Early Adopters Pay for Bragging Rights

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iPhone customer Eunice Woo.
Photograph: Robert Cardin
 When Apple announced a massive price cut on the iPhone only two months after its introduction, the company didn't merely upset its loyal fan base: It very well may have signaled a sea change in the economics of early adoption. And as a result of this change, being the first with the latest tech toy is becoming a fleeting experience--one that may or may not remain just as sweet.

Ask Eunice Woo, who waited 3 hours in line at an AT&T store in Daly City, California, to became the first iPhone owner in her group of friends. Woo is still fuming at the memory of Apple CEO Steve Jobs announcing that the 4GB model she bought for $499 was roadkill on the road to progress. Apple now offers only the 8GB phone for $399--a full $200 drop from its launch price.

"I felt really angry at Apple, and I still do--I could have had an 8GB phone for only $400," Woo says. "When someone tells you that what you just bought from them isn't really worth the price you paid and they don't even offer it anymore, you feel cheated."

Unusually Early Price Cut

Most early adopters understand that they are paying a premium, but they expect their bragging rights to last for more than two months. While Woo welcomes Apple's offer of $100 credit toward purchases at any Apple retail or online store, she would have preferred a trade-in offer that would let her get the 8GB model without taking a big loss on her 4GB unit.

Roger Kay, president of market research firm Endpoint Technologies, agrees that the iPhone price drop was unusually early and large. "Normally, early adopters ought to get about six months to run with a device before the vendor drops the price," he notes.

Kay believes that Apple needed to goose iPhone sales to recoup more of its investment in the touch-screen technology that is now also available on the iPod Touch.

"The strategy was right; the tactics were lame," Kay says of the price cuts. "It's all a matter of timing. [Apple] could have waited a bit to bring on the next round of products."

Chris Crotty, a consumer electronics market analyst at iSuppli, says savvy consumers should expect what Apple did with the iPhone--albeit with less severe price cuts--to become the norm.

"The time it's taking to develop products is coming down, and that's going to put a lot of pressure on companies to think about their pricing differently," he explains. But this trend can be good news for consumers.

"For example, during the last few years the price [and] product competition was so intense in the digital camera market that some of the companies...took losses for the first time. Consumers benefited from the [rising] quality of digital cameras and the whole emergence of digital SLR," Crotty says.

Phones seem particularly prone to big price cuts. The Razr V3 cell phone from Motorola debuted in late 2004 with a $500 price tag, but within months Motorola started dropping the price due to competitive pressures. A new version of the Razr launched in August--and AT&T sells the old one for $50 after rebates and with a two-year contract.

"This trend is going to continue--most consumers don't realize that most of this [price-cutting] is driven by the rapid advances in semiconductors," Crotty says. As semiconductors become more powerful and standardized--more than 20 MP3 players on the market today use the same basic chip, for example--it's easier for electronics manufacturers to add desirable features.

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