I usually agree with with John Gruber over at daringfireball.net. He’s got a good head on his shoulders. But I can’t agree with his consistent defense of Apple’s recent $200 iPhone price cut.
In a recent entry, he points out what he thinks is an inconsistency with Silicon Valley Insider’s position against the iPhone price cut and their suggestion that Hannah Montana charge $200 instead of $63 for her concert tickets. The idea is that because the tickets are being scalped for prices over $200 anyway, it’s better if the money went to the people actually involved in making the music, rather than scalpers. Gruber says that this is what Apple did with the price of the iPhone. I’m not going to touch the issue of whether tickets should be more expensive (I can’t help but think there are better ways to stop scalping). But I do take issue with the idea that Apple’s pricing strategy was somehow a reasonable choice designed to keep demand from outstripping supply.
Chris Biagini has summed up my reaction to the price cut perfectly (emphasis is mine):
Those of us who’ve already bought an iPhone knew full well that they’d be hot sellers, and that Apple was making a killing off of them at $599. But this price drop shows that Apple was making more of a killing than anyone could have possibly imagined, more than anyone could have possibly thought was fair. I mean, you could probably figure out the raw cost of a pork belly, but an iPhone is a little harder to pin down. In other words, everyone assumed that the iPhone was priced more-or-less as fairly as Apple’s other products and made our valuation decisions accordingly—and we were wrong.
Assuming that the iPhone and iPod touch are now priced more-or-less as fairly as Apple’s other products, this means one of two things happened:
1. Apple gambled on the crazy-high initial price tag and lost.
2. Apple knew $599 was not sustainable if they wanted to meet their sales goals, and they knowingly screwed over the early adopters.
Either way, Apple tried to screw over customers—it’s just a matter of how many. Personally, my money is on Scenario 2. Scenario 1 would require that they underestimated the iPhone’s sales potential. Given Apple’s experience in introducing high-demand products, this seems unlikely. That leaves Scenario 2, which I think is actually a little worse. Both send a big “Thanks, suckers!” to early adopters, but Scenario 2 is just a little more evil.
Remember how Steve Jobs bent over backwards during his keynote to emphasize that it was reasonable to charge the same for the iPhone as what people paid for a smartphone + iPod? I myself defended the price, citing the long development time and other costs that Apple had to recoup, and Gruber himself said that if anything it was too low). We’d never seen anything quite like the iPhone, so it was hard to compare it to other products. We thought we were paying a fair price for the product (fair, at least, compared to Apple’s other product lines). The bottom line is that the early iPhone adopters had no idea that we were paying a $200 premium for getting the iPhone a few weeks earlier than everybody else.
However, I disagree with both Biagini and Gruber about one thing. I have a lot of trouble believing that Apple had a price drop (at least of this magnitude) planned from the start — even if they say so themselves. Not because Apple is too nice to screw over their customers, but because they are too smart not to know how people would react. I think it’s likely that iPhone sales simply weren’t as good as they had hoped. Yes, they were selling well, but not “Nintendo Wii” well, and not as well as you might have expected given the amount of excitement before the launch. Apple knew they couldn’t go into the Christmas season with sales as they were (and keep in mind that most of the hardcore Apple lovers had already bought theirs, so if anything sales were going to go down from the initial numbers). They decided that a drastic price cut was their only choice. I just can’t believe that Apple would plan to slash the price only two months after the iPhone’s release if it really had been meeting all of their sales goals. It’s never been done in their history, and it would take a remarkable tone deafness to their customer base not to know how a move like this would be received by their users and by the press. I imagine that they had the $100 store credit thing as a backup plan in case the reaction was worse than expected (and indeed, it threatened to overshadow the introduction of the new iPods.
By the way, I still love my iPhone (and the iPod nano that I paid for mostly with the $100 store credit is also nice).