New Zealand Law Society - Why are iPhones so expensive?

Why are iPhones so expensive?

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By Damian Funnell

And should I be paying so much?

Commoditisation has been a constant since the dawn of the tech era.

Until the advent of the iPhone it never mattered how innovative or advanced a product was – the market would always catch up. The clones would arrive and prices (and margins) would plummet.

Sony charged a fortune for the Walkman and sold millions of units, but only until the clones arrived and the portable tape player became a commodity. IBM made billions selling PCs before Compaq and a slew of other competitors commoditised the PC industry and drove profit margins into the low single-digits.

If I put my mind to it, I’m pretty sure I could come up with a thousand examples of where innovative, high-margin products have been commoditised over time. Hell, even space travel and self-driving cars are in the process of being commoditised – before any of us have even experienced the ‘high margin’ versions.

Before the iPhone every product or technology faced eventual commoditisation. Every break-out product was soon dragged back down to earth by the gravity of commoditisation and copycat products. They all soon lost their technological lead and brand kudos and their manufacturers were forced to slash margins and/or move on to other inventions to stay relevant.

Every product, that is, except the iPhone, which is actually getting more expensive over time. Apple is making more profit on each iPhone sold year on year and this is truly remarkable. Apple has figured out how to defy gravity.

Customer loyalty

Apple has generated such fierce (some would say blind) customer loyalty that they can put their prices up with each new iteration of the iPhone while maintaining sufficient sales volumes to push profits up rather than down. This is with a product range that’s now over 12 years old – several lifetimes in the tech world.

This loyalty is even more remarkable when you look at how badly Apple treats its customers. They hike up the prices of their phones, they slow their phones down with successive software upgrades to encourage users to upgrade (the firm was fined €25 million in 2017 by France’s competition and fraud watchdog for doing exactly that, and according to a report in the Sun newspaper it was still doing it in late 2018). They’re also notoriously hostile to third party repair agents so they can maintain high margins in the repair industry.

Despite all this Apple devotees remain loyal and the numbers are staggering. According to Forbes, Apple captures about 32% of global mobile phone revenues but an astounding 66% of industry profits. These numbers are made even more remarkable when you consider that Android devices outsell iPhones by almost four to one worldwide.

The iPhone is already the most successful product known to humankind – one that propelled Apple into being the first trillion dollar company (in USD, by market cap). The influence of the iPhone is so great that competitors such as Samsung have been able to increase the margin on their premium smartphone ranges too, but only due to the iPhone effect.

Has it peaked?

Personally, I think the iPhone has peaked. The iPhone 11 sold very well upon release, but this is in the context of softening global smartphone demand as markets become increasingly saturated and consumer refresh cycles (ie, the length of time we hold on to our phones) lengthen. iPhone sales volumes have been flattening out for years. Apple has been releasing new models at a frenetic pace to try and counteract this softening demand, but there’s less and less to differentiate each successive model from the last.

Although Apple’s consumer loyalty remains incredibly strong and they have done an excellent job of attracting users into their cosy ecosystem of services (such as the App Store, iCloud, etc) they have struggled to keep up with the unrelenting pace of innovation in the smartphone industry.

Yes, you may get three cameras, Face ID and fast charging with your $2,900 (say that out loud – two thousand, nine hundred dollars) iPhone 11 Pro Max, but so do I on my $1,100 OnePlus phone.

In fact, Apple has trailed the market in hardware and software innovation for years. The iPhone redefined the entire smartphone industry in 2007, but it’s highly unlikely that Apple will ever lead innovation in this space again. This is making it harder and harder for them to differentiate the iPhone in an increasingly competitive market.

Putting prices up was a stroke of genius for the short term, but it’s not sustainable. There’s only so far they can push that strategy before even the most devoted iPhone lemmings stop paying so much for their handsets. Also, even the mighty iPhone is not immune to the forces of gravity. Unless Apple can out-innovate the clones, commoditisation will catch up.

So, why are iPhones so expensive?

Because demand for iPhones is relatively inelastic. Apple’s incredible brand loyalty has meant that consumer demand hasn’t fallen significantly, even as iPhone prices have risen.

But brand loyalty is a funny thing. Many iPhone users will read this article and think: “this guy just doesn’t get it ... if he used an iPhone he’d get it!” But I do get it. We’ve all experienced feverish brand loyalty and when we do, we couldn’t possibly imagine using anything else. Ever!

But it doesn’t last forever. In fact, often the more extreme the loyalty the faster public opinion can turn against a once loved brand or product. Many of us were evenmore loyal to our Blackberrys back in the day and we all know what happened to those.

Should you be paying so much? That depends on your values.

If you value the kudos that goes with an almost three thousand dollar phone then maybe you can justify shelling out that kind of coin for a device that’s worth a fraction as much.

If you’re less worried about status but want to remain an iPhone user, then for goodness sakes buy a cheaper one. The iPhone XR is still a very capable and beautiful phone and you can pick them up for about $1,100.

The alternatives

If you still want a premium phone that’s not a generation behind the status quo then consider switching to Android. Forget the Samsung range – premium Samsung phones seem almost as overpriced as their iPhone counterparts.

Take a good long look at brands such as OnePlus, LG and OPPO. Huawei still makes fantastic smartphones, but I’m reluctant to recommend them given Donald Trump’s trade ban.

I think you’ll find a variety of beautiful, easy-to-use phones that are packed with features and that have amazing cameras, but that are much more reasonably priced.

I for one switched to OnePlus because I refused to hand over $2,100 for the latest Galaxy Note 10+ and, apart from missing wireless charging, I’ve never been happier with a new smartphone. The OnePlus is fast as a cut cat, it has a beautiful screen and a triple lens camera that is simply amazing.

Above all else, take your time and do your research. We hang on to our phones for an average of about 2.5 years – a lifetime that is steadily increasing. You’re going to be stuck with your phone for a while, so make sure you take your time to figure out what model is best for you and resist the urge to spend too much. Generally speaking, the more you spend on your smartphone the worse value for money you’re getting.

Damian Funnell, who has strong opinions on all matters technological, advises lawyers and law firms and is founder of an IT services company and, a cloud software company.

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