The $600 iPhone: One expensive blade (as in razors and blades)

The $600 iPhone: One expensive blade (as in razors and blades)

Summary: According to Jagdish Rebello, director and principal analyst with iSuppli, the sky-high prices of Apple's 4GB and 8GB cell phones can't defy gravity for very long. According to News.

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TOPICS: iPhone
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According to Jagdish Rebello, director and principal analyst with iSuppli, the sky-high prices of Apple's 4GB and 8GB cell phones can't defy gravity for very long. According to News.com's Michael Kanellos:

The consulting firm on Thursday released an analysis of what the total component budget will likely be for the Apple iPhone. The $499 iPhone, which comes with 4GB of memory, will likely have a component budget of $229.85. Assembly costs will raise the total manufacturing price to $245.83, according to the analysis.

Meanwhile, the $599 iPhone, sporting 8GB of memory, will have a component budget of $264.85, with a total manufacturing cost of $280.83, according to the report.

The large margins make price cuts inevitable.

"They will cut prices later on," said Jagdish Rebello, director and principal analyst with iSuppli. "It is hard to imagine anyone else getting 50 percent margins for long."

Other manufacturers of high-end multimedia phones get about a 20 percent margin. That would put the retail price of an 8GB iPhone at around $350 without subsidies from the cellular carrier.

Rebello's comparison to other high-end multimedia phones certainly begs the question of whether or not the novelty, user interface, and unique ability (amongst phones) to play iTunes Music Store-purchased content, is worth such an incredible premium when compared to something like Motorola's Q which, although no star performer on the UI front (or other fronts like battery power), meets or beats the iPhone in terms of what it can do (ie: third party software can be loaded on it, it can be connected to corporate email) for the going rate of $99. I'm sure some would say "Yes, it's worth the premium."

Speaking of that premium, I think what you're finally seeing is Apple's high margin razors and blades strategy coming to fruition. As I explain in a post over on Testbed, you may be naturally inclined to think of the iTunes Music Store purchased content as the blade and an Apple piece of hardware like an iPhone or iPod as the blade since, like toner cartridges going into printers, it's the songs and movies that go into the device. But in reality, it's the other way around since the content actually outlives the devices. Sooner or later, Apple's FairPlay digital rights management system would lead Apple to selling higher margin blades to apply to the content collection razor (as well as companion blades like the $300 AppleTV).

Topic: iPhone

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12 comments
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  • Typo

    [i]As I explain in a post over on Testbed, you may be naturally inclined to think of the iTunes Music Store purchased content as the blade and an Apple piece of hardware like an iPhone or iPod as the blade since[/i]

    I think you have one too many "blades" in that sentence. I assume you meant the songs are the razors?
    toadlife
  • iPhone cost

    I cannot argue with the iPhone cost analysis, but must stress that it is speculative (they didn't actually disect one). I would hope the cost includes a powerful processor, since my current phone drives me mad with its 300ms delay on the interface.

    The cost is not just the value of the parts...what about the enginering and design cost? This was a multi-million dollar investment (Apple spent over $1.2B in R&D the last 2 years). Even selling 1M iPhones at a 50% margin might not pay back the development cost.

    It is the elegant interface of the iPhone that has me willing to pay the premium price. Most phones I have used thus far have been frustrating to operate. Just the ability to drop it into a cradle for charge/sync (like the iPod) was enough of a reason for me. Once the R&D cost has been offset by sales, I would expect the price to drop.
    gusbear
  • They forget one critical component

    What happened to the R&D? It took apple 2-1/2 years of development. Why isn't
    that part of the equation. How many man-hours were spent? Do they not deserve to
    recuperate this cost?

    I for one can't wait for the iPhone. However, I can't stand Cingular's service. Thank
    god I can pop in my T-Mobile sim card and all is well, albeit some functions won't
    work. But who cares. I know it's available only for Cingular... for now
    grkness
  • Like a new game console, it's expensive at the start

    no real competitors to force a pricing competition and subject to early adopter lust, it doesn't matter the component costs, the supply and demand hype machine means charge at the fringe of the extreme and make some money before either the hype lessens or competition flares up. What if those CrackBerries began to belt out some tunes, . . would the corporate warriors see a home device in the same vein as of iPhone and would the addiction spread directly.
    Boot_Agnostic
  • High price will help to gear up manufacturing

    One thing that a high initial price will do is to reduce the need to manufacture millions of the iphones right off the bat. A high price will allow Apple to start out relatively slowly allowing them to judge what the manufacturing might eventually have to be. Imagine if the price was $300 at the start. A couple of things might happen. Apple could make millions of units expecting large sales, and they might or might not sell. Another thing that could happen is that they could not keep up with production which really ticks a lot of people off. Pricing is used quite a bit to control sales and I think that may be the reason for Apple's high initial price.
    Prime Detailer
    • ... and help avoid expensive recalls

      These are good points, Prime. Another advantage to starting out slowly is to reduce the expense of working out the bugs that inevitably show up in such a new and innovative product when more and more people start using it. Apple will issue recalls for any serious problems customers have with new models and fix the problems as they ramp up production on later models. Recalls are expensive. If they made millions of them at the start and sold them cheaply, they would take a serious hit if they had to issue a recall to correct some defect and replace or repair all those first run iPhones.

      I bought one of the first all-in-one iMac G5 models and didn't buy Apple Care. When I started having hardware problems 6 months out of warranty, I took it to the Apple Store weighing the alternatives of a large repair bill or buying a new iMac. Apple replaced the logic board at no cost to me because it had a manufacturing defect. They did the same thing for my daughter's 4 year old iBook G4. Yes, I'm a loyal Apple customer. They've earned it!
      PMDubuc
      • correction

        "4 year old iBook G4" was a G3 iBook, of course.
        PMDubuc
  • No, it doesn't "beg" the question

    It may raise the question, but it doesn't beg it. How can we trust your theories or your opinions when you don't know the basic principles of logic and you misuse the English language?
    Vesicant
  • Millions of Apple customers disagree with you, David.

    David, In your quest to save the world from the evil DRM monster, you are viewing the world thru twisted glasses.
    Is there really an evil "master plan" to rape the customers as they are locked in the DRM chains?
    Perhaps Apple is trying to provide value to its customers through good design and an attractive business model.
    Millions of their customers must feel this way.
    No one was forced to buy Apple's products.
    Like all new hi-tech products, the iPhone will start out expensive and then the prices will drop. You haven't told us anything new here.
    With the intense competition in the cell phone market, it is not likely that they will be making such high profits for long and they know it. Again, your theory doesn't make sense, long term.
    As for all those missing features, Apple hears the people talking... see how many features are missing in a few months.
    UncleYitz
    • U$ 600 is the new fashion price - iPhone, PS3, etc.

      And people complains about sony's U$600 PS3 Price, comeone the thing is a blue-ray player and still people don't make their minds about getting it or not, idon't think the army of apple fanboys will drop U$ 600 just to paste an adhesive apple to their car or windows or bike or somewhere.

      Dude usually high prices comes from high manufacturing costs, not some corporate guy (bill or steve usually) thinking a logo (an apple this time around) is worth a 50% extra value. I'll buy a macbook and become an apple fanboy when i can get a nVidia Geforce Go 7900 GTXon it, till then a MacBook Pro is just an expensive toy just as this phone i'll guess i'll keep my music player and CellPhone cause the iPhone is a jack of all trades but master of none. Maybe if apple fits a 30 GB hard drive it'll be worth the U$600 price tag. Other than that it's just an other expensive good looking gizmo. Sony PSP ring a bell anyone...
      yepes4@...
  • Not that surprising

    When Steve Jobs put the prices up on the screen at the keynote, I was a little disappointed. In the past couple years, Apple has really made an effort to sell iPods at a more competitive price level (I guess they didn't have much choice when the #2 DAP maker is Sandisk). Though I had secretly hoped they would do the same with the iPhone, I'm not really surprised.

    I'm sure that most of us still remember how ridiculously high Apple priced the first generation iPod. Combine that with the outrageous prices of even the most basic cellphones, and suddenly the price of iPhone doesn't seem all that bad after all.

    I think the real question should be: once you get that iPhone, will you be able to afford to use it? Looking at the rates for Cingular's data plans, I'm thankful the iPhone comes with built-in wi-fi.

    I don't claim to be a cellphone expert, but after some quick searching, the one phone I could find which seemed to have the most similar features (Cingular's 8525) is pretty darn expensive as well.
    fondy
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