Last Words on iPhone Price Cut

What's going on here?
Like mentioned in the prior blog post, Apple slashed $200 or 30% the retail price of their overly hyped iPhone, two months after they introduced the phone at $599. To make the early buyers feel better, Apple offers a $100 store credit to all the buyers.

The early adopters must have been hurt here then?
Oh yea... Angry rants popped up all over the country right after Steve Jobs announced this in an Apple's event last week.

What's behind this?
No one can give the definite answers on this except Steve himself or the Apple PR who have been tight-lipped. Expectedly, they're not going to say anything. Some of the hypotheses are:
1) Apple wants to boost the Christmas sales.
2) Similar to 1), they want to wow investors with Q3 and Q4 numbers, which they will.
3) They are doing price discrimination by time, letting people who are willing to pay premium buy the phones first, then broader mass which intends to pay cheaper prices will jump in after the price cut.
4) They want to release the inventory, preparing for the next revisions with 3G and other updates.

Do you think they made any mistakes from the beginning?
From economic perspective, there's nothing wrong with this logic. Early adopters naturally have suffer from the high early acquisition costs. Everyone who bought the iPhone knows about it and accepted it. Otherwise, they wouldn't have paid $600, which is three times higher than other average smartphones in the market.

$100 seems to be quite cheap for a compensation for a loyalty fan. If you're Apple, would you do anything differently?
No... I'm sure most people who own the iPhone love the devices. They're happy with it for the past couple of months, and can be a little angry to themselves for paying more than they should have. Offering money back for this reason is very unusual in this industry. Offering Steve Jobs' apology in the last paragraph of their open letter is even more unusual.

Some people are talking about Apple's fanboys. If I'm Apple, I wouldn't even worry about them. Apple has done this to the fans so many times with the iPods, laptops, and the desktops. Apple has done an incredible job in fading out and in their products. The distributors can senses a slight demand shortage, and before they realize, boom... new products are on the shelves. The fans are so used to buying Apple's gear, and then seeing the new devices in the same line at cheaper prices released a week later.

More importantly, their stock has already rebounded. People will forget about this price cut and the stock is going to make all time high again after the next earning report.

What do you think will happen to the iPhone?
The price has reduced to the point that mass is willing to pay so it's going to flow out of stores like water this holiday season. Price will not drop lower than this. For the longer term, Apple will make faster, thinner, prettier iPhone with larger storage and more features and gradually launch it at the similar price even with the carrier's partnership.

So AT&T is and will be pretty happy, huh?
Not exactly. Although they have switched, upgraded, and broken cellphone contracts of a million wireless users, they haven't really enjoyed the benefits and cross-sales of iPhone services. For example, Apple offers a tool to make ringtones from iTunes purchased songs. Or the access to iTunes music store through Starbucks' T-Mobile Wi-Fi network. AT&T will sign up at least a couple of million more users over the next two contracted years. However, I don't see this partnership lasting very long - Apple is so dominant in the relationship which can upset AT&T, Sprint has advanced AT&T in terms of technology (WiMax iPhone, anyone?), etc. After two years are over, Apple will see who can allow them to make most money. If no player stands out, they're going to unlock the iPhone.

As a consumer, what would you do?
Well... Quite hard to say. First thing is that, don't buy Apple's devices because they're cool. Apple's products are better than gorgeous most of the time. But think of it more on the features. Don't buy an iPod if you love staying home and spend five minutes driving to work every day. Then, if you think you really need a device, buy it early. I bought my 30 GB video iPod from the first month. Now it's not even outdated and I feel it worths my money. Finally, having a price protection credit card especially for buy stuff from Apple is not a bad idea.