It’s no longer driven by what carriers want. It is driven by what consumers want. Consumer demand for Apple’s phone has driven profits way past Nokia in a few short years. Despite its small market share.

The consumer does not care about carriers. They hold those brands largely in contempt. They just hate some less than others. And if Nokia are indeed tied to the demands of carriers, then instead of avoiding the icebergs they are tethering their ship to them.

Plotting lines on a graph does indeed reveal increasing sales of so-called smartphones for Nokia. But these devices are not the ones that matter. It is only the N-Series devices that are a competitor for iPhone – and N-Series sales are declining as rapidly as Nokia’s profits.

This is not a co-incidence. Only the N-Series class of devices are really capable of delivering substantial profits.

So while extrapolating lines on these graphs will tell you that in 18 months time Nokia will be selling even more smartphones.

But those same extrapolations also say that Nokia will be trading at a loss.

C.

I look at the iPhone as a super iPod Touch (better cameras and range with 3G). The phone is free.

I barely use the phone. Always been that way. But I have to have a number and a line available for the times I do require a phone (and when I require it, I *really* do require it — calls with family, job phone interviews, etc.)

I have to pay for phone service anyway, and it has to be cellular, too (land lines are not an option since they became useless about a decade ago with all the telemarketers out there.) So I summarize up the iPhone this way:

1. The iPod Touch portion is what I really paid $300 for.
2. I don’t count the cost of the phone service contract since I’d pay that anyway out of my personal “overhead” budget. This is an expense to me whether I got an iPhone or any other device.
3. The phone portion therefore is free.

Maybe not the most astute or correct analysis, but that’s how I view it.

I am presuming that the iPad simply hasn’t gone on sale there yet. Now that store.apple.com is offering 24 hour shipping on iPads, I would guess that supply is starting to catch up to demand and Apple will start opening new countries for the iPad shortly.

So far the iPhone, the locking/exclusivity is a problem in some countries but not others. In Italy and Belgium for instance all iPhones are sold unlocked — locking would be illegal. Plenty of countries have banned carrier exclusivity as well — France for instance.

And neither of them comes close to competing with an iPod Touch as a general purpose device. (Both are superior platforms for pure gaming, however.)

The DS is a joke for anything but gaming. The PSP has more power, but lack of both a keyboard and a touchscreen makes it a bad, bad joke as an internet appliance.

(And the “iRiver Plus4″? Not a product. It’s software.

The various iRiver products don’t seem real impressive or nearly as well-reviewed. Like the P7? Costs $169 with 8GB, has useless software [according to CNET], and doesn’t even have WiFi or bluetooth.

(And it has a proprietary USB cable. Just like the iPod does, but without the advantage of being able to buy one anywhere because it’s amazingly popular. So it’s a negative in a much more dramatic way…)

Yes, it’s a lot cheaper than an 8gb Touch. And I’d feel ripped off, in comparison, if I had one.

There’s a reason they’re not sweeping the market and putting Apple to shame – and crappy UI is it.)

The AT+T contract is, indeed, a pretty grim option, but it’s better than no phone.

There’s a reason they sell like hotcakes.

iPhone was introduced and defined as a multi-touch iPod, phone, and internet communicator; apps were later added. Are there now distinct markets that want different physical/pricing configurations but still include all 3 (or 4, apps) elements? Maybe if the new nano is a superhit, Apple may think about releasing a phone and music player (just 2 elements). From another perspective, does iPhone 4 add a 5th element with Facetime and HD video recording; or is that just an adjunct like video was to the iPods?

For now, I think the older 3GS is just a “pricing” play by Apple – it allows Apple to have a lower starting price, makes the iPhone 4 not seem as expensive in comparison, puts pressure on cheaper competitor phones, and gives Apple some time to roll out iPhone 4 thruout the world (i.e., South America, Africe: 3GS is not obsolete!). And it gives the user a choice, but not a complex one.

HTC is actually closer to the green quadrant than to the red, but still in the middle (yellow) cluster.

“Imagine I give you a choice. Do you want to go for a weekend to Rome? All expenses paid. Or a weekend in Paris? All expenses paid. Now, these are different things. They have different food, different culture, different art. Now imagine I added a choice to the set that nobody wanted. Imagine I said, “A weekend in Rome, a weekend in Paris, or having your car stolen?” It’s a funny idea. Because why would having your car stolen, in this set, influence anything? But what if the option to have your car stolen was not exactly like this. What if it was a trip to Rome, all expenses paid, transportation, breakfast. But doesn’t include coffee in the morning. If you want coffee you have to pay for it yourself. It’s two euros. Now in some ways, given that you can have Rome with coffee, why would you possibly want Rome without coffee? It’s like having your car stolen. It’s an inferior option. But guess what happened. The moment you add Rome without coffee, Rome with coffee becomes more popular. And people choose it. The fact that you have Rome without coffee makes Rome with coffee look superior. And not just to Rome without coffee, even superior to Paris.”

The older (3GS) model is “Rome without coffee” and competing products are “Paris with coffee”. By offering “Rome without coffee” Apple guarantee higher orders for “Rome with Coffee”…

From: http://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions.html

Thanks Horace!!!

2) you’re clearly innocent of everything involved in being a very large company trying to organise manufacture, distribution and servicing of a consumer item such as a smartphone or tablet. You might see if you could learn something on the topic (there’s a whole web with management tutorials and case studies out there) instead of waffling on.

3) saying things like “I remember reading that..” really doesn’t cut it when you’re posting on the web and a search engine is a new browser tab or window away where you could find a link to your evidence (such as it might be).

http://www.asymco.com/2010/06/16/iphone-4-asp-is-600/

And after all this you still do not buy, well then Apple can wait for you to succumb, as they are not in a hurry to lower prices because Apple sells every iOS device they make. And if you don’t succumb, there is a buy 1 get 1 free Android device waiting for you at Verizon.

“Talking about iPad I think that the best solution distribution-wise would be roll out them online globally, with global warranty. Because, if judging by the original iPhone, the shortage in the US was artificial, not real.”
Oh conspiracy theories abound! Look Apple have rolled out the iPad to the places they can service in the order they can service them. Artificial shortages is a myth. How many other companies who released a phone this year or a tablet this year managed to ramp up production as quickly as Apple have managed?

You may think that Apple have managed distribution badly but honestly you are completely misreading what is happening and painting the whole thing with your ideas.

As for the “churn,” the tremendous investment many if not most iPhone users will have in iTunes media and apps is another disincentive to change brands. With both the huge range and generally high quality of Apple’s apps another phone would have to be pretty damn good to seduce me away.

The conclusion that Apple is deliberately limiting the iPhone’s market share is rather premature when you look at their growth rate of 65 % over the last twelve months (or 80 %, purely in terms of sell-through). For now I would much rather argue that they are expanding production as fast as possible and price is dictated by that supply limit. Apple’s strategy may very well be to keep the iPhone growing by 50 %+ per year for the next 5 years, and drop prices only when that goal is in danger.

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Even if a year-old 3GS iPhone is objectively better than a new Android phone, many people would rather have the new Android. They just assume that if the iPhone is a year old, it’s not much good anymore — it must be too slow, and the screen probably isn’t good, you can’t update it, etc. The fact that it’s directly comparable to a new iPhone 4 makes it look bad.

There are lots of people who buy new (but mediocre) bicycles at the shopping center for $129 when they could obviously get a much better bike, used, for the same price.

A majority of people in the world buy mediocre cars, eat mediocre food and so on, just because their self-image is of someone who lives “reasonably”. These average men and women don’t go to nice restaurants, and even in mediocre restaurants, they don’t order the most expensive dish (though they could easily afford it), just because they’ve accepted their fate as someone reasonable. As long as the iPhone is the most expensive phone, it’s going to be off the table for this (vast) group of people, who think “the iPhone is nice, but I don’t deserve it/can’t afford it”. These people have historically been Windows buyers and are now Android buyers.

Apple will never be able to convince these people that their phone is better — these people know it’s better but it’s because of that they they won’t buy it. Apple could combat this by making a better, more expensive phone, just to make the normal iPhone seem like less of a luxury, or by creating a less-expensive telephone to sell to the masses. However, historically Apple has shown little interest in pursuing this part of the market — it would be like Mercedes targeting Chevrolet buyers.

Apple’s ability to maintain high margins has been consistent over time and over multiple products. I think there are 3 main reasons:
1) Product differentiation. Through hardware, software and multiple product integration (ie, macs, iPhone, iPad, iTunes, iWork, MobileMe, etc all feed into each other) and Apple’s unique flair with design, marketing and support, Apple continues to provide lust worthy products which appeal to large numbers of people despite a mild price premium. Apple speaks of increasing value to customers which includes intangables such as user friendliness, the genius bar, etc etc. It’s because of this increased value that Apple can maintain high margins while others have to fight a war of price.
2) Ironically I think mid-priced and cheap Android products are going to provide huge price pressure on the upper end of the Android market leaving this high margin section of the market for Apple to dominate. As in the PC market, most Android oriented consumers will not have to pay for the upper end Android products when they can get essentially the same phone minus some questionable “high end” features for a lot cheaper. And like in the Win-PC market, if you want an Android phone you can get a cheap one, if you want an Apple product you’ll pay the exclusivity price. Apple has shown they know how to pull this off and maintain high margins.
3) Apple have a purchasing power advantage. Android is not a company that buys physical parts. HTC, Motorola, etc are. Android may well surpass iOS in sheer numbers but when it comes to making a profit on phones its how many chips and boards and buttons and screens you buy which determine your price.

First thanks for a great blog. Now I have four great blogs I read rather religiously: Daring Fireball, Roughly Drafted (wish he would post more), Counternotions (same wish here) and this blog. This is on top of other great content from other “Apple Press and people”. I found this blog via Philip Elmer-DeWitt and John Gruber; I thought I should mention that.

Thanks for the graphs. I download them for future use and copying for my own projects.

Apple is not going to cut margins for a very long time. Here is why:
Apple sells the iPhone as a premium device. Market share is secondary. They are undersupplying the market by 40 – 80%. There is huge pent-up and unfulfilled demand for iPhones and this will remain so for years. This allows Apple to charge what it thinks is the right price for its wares.
This undersupplying guarantees that the iPhone will almost always sell out. No obsolescence to deal with for carries. No huge marketing spend to move the devices.

Obsolescence and distressed stock is one of the biggest costs for telecoms companies. With iPhone, you do not have to deal with this at all. On the other hand this is already the biggest problem with Android devices: they cost telecom companies serious money. This forces the telcos to negotiate harder on the cost of devices and later for marketing help to move the devices.

iPhone generate the highest ARPU of all mobiles OSes 2X higher than an Android device. Lastly iPhone has the lowest churn.
All Apple needs to do to keep its high margins is to continue to innovate faster than Google, keep the phone a premium device, everything else follows. For the telcos a device with high cachet, high ARPU, low churn, and no obsolescence deserve every penny you pay for it.

But one thing at concerns me is that the tipping point may be reached earlier due to the mad rush to catch up and by market flooding.

Thanks for the analysis.

This has nothing to do with competitive pressure. If Android vendors are able to do the same thing they will also see healthy growth. (see also RIM vs. Apple)

Furthermore innovation is not quantifiable (i.e “more innovation” is meaningless). Innovation is measured by its effect.