Gregory Johnson, Director of the Consumer Defense Resource Group, responds to the recent iPhone price drop.

Question

Gregory Johnson, Director of the Consumer Defense Resource Group, responds to the recent iPhone price drop.
In a strange turn of events this week, some consumers are upset now because as of Wednesday (Sept. 5) Apple lowered the retail price of their iPhone by $200. The 8GB iPhone is now $400 rather than $600. Customers raised such an outcry that Steve Jobs has published an open letter in response.
Apple and other companies are continually coming out with new products that usually offer more speed, more storage, more features, and cost less than previous models. Nobody has ever complained -- until now. Why haven't people complained in the past when Apple has had significant price drops and major upgrades on their other products? There wasn't a revolt then. There were no mobs of angry customers demanding rebates.
My first CD drive was a 2X speed external drive that required a special interface card in the computer. It cost $1,200 and today better drives are available for about $30. My first scanner was a very slow and big unit costing over $1,000. Today, better scanners are available for under $100. My first computer cost more than $2,000 and had a 20MB hard drive. With 8GB of storage, the iPhone should cost about $800,000. So, $600 didn’t seem too expensive.
I bought my iPhone for $600 knowing that by next year they would probably drop to about $300 or $400. I didn't think there would be a mid-year drop, but so what. I knew the trajectory of technology progress would mean that a better phone will be available in 6 to 9 months at probably a lower price -- more apps, faster, more features, more memory. It's a given. You buy something this month. Next month it will be obsolete. That's just the way it is. Perhaps Apple should put a disclaimer on their website stating: "Warning: Our products will increasingly become faster, cooler, more innovative, and offer greater value for the dollar as time goes on. Get used to it."
Apple is progressing so quickly now, beyond any other technology innovation company, that this kind of thing is likely to happen again in the future with some other product of theirs. Are people going to complain each time? Must the company give out rebates each time? This all seems so silly. It’s no longer possible to compare Apple to other companies with regard to their ability to implement product improvements. It’s like dog years versus human years. Two months in Apple’s world of product development is equal to about 6 to 9 months for most manufacturers. I know it is difficult, but people need to get used to that.
To the complainers out there, I have a few questions. Would you like Apple to be less innovative? Would you like Apple to not give you more value and voluntarily drop their prices by hundreds of dollars? Is that what you want? Don't get upset at Apple just because they are pushing the envelope of technical innovation and value from one month to the next. What if Apple released an 8-core computer this summer and then by fall they announced their new 16-core computer? This is the kind of development and progress pace we need to start expecting from Apple. The migration to Intel processors went much faster than anticipated.
Some research suggests that the iPhone cost of materials are about $300. So, there had been some complaints that Apple is price gouging by selling the iPhone for twice that amount. What people don’t understand is that there are other costs in building a piece of technology and running a business beyond the electronic components that go into them. The actual cost per 8GB iPhone is probably about $550. When Apple sells them for $400 each, I calculate they are taking a loss on the phone of about $150 per phone. Why would a company do this? There is something called a “lost leader” in retail sales. It’s a product you sell below your cost in an effort to rapidly expand your customer base. I’m guessing this is what Apple is doing by offering the iPhone at such an amazingly low price.
I'm planning to purchase an Apple notebook sometime soon. I'm not in a hurry, so I'm waiting until they announce the next major upgrade to their notebook line. I'm guessing it will be this fall. If I really was in a rush to get a notebook, I'd get one now, and then be a little disappointed when the new ones are announced -- but I wouldn’t be surprised. Instead, I'm waiting. I'd like to see built-in broadband cards (cellular data access) and LED back lighting in the 17-inch notebook. Perhaps larger hard drives and faster processors would be nice. It would be wonderful if it had an optical glass touch screen like the iPhone.
This latest uproar reminds me of the consumer complaints about iPods scratching. For decades, portable handheld computing devices have been available. They get scratched, and nobody says anything. Anyone concerned about their device scratching can purchase a protective cover. Then Apple comes along and offers their product. Suddenly consumers are in an uproar about it scratching and there is a class action lawsuit. It doesn’t seem fair that the most progressive and innovative company out there is the one that gets beaten up by consumers the most.
My comprehensive review of the iPhone can be found here:
http://web.mac.com/resourcesforlife/journal/writings/Entries/2007/8/18iPhoneReview.html
The Consumer Defense Resource Group is online here:
http://www.resourcesforlife.com/groups/cdrg/
The above article can be found here:
http://web.mac.com/resourcesforlife/journal/writings/Entries/2007/9/7iPhone_Price_Drops_-_ConsumersUpset.html

Answer 1

Junk Mail Designer wrote:
I'm not biting.
I've read too many reports in the media from people more highly credentialed than Mr. Johnson to the contrary.
The analogies and comparisons are still way off. Production didn't get cheaper, the phone didn't get upgraded, no carrier's are subsidizing, retailer's are not discounting. Never has the MSRP of CD-ROMs, nor cellphones, nor HDTV's dropped this quickly in history.
I'm tired and going to bed. But here's your assignment. Apple's price decrease rate is 33.3% in 67 days. What would a $10,000 item cost at that rate in one year?
Actually product advancement and innovation are very much the central issue here. Apple has effectively "upgraded" the 4GB unit to 8GB and reduced the price by $100. It's all in how you look at it.
The real issue of innovation and development has yet to be seen, but the recent price drop is an indicator that Apple already has something "in the shoot" to be released soon.
I was thinking it might take a year for a new version of the iPhone to be announced. Yet, with the recent price drop, it seems they may be lowering the price on the original unit to make room for a new one. Which is my point exactly. Apple is so fast at innovating that they already have something new to release (that's my prediction).
They can't release something new and sell the old units if the "something new" and the "something old" are at the same price. It makes sense that the 8GB unit would drop to $400 and the new one will be $600.