple's iPod sales. I'd be interested in any articles discussing that possibility and its impact on Apple's stock price.