Lessons Learned From the iPhone Price Cuts

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Like more than a few iPhone users, Paul Forrester couldn't believe his ears last Wednesday when Steve Jobs ended an Apple press event by announcing a $200 price cut to the iPhone. The price cut came a little more than two months after Forrester and other iPhone early adopters started plunking down as much as $599 for the newly released mobile device.

"I'm a bit put off by it," said Forrester, a San Jose, Calif.-based technology executive and Mac user for more than 20 years. And Apple's subsequent decision to offer a $100 credit in the wake of angry feedback from early adopters did little to soften the sting for Forrester.

"Giving me $100 credit in the Apple store is kind of a yawn for me," said Forrester, who expected iPhone prices to fall at some point though not by as much as they did last week. "I still have to go spend money in the store-it's not a true rebate. They aren't really giving me my money back."

The entire episode, which began with Jobs' announcement Wednesday and culminated in Thursday's $100 credit, has been a revealing experience all around-for Apple, which learned the peril of introducing steep price cuts so soon after a high-profile product launch, and for early adopters, which learned that such cuts are standard practice in the mobile phone industry.

"The price cut was not a surprise," independent telecom analyst Jeff Kagan said. "This is the way the cell business works - it's the way it has always worked. I don't understand where all the complaining is coming from."

Early iPhone buyers, who flooded message boards and Steve Jobs' inbox with complaints about the price cut, would disagree. For some, it was the prospect of paying $499 or $599 for the 4GB and 8GB models, only to find an 8GB iPhone selling for $399 so soon after the iPhone's June 29 launch. For others, like Bob Prescott, it wasn't about the money-rather, as he explained to Macworld, it was more about the feeling of being taken by Apple.

Too much, too soon?

Price cuts may happen in the world of cell phones, but a tech-industry analyst argued that the size and timing of the iPhone's price cut were what set many users off.

"[Apple] definitely should have seen this coming," said Roger Kay, president of market-research firm Endpoint Technologies. "The first questions on everyone's lips were ones Apple should have asked before they announced the price cut. I think it was too much, too soon. Introducing a product at a premium price and then discounting it makes sense, but not after two months and not by one-third."

Still, other analysts felt that any price cut announced at any time would have generated complaints from early adopters. "There are two groups of people," said Gene Munster, a senior analyst with investment-banking firm Piper Jaffray. "The first wave doesn't care because they knew what they were getting into. The second wave is pretty upset, but with Apple everyone has an axe to grind. Whether it's a battery or a screen, it's always something.

"If they [consumers] don't like the fact the price dropped, they will hate it even more in a few months," said Kagan the telecom analyst. "If you look at every major phone in the market, you'll see the same thing."

Take Motorola's popular Razr cell phone, Kagan added. That phone debuted with a $500 price tag. Within months, Motorola starting dropping the price and now it can be purchased from AT&T with a two-year contract for $49.99.

The Razr is not a great comparison, Kay contends, since Motorola dropped the price in the face of fierce competition from rivals. "Apple did this without anyone in the market against them," he said.

Still, price cuts are not unheard of for Apple offerings. The first 5GB iPod sold for $399; within a year, its price had fallen by $100 and a model with twice capacity was available for the same asking price.

Kagan has another theory on why there was notable outrage among iPhone users. "People that have traditionally not spent the full price on a new phone rushed out to get it," he said. "They were caught up in the swell and hype, and they did it. Maybe they were not the kind that would have spent that kind of money on a new phone if it wasn't from Apple."

However, Kay says that Apple should know its customers and their reactions: "The problem with the Mac faithful is that they have that type of personality-if you disappoint them, they can turn on you."

Why cut it now?

Besides a torrent of complaints from angry iPhone users over the $200 price cut, Apple also has faced speculation that the steep price reduction was in response to lower than expected iPhone sales.

Not true, according to Apple. In announcing the cut, Jobs said Apple was trying to spur holiday sales and predicted that Apple would meet its stated goal of selling its 1 millionth iPhone by the end of September. Indeed, the company hit that milestone Monday. According to tracking performed by Piper Jaffray's Munster last week, Apple could approach 1.1 million iPhones before the quarter ends September 30.

"Apple's take on this is that they have best phone in the market, so why let competitors get in there when they can stop them," Munster said.

If sales are tracking higher than expect, why would Apple cut its prices so drastically? The holiday season is upon us and Apple intends to take full advantage of that.

"Just as the holiday fourth quarter has been a massive season for the iPod, Apple is clearly positioning the iPhone to take advantage of that same opportunity," said Ross Rubin, director of analysis at market-research firm NPD. "It's a huge opportunity for them."

It's all part of a cycle that all cell phone makers go through, Kagan explained-Introduce a product at a high price; drop the price; introduce a new product at the former high price; and then drop the price of the older models even more.

Price cuts to continue

For that reason, don't expect this to be the last time iPhone prices and features change dramatically. "This is a way of making the phones interesting and available to more customers," Kagan said.

As for this current price cut, analysts don't expect the initial anger to last. "As long as Apple has the best products, people are going to keep coming back," Munster said.

Indeed, the iPhone owners Macworld spoke with seemed ready to move on. Prescott says he's happy with Apple's $100 credit, but even happier that Apple listened to its customers. He plans to keep buying Apple products in the future.

Forrester feels the same way. "The only reason I'm not buying another one right now is because I'm waiting for the next version," he said.

This story, "Lessons Learned From the iPhone Price Cuts" was originally published by Macworld.

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