Apple’s Pricing Surprise

The most common question I recovered from the media and financial analysts I talked to after Apple’s event was what stood out most to me. As interesting as a number of things were that Apple released, but one thing stood out to me the most, Apple’s pricing strategy.

Hardware Pricing
Apple has bucked its own trend of hardware pricing in smartphones. The iPhone 11 enters the market $50 less than the iPhone XR, whose place the iPhone 11 takes place in the line. The iPhone 11 has notable upgrades to the XR. It has dual cameras. It also has the updated processor, the A13 Bionic, which enables cutting edge features in computational photography, graphics, and performance. Given Apple’s pricing strategy for the last few years, you would have thought that adding such features would cause them to raise the price instead of lowering it. But, Apple decided to price the iPhone 11 compellingly for the market. There are a couple of ways we can read into this that may shed light on Apple’s pricing tactics in the future.

The first way would be to point to Apple’s success in driving volume in the X and XS/XR products the past two years, and that component ramp allowed them to get favorable pricing for key components which allowed them to lower the price. If this is true, it may be an indication of a new pattern. The pattern we understand, since we now have two major new design cycles to learn from in the move from iPhone 5 to 6 design and then from 6/7/8 design to the X design and those cycles happen in four years. Basically every four years, Apple move to a totally new design for iPhone. With the 6/7/8 designs, we didn’t see too much year-over-year price increase. Then with the X design, there was enough new innovation to bring prices higher due to components and other manufacturing costs. The potential new pattern here is if Apple moves to a new design that costs dramatically more to produce, we may see higher costs the first two years of the cycle then perhaps a lowering of costs once Apple’s component cost curve comes down.

If this pattern is a repeatable one, then it means Apple’s ultimate goal is to bring costs down of the hardware, as the manufacturing costs become more favorable thanks to their scale.

While that is one way to look at this surprising change of direction from Apple on iPhone pricing, the other is Apple reaping the rewards of their services business, and looking to drive more customers to their services and as a result able to offset the hardware margins with services margins and offer their hardware at lower price points. This in no way suggests Apple becomes a services company, only that by having a healthy and growing services business it allows them to give margin in hardware and make it back in services. The result could be a continued strategy of affordable products that bring more customers into the ecosystem and thus contribute to the cycle that allows hardware to stay moderately priced.

On a per feature basis, it will be hard to ignore the value of the iPhone 11 compared to the competition which was already preparing to price against higher ASPs and try to compete on price. Apple has fundamentally taken that strategy away from competitors, particularly those who don’t have many surrounding businesses to cushion themselves as Apple does.

If you look at Apple’s pricing from iPhone 11 at $699, or keeping Apple Watch Series 3 in the market at $199, or the new iPad loaded with features at $329, even the XR $549 and iPhone 8 at $499, it seems Apple is hitting a range of price points with still competitive products in their respective markets. For customers looking to upgrade the prices have never been more attractive, and it’s a similar story for prospective new customers looking to get into the Apple ecosystem for the first time.

The bigger picture point here on pricing is to emphasize Apple is not following the path most people thought which is to keep raising prices and milk their base now that they are locked in. Certainly, understanding the global markets and price pressure is part of it, but by looking to be aggressive on price when the economics line up, Apple is able to pull levers in manufacturing, absorb margin, or look to offset with revenue growth in other areas and continue to price products in ways that competitors can not.

Services Pricing
As surprising as the pricing for iPhone 11 is, the pricing for Apple Arcade and Apple TV+ were even more surprising. The consensus across a range of sources from Wall St. and even Hollywood was Apple would price Apple TV+ at $9.99, and they honestly could have and probably still had a decent conversion. No reports, or industry gossip I heard ever had Apple TV+ priced at $4.99.

For Apple, the strategy for TV+ seems to be coming into view. For more talent to get involved and want to showcase their stories with Apple, there needs to be a sizable viewing audience. While actors and storytellers like money, they also want their stories to be told and seen by as many people as possible. That is why attracting the best storytellers to Apple’s platform is not just about Apple paying more than other studios but having a much wider reach. This is where the pricing at $4.99 makes for a much easier entry point for the masses, particularly since it is a family plan for that price. The other way Apple is cleverly looking to build the Apple TV+ customer base is to bundle it with the sale of an iPhone, Mac, iPad, or Apple TV. Basically, if you buy a device you can watch Apple TV+ on then you get it for a year free.

Apple told me this is a limited-time offering, but there is no timeline for when it would expire. My gut says they offer it for at least the next six months, although, I’d encourage them to offer it for the next year. If Apple let this promotion for run for a year they would sell over 200 million of products that would get the Apple TV+ service for free, and if even 50% of those start watching the content they would have a view base almost as large as Netflix and larger than Amazon Prime in less than a year. That is a pretty compelling user base to keep attracting the best Hollywood talent and storytellers to Apple TV+.

With $4.99 being the price for a family, up to six people, it would be hard to estimate just how many individual eyeballs Apple TV+ is reaching. Apple would likely know this, and it will be interesting what statistics they share with content producers in order to keep them interested. But the pricing here certainly makes it feel like there is more subscriber upside than many initially thought and that bodes well for Apple and Apple TV+ as a service.

The other new service launch was Apple Arcade. To be entirely honest, I had pretty low expectations of Apple Arcade going into the keynote. We did some research last month, which we used as a feeler for interest in both Apple TV+ and Apple Arcade, and Apple Arcade stood out as the one with very little interest and excitement. However, after seeing a number of the games available, and the $4.99 price, I’m now much more optimistic on Apple Arcade.

The way I started to think about Apple Arcade was that Apple is in many ways doing what Nintendo has always been good at. In fact, I think internally, using Nintendo as a model is exactly the strategy for Apple Arcade. Some of the best games produced by Nintendo are a cinematic story like experiences. Zelda is a great example. Apple is presenting these games in many of the same ways that you have seen Nintendo showcase their games which have great storylines and a cinematic feel. Apple also feels like a game studio as well now, in that they are essentially purchasing these games for exclusivity and publishing as well as providing the underlying developer tools and hardware. This has long been how game consoles have thrived, and Apple is taking many of those components and integrating them for their ecosystem of hardware.

While not all the 100 games, at launch, will be playable cinematic stories, the ones Apple spotlighted did have more of the story feel. Which keeps their theme for both Apple TV+ and Apple Arcade consistent in that humans like great stories and with Apple TV+ you can watch those stories, and with Apple Arcade, you can play them.

I think Apple Arcade will do much better than many originally thought, and in particular with the younger demographic and it may as well be extremely well-positioned for Asia and China in particular.

If you take a step back and look at the whole picture, there is quite a compelling story for Apple’s products, software, and services ecosystem. There are hardware options galore at varying price points, marketplaces, commerce, and services of all kinds. From the Apple customer perspective, there is deep value in this ecosystem and whey, and I’m confident Apple’s loyalty will remain high for many years to come.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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