Understanding Apple’s iPhone ASP

Apple’s ASP defies the logic and assumptions so many have built up over the years. In fact, I could argue the smartphone, in general, is continuing to defy the logic of many but even within the smartphone market, the common sentiment (note I did not say common wisdom) was that the market would commoditize like all consumer electronics categories do as good enough products and low-priced products and vast competition in the lower price tiers would create a race to the bottom.

This is the theory most business schools teach, most business consultants abide by, and many pundits agree with. In fact, some will argue (and I’ve had these arguments) that from a pure disruption theory standpoint Apple has been disrupted. Their logic is that Apple is doing what all disrupted players do and entrench in the high-end. What many of these disruption theory fundamentals don’t reconcile is their positions require that the disrupted company loses a chunk, if not the majority of their customers to the low-end players. Their position can not account for Apple’s growth of new customers, often from those lower-price tiers, and the simultaneous ASP increases at scale. In line with this point, I found this tweet entertaining.

It is the scale part that is confounding to many. What Apple is doing in getting customers to move upstream is not uncommon in pockets of a market. It is, however, extremely uncommon to do so at the scale which Apple is achieving. But what might be most interesting to this conversation from a business theory perspective is how Apple alone seems to be the only one pulling off raising ASPs.

Open Vs. Closed
Part of the understanding that needs to occur is related to some new dynamics we are observing in the open vs. closed systems debate. Many of the assumptions about the race to the bottom theory have been made using business examples, not consumer ones. This is not to say the dynamic does not happen in consumer markets; it does, we are just learning more about what categories are isolated and which are not. For example, TVs are subject to this dynamic, but smartphones are not.

But we also have to understand that the typical theory of open systems always winning and killing closed systems is not always true. Not only is it not always true, but it may also very well be true much less than many business theory experts understand. While new enterprise case studies are showing up where closed systems are gaining traction, the best example we have in consumer markets is the smartphone market.

What I find most interesting about this, and ASPs are a core part of the dynamic, is the difference in ASP performance the last quarter between Samsung and Apple.

In the last quarter, Samsung had weaker than expected earnings largely because of struggles in the smartphone unit. Samsung’s smartphone sales volume was not dramatically lower; rather their ASP mix skewed much more heavily toward the low-end. Essentially, Samsung higher ASP phones are struggling to sell, and they are selling more lower-priced phones.

In the same quarter, Apple successfully increased their ASP, in a quarter that typically skews toward more price sensitive buyers no less. Explaining this is where many business and market theorists will be challenged. What’s more, if you take the tweet I mentioned above and apply it to what happened, the low-priced Android smartphones (race to the bottom) has notably impacted Samsung and not Apple. Now, Samsung will likely have better ASP quarters ahead, but in general, they are struggling to keep market share in certain price-sensitive markets, and the result is a continual pricing battle Apple is immune to.

While I’ve made this point and observation before, it is worth repeating that the sole reason Apple doesn’t just maintain ASPs but also increase them can be summed up with one word–exclusivity. I use a broad term as exclusivity, where most would just point to Apple’s monopoly on iOS because it is not just iOS that Apple has exclusivity with. They have exclusivity with some of the world most advanced semiconductor components, an unprecedented exclusive retail experience and reach for a consumer brand, amongst other things. But this point, is about all the things Apple has combined together as a package that delivers consumers an exclusive experience they can’t experience elsewhere. This, at its root, is why Tim Cook and Apple management can make such statements like “things only Apple can do.” Apple’s ability to layer exclusive things into their products is among on of their strongest competitive advantages.

The business takeaway here goes deeper than differentiation because differentiation alone does not create a dominant market position. That differentiation must be built on fundamentals that are exclusive to your company or product. We advise many of the biggest tech companies in the world, so I understand how this is not always the easiest thing to do. However, one constant I’ve learned is the earlier you can integrate an exclusive advantage into your business or product the better.

Stepping back to take the thousand foot view for a moment, I do think we are in a position to offer fresh critique to many entrenched business theories and in particular around the assumptions often applied open vs. closed systems. This is worth addressing in a dedicated analysis at some point in time, but that will have to wait. Until then, simply appreciate how Apple has defied all conventional business and market logic as they approach their journey has spanned near bankruptcy to soon be the first company with a market cap of one trillion dollars.

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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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