Case Study Apple iPhone Price Cut

The Icfai University Journal of International Business, Vol. IV, No. 1, 200946© 2009 The Icfai University Press. All Rights Reserved.

Apple iPhone Price Cut:

Is it a Right Strategy?

The first adopters always pay a premium. I am one of them. I am used to that. But that

one was too soon, too harsh.1

– Steven Wozniak, Cofounder of Apple Computers

Apple Inc., one of the most renowned companies in the world for computer technology,

ranked 121st in the Fortune 500 in 2007.2 Apple Inc., with its focus on design and manufacture

of consumer electronics earned revenues of $19,315.0 mn3 in 2007. Apple products include

Apple TV, iPod and iMac. These products have earned a reputation for being highly priced

and also of high quality. On June 29, 2007, amidst much fanfare and keen anticipation from

its customers, Apple launched the iPhone.4 The iPhone was touted as a revolutionary device,

which combines the features of a mobile phone and an iPod for the convenience of the user.

Within two months of the gadget’s entry into the market on September 5, 2007, Apple

lowered the price of its 8-gigabyte (GB) storage iPhone from $599 to $399.5 This created a

furore among customers and other players in the industry. In the technology industry, where

the product lifecycle is short and the market is highly sensitive, many experts ponder if the

price cut was the right move.

iPhone: A Revolutionary Invention

The technology influencing mobile phones sprang into prominence in the mid 20th century.

“Mobile phones are becoming absolutely indispensable in the developing world”,6 said

Robert Conway (Conway), Head, Global System for Mobile Communication (GSM)

Association.7 The first mobile telephony service started in Sweden was a form of radio

Case Study

Lekha Ravi*

* Team Leader, IRC (IBS Chennai Research Center, Chennai, India. E-mail: [email protected]

1 Steven (2007), “Apple Legend Woz Blasts iPhone Price Drop and Refund Policy”, http://www.crn.com/hardware/202100333, September 22.

2 “Fortune 500”, http://money.cnn.com/magazines/fortune/fortune500/2007/full_list/101_200.html3 Ibid.

4 “iPhone Premieres this Friday Night at Apple Retail Stores”, http://www.apple.com/pr/library/2007/06/28iphone.html, June 28, 2007.

5 “Apple Sets iPhone Price at $399 for this Holiday Season”, http://www.apple.com/pr/library/2007/09/05iphone.html, September 5, 2007.

6 “Mobile Phone Technology Turns 20”, http://news.bbc.co.uk/2/hi/technology/6983869.stm, September 7, 2007.7 GSM Association founded in 1987, is a global trade association representing over 700 GSM mobile phone

operators across 218 countries of the world. It plays a pivotal role in the development of the GSM platform andthe global wireless industry.

47Case Study

telephony tested by the Swedish police for use in police cruisers. This form of radio telephone

was a two-way radio, which was widely used in taxis and police cruisers. In 1946, American

AT&T and South-western Bell8 brought out the first commercial mobile telephone service,

which was used in communication devices. The ‘modern’ mobile phone was developed,

researched and experimented in the 1970s.9 In the late 1980s, the mobile phone industry

started developing rapidly, attracting more users. In 2003, there were approximately 1.52

billion mobile phone users around the world.10 The technology is experiencing a fast growth

and mobile phones are getting more and more sophisticated (Annexure 1). Applications of

mobiles are expanding as mobile phones assist in security systems and surveillances. According

to Conway, “The technology is a gravitational force that brings into its orbit a huge amount

of innovators.”11

Adoption of technology has only increased the number of users using different gadgets

and showed no signs of slowing down even in the developing nations. As consumers advance

through different stages of their lives, the interest levels, usage patterns, spending habits,

and brand preferences for mobile and other technological products and services constantly

change. Understanding the changes in lifestyle and the consumer demands is the key element

in forecasting the target market in mobile technologies and services.

The iPod, for example, was a new revolutionary model from Apple. Apple was the first

company to fully exploit the home computer market and launched the iPod, bringing

digital music to the masses. With the introduction of the iPod, the company created a user

friendly product, where the user could download music from the Internet and transfer it to

the player. Apple uses its technological expertise to improvise its products based on

consumer needs. According to Richard Jameson, analyst, GfK NOP,12 “Apple’s history

proves that it has the magic touch when it comes to product development and marketing”.13

After its launch, Apple totally redesigned its iPod and introduced the iPod nano, a

full-featured iPod in a small size that changed the rules for the entire portable music

market. After the introduction of iPod nano, the iPod continued its run as Apple’s single

most successful product. As the market was moving towards convergence between various

devices, the most fashionable amongst Apple’s products, the iPod nano made a strategic

move, with optional accessories including lanyard headphones.14 The iPod nanos also

came with a price drop. A 4 GB version of the device was priced at $149, $50 below the

8 Southwestern Bell Telephone is a wholly owned subsidiary of AT&T founded in 1920 to take over thetelephone operations of southwestern telegraph and telephone Co. and the Bell Telephone Company ofMissouri.

9 Hill Ian (2005), “Mobile Phone—Everyday Clever”, http://www.abc.net.au/southqld/stories/s1482448.htm,October 11.

10 Ibid.

11 “Mobile Phone Technology Turns 20”, op. cit.

12 GfK NOP is a leading market research organization, providing cutting edge quantitative and qualitative surveysand fact-based consultancy.

13 “Apple iPhone too Expensive, Say Consumers”, http://www.telegraph.co.uk/connected/main.jhtml?xml=/connected/2007/11/23/dliphone23.xml, November 23, 2007.

14 Lanyard headphones are ones that can be conveniently hung around the users’ neck.

The Icfai University Journal of International Business, Vol. IV, No. 1, 200948

cost of the current version with the same memory. An 8 GB version was priced $199, also

$50 less than the current model.15 Following the phenomenal success of its music player,

the iPod, Apple planned the launch of the iPhone, a combination of an iPod and a mobile

phone. Apple wished to make a breakthrough with consumers in terms of design and user

interface with its iPod.

The launch of iPhone provoked so much hype and debate like no other product launch in

the past. The hugely anticipated new technological gadget iPhone was launched on June 29,

2007 and revolutionized the tech-savvy market. Apple’s iPhone entered the highly volatile

cell phone market combining telephony, MP3, web surfing and video watching. The iPhone

was a gadget, which was most awaited, by both the technology enthusiasts and mainstream

media. The shipments during the holiday season of 2007 were expected to top the previous

year’s 21 million units.16

iPhone proved to be a revolution as it had reformulated the way people interact with

computers. The iPhone had the following features: 2-megapixel camera, headset and audio

jacks, an iPod dock, Wi-Fi ,17 stereo Bluetooth and a speakerphone (Exhibit 1). The iPhone

weighs about 135 g, which is a little heavier than a standard mobile phone but lighter than

15 Crum Rex, “Apple Revamps Entire iPod Line, Cuts iPhone Price: Shares Drop on Worries about Low iPhoneDemand; Touch-Screen iPod Debuts”, http://www.marketwatch.com/news/story/apple-shares-fall-iphone-price/story.aspx?guid=%7b1AD005D1-E60C-4564-98C3-9842358467B7%7d&print=true&dist=printTop,September 5, 2007.

16 Krazit Tom (2007), “Apple’s iPhone Takes Center Stage”, http://www.news.com/Year-in-review-Apples-iPhone-takes-center-stage/2009-1041_3-6222156.html, December 17.

17 Wi-Fi is a wireless technology brand owned by the Wi-Fi Alliance intended to improve the interoperability ofwireless local area network products. Its applications include Internet and VoIP phone access, gaming, andnetwork connectivity for consumer electronics such as televisions, DVD players, and digital cameras.

Exhibit 1: The Apple iPhone

♦ Multi-touch support 3.5-inch 480 × 320 touchscreendisplay.

♦ 2 megapixel cam.

♦ 4GB or 8 GB of storage.

♦ Bluetooth 2.0 with EDR and A2DP.

♦ WiFi that automatically engages when in range.

♦ Quad-band GSM radio with EDGE.

♦ Runs OS X with support for Widgets, Google Maps,and Safari, and iTunes (of course) with CoverFlowout of the gate.

♦ Five hours of battery life for talk or video, with a full16 hours in music mode.

Features

Source: Ziegler Chris (2007), “The Apple iPhone”, http://www.engadget.com/2007/01/09/

the-apple-iphone/, January 9.

49Case Study

many devices with a QWERTY18 keyboard. The thin design has a touch screen and does not

have a keypad. Users have to use on-screen soft keys to dial numbers, enter web addresses

and type e-mails and text messages. All menu navigation and data entry from typing messages

to dialling phone numbers is done on the touch screen which makes it appealing to the less

tech-savvy user. The phone also supports a digital-music player that syncs with iTunes.

Apple’s voicemail system formulates good use of its visual interface to let the user pick just

the message he wants to listen to. The iPhone has a built-in rechargeable battery that offers

a talk time of up to eight hours and standby time up to 250 hours. However, browser

sessions on General Packet Radio Service (GPRS), rapidly depletes the battery. The battery

life would be shortened if the iPhone is used as an iPod music player by users.

The Apple iPhone has unique features and does most functions with single contact and

works with long standby time unlike other phones. It supports features like multi tasking

wherein the user can read a web page while downloading e-mail in the background over

Wi-Fi or Enhanced Data rates for GSM Evolution (EDGE). The interface is unique with a

large multi-touch display and innovative new software that allows controlling everything

with the touch of a finger. It combines the features of multiple tools into one handheld

device and appears with a grid of colorful icons, with the four chief functions—Phone,

Mail, Safari web browser and iPod—in a separate strip along the bottom. All these

sophisticated features made the iPhone a much sought after device. There was, however,

tough competition from the other players as well. Though there were overlapping features

amongst the top mobiles, the Apple iPhone continued to enjoy a niche market (Exhibit 2).

18 QWERTY refers to the arrangement of keys in odd fashion to prevent jamming on mechanical typewriters byseparating commonly used letter combinations keys.

Exhibit 2: Comparison of Features of Popular Mobile Devices

(Contd...)

Apple iPhone

(8 GB)

Blackberry

Pearl (8100)

Nokia e-Series

(E61)Imate 8150

Appearance:

• Multi-touchsupport 3.5-inch480 x 320touchscreendisplay

• 2 megapixel cam• QWERTY keyboard

• Dimensions is 107

x 51 x 14.5 mm• 90 g1.3

MegaPixels,• Camera, memory

card slot, musicplayer, and voicedialing

• QWERTYKeyboard

• 320 x 240 pixels,58 x 45 mm -QWERTY keyboardwith Five-way scrollkey

• 117 x 69.7 x 14mm, 108 cc andweight 144 g

• 1.75 inches wide,4.25 inches long,and about 0.75inches thick withjoystick

• 176 x 220 65 Kcolor reflective TFTscreen, and IrDA

Browser and

Technology

• Wi-Fi thatautomaticallyengages when inrange

• Network with GSM850|900|1800|1900

• EDGE data,

Bluetooth 2.0,

SureType text

• UMTS/GSM 850/900/1800/1900·Edge with 10,236.8 kbps

• 120 MHz, ARMv5processor,

• 16 MB RAM, 32MB ROM


The iPhone combined the features of an iPod music and video player with that of a

mobile telephone and was available through AT&T Wireless Services. The iPhone had been

locked by the service provider AT&T in the US in a two-year service agreement. In countries

like India customers cannot use the iPhones even if they purchase it in the US or UK, as they

have to reload the software to use it. The demand for iPhone was relatively strong and it has

been rated higher than the demand for any other Apple product that has ever been shipped.19

According to iSuppli,20 iPhone was the best-selling handset, among the 2,70,000 smart

phones and feature phones sold to the US consumers during the first month of its sale in July

2007.21 Market analysts pointed out that Apple had created a strong brand and customer

loyalty, which it capitalized on by adopting a skimming strategy in pricing. They also felt

19 Krazit Tom (2007), “Apple’s iPhone Price Cuts Leave Mixed Feelings”, http://asia.cnet.com/reviews/mobilephones/0,39050603,62032012,00.htm, September 10.

20 iSuppli corporation is a market intelligence company that helps clients improve performance in the electronicsvalue chain by providing them with the facts, analysis and advice they require to know precisely how tosucceed.

21 “Apple’s iPhone Price Cuts Leave Mixed Feelings”, op. cit.

Exhibit 2: Comparison of Features of Popular Mobile Devices (...contd)

Apple iPhone

(8 GB)

Blackberry

Pearl (8100)Nokia e-Series

(E61)Imate 8150

• Runs OS X with

support for

Widgets, Google

Maps, and Safari,

and iTunes (of

course) with

CoverFlow out of

the gate.

• Quad-band GSM

radio with EDGE.

• Bluetooth 2.0 with

EDR and A2DP

Storage

• 4 GB or 8 GB of

storage

• 5 hours of battery

life for talk or video,

with a full 16 hours

in music mode

Price

$399.00 (Reduced

price)

keypad, and push

email

• 1.9 GHz and 800

MHz digital

• Wi-Fi 802.11i/e/g,

VoIP over WLAN

• MP3/AAC/MPEG4

player

• Unlocked

Quad-Band

3G/EDGE/Wi-Fi

• 64 MB flash

memory

• Battery with 900

mAh Li-Ion

• 360 hours stand

by

• Standard battery,

Li-Po 1500 mAh

(BP-5L)

• Stand by Up to 260 h

• Talk time Up to 7 h

128 MB shared

memory

$799.95$357$229.95

51Case Study

that Apple’s customers accept its highly priced products with equanimity. To go a step

further, they consciously expect it to be so.

iPhone: Banking on Pricing

The iPhone had entered the market with a stock of about 3,00,000 iPhones and a

manufacturing capacity of roughly 1,50,000 a month.22 The 8 GB iPhone was available for

$399 in the US through Apple’s retail and online stores and AT&T retail stores. The iPhone

4 GB models were sold only till the supplies lasted.23 It had launched its iPhone during

the holiday season (when spending is on a high) to make it affordable for more customers.

The Apple iPod, which was launched in October 2001 was a success story and was priced

at $349 (as of 2007) for 160 GB. Though relatively high priced for an MP3 player, it was

hugely demanded and remains popular till date though there was a price slash in 2005.

The new ipod shuffle with 512 MB, which was introduced later, has a unique appeal and

its price starts at $99 and $149 for 1 GB.24 Joe Wilcox, analyst at Jupiter Research25

observed that the lower-priced iPod is part and parcel of Apple’s new mass-market strategy,

which went on to sell its one-millionth piece before the end of September 2007.26 Similar

to the price cut of the iPod, two months after the launch of the iPhone, Apple lowered the

price of 8 GB storage iPhone from $599 to $399 on September 5, 2007. The price cut

evoked a sharp response from many quarters.

Steve Wozniak, Cofounder of Apple Computers, said, “Nobody expects a product to

drop that much in price in such a short time”.27 He criticized Steve Jobs (Jobs) the chief

executive of Apple Inc., for his decision to drop the price of the iPhone by $200 within 68

days of its launch. Jobs, in his letter on the company’s website, acknowledged that Apple

had disappointed some of its customers by the sudden price cut of the iPhone’s 8-gigabyte

model and said he had received hundreds of e-mails complaining about the price cut.

According to Apple executives, the move had been planned long ago and felt that the

pricing strategy was conceived in part to keep the iPhone’s pricing in line with its new

iPod Touch. But the sharp price cut suggested that even Apple, which has long lived in a

pricing bubble insulated from other personal computer makers, is not immune from the

brutal pressures of the cellular phone business.28 “My suspicion is that they got to 7,50,000

really quickly, and then it started to slow down”,29 said Van Baker, an industry analyst at

22 Howe Karl (2007), “Apple’s iPhone Price Cut is Smart Marketing”, http://seekingalpha.com/article/46620-apple-s-iphone-price-cut-is-smart-marketing, September 7.

23 “Apple Sets iPhone Price at $399 for this Holiday Season”, op. cit.

24 Jennifer LeClaire (2005), “Apple Shuffles Price Strategies with New iPod Model”, http://www.macnewsworld.com/story/39590.html, November 11.

25 Jupiter Research provides research analysis and advice, backed by proprietary data, to help companies profitfrom the impact of the Internet and emerging consumer technologies on their business.

26 “Apple Shuffles Price Strategies with New iPod Model”, op. cit.

27 “Apple Legend Woz Blasts iPhone Price Drop And Refund Policy”, op. cit.

28 Darlin Damon (2007), “Apple Cuts iPhone Price and Revamps iPods”, http://www.nytimes.com/2007/09/05/technology/05cnd-apple.html?em&ex=1189310400&en=1e18a6b4c2fb4789&ei=5087%0A, September 5.

29 Ibid.


Gartner Group.30 Following the price cut, share price of Apple dropped by 5% and stood

at $136.76 on September 5, 2007.31

Jobs issued an apology after the consumer complaints on September 6, 2007, the next

day after its price cut for those who purchased the product at high price (Annexure 2).

It refunded the $200 difference for those who bought the phone within 14 days of the

reduction. After protests over the decision to reduce the price of the iPhone the company

offered $100 credit at Apple stores in a move to make peace with those who had purchased

the higher-priced phone before that period.32

Protests against Apple went to the extent of consumers filing cases against the company.

Dongmei Li (Li) a customer of Apple filed a case on September 24, 2007 in the US District

Court, against the company for violating price discrimination laws claiming that it should

stop selling the $499 4 GB model.33 Li had waited for the launch of iPhone and then

found that the store only had 4 GB iPhones in stock and had subsequently purchased one.

Much to her chargin, Apple then slashed the price of the 8 GB iPhone and stopped selling

the 4 GB model. 100s of customers like Li who paid the full price did not expect the

sudden reduction and complained bitterly. Li went on to sue Apple on the grounds that

the price reduction badly affected early purchasers, as they could not resell the product for

the same profit as those who bought the cell phone following the price cut. The complaint

mentioned that Li was only offered the

$100 store credit while those who had

purchased their iPhones two-weeks

prior to the price cut were refunded

$200 in cash. The historical analysis

of Apple’s stock price (which Li

provided in the 8 page complaint)

outlined Apple’s incredible stock-

market gains in the time period

following the price cut. Apple,

however, had no financial reason to cut

prices, but to gain more customers

during the holiday season.34 By the end

of September 2007, Apple had sold 1.4

million iPhones and also launched the

30 Gartner Group is an information and technology research and advisory firm headquartered in Stamford,Connecticut. Gartner clients include many large corporations and government agencies, as well as technologycompanies and the investment community.

31 “Apple Cuts iPhone Price and Revamps iPods”, op. cit.

32 Robertson Jordan and Wong May (2007), “Apple’s Jobs Sorry for iPhone Price Cut”, http://www.washingtonpost.com/wp-dyn/content/article/2007/09/06/AR2007090601766.html, September 6.

33 Jose San, “Woman Sues Over Apple’s iPhone Price Cut”, http://abcnews.go.com/print?id=367642034 “Woman Sues iPhone trio Over Price Cuts—Steve Jobs, Apple, AT&T all Named in Latest Lawsuit”, http://

www.intomobile.com/2007/09/29/man-sues-iphone-trio-over-price-cuts-steve-jobs-apple-att-all-named-in-latest-lawsuit.html, September 29, 2007.

Exhibit 3: Retail Price of 8GB iPhone

Countries Initial Price Release Date

US $599 June 2007

UK $537 October 2007

Germany $553 November 2007

India 2008

Australia 2008

–

–

Source: Krazit Tom, “iPhone debuts in UK, Germany”,

http://www.cnet.com.au/mobilephones/phones/

0,239025953,339283635,00.htm, November 29, 2007\

and ‘iPhone Release Date’, http://www. iphone

releasedate.net/

53Case Study

device in the UK, Germany, and France.35 In Asia and Australia iPhone was scheduled to

be released during 2008 (Exhibit 3).

Apple has indicated in the past that its ‘one price fits them all’ strategy is to assist the

evolution of the youth market and make this form of buying more attractive to consumers36

(Exhibit 4). Apple no longer accepts cash purchases for iPhone and it limits the sale of the

cell phone to two per person to stop people from reselling them.

Exhibit 4: Price Comparison of Different Brands

Products Price of Different Brands

Laptop Apple Sony Dell HP Pavilion dv6500tse

$1,999 $1,760 $1,424 $1,522

iPod and Mp3 Apple Sony Samsung Creative

$290.90 $173.11 $303.01 $200

iPhone Apple LG Prada Nokia Blackberry Pearl

$599 US$780 $276.64 $229.95

While the company was dealing with the price cut controversy, its competitors were

working on developing models that could compete with the iPhone. Apple’s competitor LG

was working on iPhone ‘killers’, its new product Prada phone KE850 will attempt to offer

unbeatable combinations of style, features and price.37 It costs £300 ($614) (Annexure 3).

Nokia with its N800 was already a tough competitor to Apple’s iPhone with a niche market.

The iPhone price cut caught the media attention in a big way and raised questions about the

35 “Apple’s iPhone Takes Center Stage”, op. cit.

36 Delahunty ‘Dela’ James (2007), “NBC Denies Apple’s Claims”, http://www.afterdawn.com/news/archive/10950.cfm, September 2.

37 MacLeod Murdo (2007), “All I want for Christmas Is the Smartest Mobile Phone”, http://www.macnewsworld.com/story/iphone/59572.html, September 30.

Exhibit 5: Excerpts from “Several Advantages to Apple’s iPhone Price Cut”

1. Attract more non-AT&T (T) customers to switch carriers. Apple receives bonus revenue fornew subscribers. Eventually, Apple will have to offer the iPhone to other carriers, but while it’sexclusive to AT&T Apple can capture high margin revenue. Service revenues fall straight to thebottom line, thus it makes sense for Apple to ramp up adoption as much as possible beforetheir exclusive carrier agreement expires.

2. A high initial price meant that the early adopters would be mostly ‘die-hard Apple loyalists’.This consumer segment has significant Apple bias, thus those users will talk very positiveabout the product, hence generating significant buzz. In addition, loyalists won’t focus on anydrawbacks, for they focus on all the strong points of the device. Thus, Apple is less likely toreceive negative word of mouth from the product release.

3. The initial high selling price means fat margins that can be allocated toward the recapture ofup-front development costs. The sooner these development costs are recovered, future margins

will expand at a faster pace.

(Contd...)


device’s continued success. However, there are also some advantages to Apple’s price cut

(Exhibit 5). The price cut has raised the question as to whether Apple needed to stimulate

demand as it is the most valued gadget in history, by reducing the price drastically soon after

its release. Experts observe that Apple is switching from a price-skimming strategy to market

penetration strategy. They felt that it would be able to expand market share more rapidly and

competitive barriers could be strengthened through the change in strategy.

Road Ahead

In spite of its popularity, the iPhone is said to suffer a few shortcomings. Apple iPhone lacks

some features like user-changeable battery, voice dialing, voice recording, video recording,

instant messaging, Multimedia Messaging Service (MMS), copy and paste and common

Bluetooth file transfer OBject EXchange (OBEX). It is hard to use the on-screen keyboard

because of its small sized surface.38 Further, the iPhone is available only through AT&T

service provider and not through third parties. It comes with a two-year service agreement in

the US. In countries like India even if iPhones are purchased customers cannot use them, as

they have to reload the software to use it. Many users opine that though it boasts of a very

clear and sharp screen, Apple’s user interface is finger driven and the screen rapidly becomes

covered in unsightly fingerprints.

Apart from these limitations, Apple had to tackle the consequent criticism following the

price cut of the iPhone. Stephen Hoch, marketing professor at Wharton University, observed,

“The reversal on Apple’s iPhone may have been more dramatic because the company has marketed

itself as consumer friendly. People have strong positive feelings about Apple. They feel they are

part of the Apple family. When Jobs announced the price decrease, people felt betrayed”. 39

Exhibit 5: Excerpts from “Several Advantages to Apple’s iPhone Price Cut” (...contd)

4. The new iPod Touch is essentially an iPhone, without the phone capabilities. Thus, both thenew iPod and iPhone will share the same components, which will drive scale efficiencies. Theshared costs between the two products will aid in offsetting the margin decline stemming fromthe lowered selling price. Increase in volume spreads fixed costs over more units, whichimproves the incremental profit margin per unit.

5. The lower price point of the iPhone should dramatically boost adoption. According to aChangeWave Alliance survey of 3,000 non-owners, one-third stated ‘high price’ as the reasonfor not buying an iPhone. Roughly 25% of those respondents indicated they would ‘likely’purchase an iPhone in the future, while one-third said they were waiting for the price to comedown.

6. Apple is switching from a price-skimming strategy to a market penetration strategy. Apple willbe able to expand market share quicker; this will strengthen competitive barriers.

Source: Muller Turley (2007), “Several Advantages to Apple’s iPhone Price Cut”, http://seekingalpha.com/

article/46827-several-advantages-to-apple-s-iphone-price-cut, September 10.

38 “Apple iPhone”, http://lifestyle.headlinesindia.com/nokiaphone/apple-iphone.html39 “The Price is Right: But Maybe It’s Not, and How Do You Know?”, http://knowledge.wharton.upenn.edu/

article.cfm?articleid=1813, August 21, 2007.

55Case Study

According to Wharton faculty and analysts, the iPhone episode reveals the perils of

pricing in a marketplace where constant innovation, fierce competition and globalization

are changing the rules of the game.40 John Zhang, marketing professor at Wharton

University, said, “The product lifecycle is short and the market is moving quickly. You

don’t have a lot of time to learn from your mistakes. You have to price the product right

the first time”. 41

Jobs, while speaking to reporters, defended his move stating that his price cut was

directed to attract new customers in the holiday season with more aggressive pricing. He

added that it benefits both Apple and every iPhone user to get as many new customers as

possible in the iPhone ‘tent’.42 Jobs observed, “…even though we are making the right

decision to lower the price of iPhone, and even though the technology road is bumpy, we

need to do a better job taking care of our early iPhone customers as we aggressively go

after new ones with a lower price. Our early customers trusted us, and we must live up to

that trust with our actions in moments like these.”43 Greg Joswiak, Apple’s worldwide

vice president of iPod and iPhone product marketing, also agreed with Jobs and observed

that there was no better time for the price cut and he also added that it was that time of

the year that was most important and an opportunity to come into the holidays with a

fresh and aggressive product line.44

Keeping in mind Apple’s range of high priced products which gives it an ‘aura’ of

exclusivity, was Jobs decision to reduce the price a right one? As demand for the elusive

iPhone soars, analysts are closely watching the fallout of the price cut. Jagdish Rebello,

Director and principal analyst, iSuppli, said, “With a 50% gross margin, Apple is setting

itself up for aggressive price declines going forward”.45

40 “The Price is Right. But Maybe it’s Not, and How Do You Know?”, op. cit.

41 Ibid.

42 Krazit Tom (2007), “Apple to Offer $100 Store Credit to iPhone Customers”, http://www.news.com/8301-13579_3-9773207-37.html, September 6.

43 “To all iPhone Customers”, http://www.apple.com/hotnews/openiphoneletter/44 “Apple Revamps Entire iPod Line, Cuts iPhone Price: Shares Drop on Worries about Low iPhone Demand;

Touch-Screen iPod Debuts”, op. cit.

45 “Analysts: IPhone Prices May Go Down”, http://www.washingtonpost.com/wp-dyn/content/article/2007/01/18/AR2007011801360.html, January 18, 2007.

�


First Mobile Telephone FirstMobile Phones, used in

Chicago

Transportables or Luggables(Portable)

DynaTAC 8000X

Annexure 1

Evolution of Mobile Phones

1989 Current Design Camera Phones

GSM Digital PhonesStandard

Open

In-Built or Snap-on Camerasand Larger Screens for

ViewingFlip Top

Concept Phones 2 Concept Phones 4Concept Phones 3

1946 1981 1983

Convergent Devices Concept Phones 13G Next Generation Phones

Designers work on the futureto try and predict what

technologies and styles willbe common.

Camera and larger screenswith video.

Mobile phones can also beused as PDAs, MP3 players,and games consoles and asdevices to surf the internet.

57Case Study

Annexure 2

Apology Letter Sent by Steve Jobs to iPhone Customers

To All iPhone Customers

I have received hundreds of e-mails from iPhone customers who are upset about Apple dropping

the price of iPhone by $200 two months after it went on sale. After reading each of these

e-mails, I have some observations and conclusions.

First, I am sure that we are making the correct decision to lower the price of the 8 GB iPhone

from $599 to $399, and that now is the right time to do it. iPhone is a breakthrough product,

and we have the chance to ‘go for it’ this holiday season. iPhone is so far ahead of the

competition, and now it will be affordable by even more customers. It benefits both Apple and

every iPhone user to get as many new customers as possible in the iPhone ‘tent’. We strongly

believe the $399 price will help us do just that this holiday season.

Second, being in technology for 30+ years I can attest to the fact that the technology road

is bumpy. There is always change and improvement, and there is always someone who bought

a product before a particular cutoff date and misses the new price or the new operating system

or the new whatever. This is life in the technology lane. If you always wait for the next price cut

or to buy the new improved model, you’ll never buy any technology product because there is

always something better and less expensive on the horizon. The good news is that if you buy

products from companies that support them well, like Apple tries to do, you will receive years

of useful and satisfying service from them even as newer models are introduced.

Third, even though we are making the right decision to lower the price of iPhone, and even

though the technology road is bumpy, we need to do a better job taking care of our early

iPhone customers as we aggressively go after new ones with a lower price. Our early customers

trusted us, and we must live up to that trust with our actions in moments like these.

Therefore, we have decided to offer every iPhone customer who purchased an iPhone

from either Apple or AT&T, and who is not receiving a rebate or any other consideration,

a $100 store credit towards the purchase of any product at an Apple Retail Store or the Apple

Online Store. Details are still being worked out and will be posted on Apple’s website next

week. Stay tuned.

We want to do the right thing for our valued iPhone customers. We apologize for

disappointing some of you, and we are doing our best to live up to your high expectations of

Apple.

Steve Jobs

Apple CEO

Source: ‘To all iPhone Customers’, http://www.apple.com/hotnews/openiphoneletter/


Reference # 48J-2009-02-04-02

Annexure 3

Competitors of iPhone

Samsung F700 LG Prada Phone KE850 Linux Based FIC-GTA001

Features: 5 megapixel camera,Touch pad technology, 7.2Mbps impressive downloads,QWERTY Keyboard, 2.78"Color Display, Bluetooth

Features: 3-inch LCD touchscreen display, 2 megapixelcamera, microSD memory cardslot

Features: 2.8-inch VGAdisplay, multi-touch sensorrecognition, GSM, GPS andMP3 playback capabilities

Nokia Aeon Concept Phone Neonode N2 TouchScreen BenQ-Siemens Black Box

Concept Phone

Features: Touch phonetechnology

Features: 3GSM MiniSD card,MP3 Player (MP3, WMA, Wav),Calender and Adress booksynchronized using ActiveSync,GSM Quadband 850, 900,1800 and 1900 MHz bands,GPRS, LCD: 2,0” (176 x 220pixels)

Features: 2.8-inch VGAdisplay, multi-touch sensorrecognition, GSM, GPS andMP3 playback capabilities

Neo1973 Asus Aura Concept Phone Meizu M8

Features: Touch-sensitiveVGA display, GPRS data,Bluetooth, 128MB RAM, AGPS(Assisted GPS), and 64MB ofFlash

Features: QWERTY keypad,2-megapixel camera, 3.9-inchtouch screen display and is only9mm thick, GSM net- works,3.9-inch touchscreen display,Bluetooth, a microSD card slotand miniUSB connectivity.

Features: 57x105x11.5mm,3.3-inch (720x480 pixels)display, Bluetooth, 3-megapixel camera, TV-out, linein/out, video recordingcapabilities of 30fps at720x480 resolution.

Source: “Top Ten List of iPhone Competitors”, http://www.mobilewhack.com/top-

ten-list-of-iphone-competitors/

Documents

Case Study Apple iPhone Price Cut