Monday, August 5, 2019 [Tweets] [Favorites]

Apple No Longer Is the iPhone Company

Jean-Louis Gassée:

When the iPhone grew to represent more than 50% of Apple’s revenue, critics worried that the company was overly dependent on the device. Now, critics fret because the percentage fell to 48% in the quarter ending in June. The decline isn’t bad news; it’s the mark of a neatly maturing business that benefits from its ecosystem’s network effects.

[…]

Still, there is a problem to be solved: What do you do when your leading product finds itself in a saturated and stagnating market? A strong temptation is to wage a price war. When the race to the bottom ends, the last man standing is supposed to be able to raise prices back to profit-making levels.

[…]

Apple’s iPhone Game Plan is in plain view, repeatedly explained by its executives to Wall Street analyst in Earnings Release conference calls and other public pronouncements: Let the iPhone stay in its natural element: the Affordable Luxury segment, analogous to Audi for cars or Burberry for clothing. And, from there, play the ecosystem game.

Why is the alternative selling products at a loss in a race-to-the-bottom? Why not trade some margin for more marketshare, which would help both the app ecosystem and services revenue? Or expand down by designing lower cost, lower end products that are nevertheless good and still have good margins.

This is probably even more needed with the Mac product line. Too many potential customers are being turned away because the base prices keep going up and up.

See also:

Previously:

Update (2019-08-08): Rich Edmonds:

When looking at the two different prices, you’d assume the MacBook Pro packs more of a punch, but throwing these two notebooks into the ring would result in a draw. The numbers don’t lie.

13 Comments

I think it’s more fair to say the price of entry-level Mac models has fluctuated over time. The original iBook G3 was $1,599 starting price, whereas the entry-level MacBook Air is $1,099 for something that weighs less than half as much and specs that blow that original out of the water. There’s probably a better analytical method that could be used to plot things like RAM, storage, screen res, CPU speed per dollar over time and I bet the trend line mostly goes down.

@foresmac It does depend on what your reference points are. The 11-inch MacBook Air was $899, for example. Mainly, I’m thinking about the prices relative to PCs and to more recent Macs.

Apple is positioned purposefully as an aspirational brand. It's not the case that higher margins preclude people from buying - the relationship works the other way. By producing a product that lots of people want but only a portion could afford is what allows Apple to command higher margins in the first place. What makes that formula work or (JLG phrases as "affordable luxury") is that a large number of consumers who can't afford Apple today expect that at some point in the future (when they earn more) they will be able to, which is a different market position than being priced forever out of reach. That's allows apple to be a favorite brand even for people who can't afford it yet or have to buy used hardware.

I'm sure they could change their strategy and be successful as more of a mass market brand, but that's not the business plan for whatever reason. I'm with you - I'd rather see a larger install base and ecosystem. I don't particularly care for the fashion aspect of modern Apple - I macOS is still the best operation system available and I wan't it to be used more widely.

Apple probably wouldn't have lost the edu market if it had produced inexpensive plastic MacBooks (with better management tools) instead of pushing iPads. It could certainly have a larger share of the PC market if it had lower base prices.

@Fred I get what they’re trying to do but am not convinced it’s the best long-term strategy. I don’t think having some more affordable models would make it (much) less of an aspirational brand. (Seemed to work well for iPods.) Rather, they would get people on the ramp to eventually buying the affordable luxuries. Whereas, if someone starts out with Android or Windows and gets comfortable with them over years or decades, chances are they’re not going to even think about switching. At least that’s what I see anecdotally. I think the products are getting a slight reputation as not worth the price and for snobs, i.e. not as aspirational as we’d like. It would have been easier to acquire that customer sooner, and meanwhile they would have been generating services revenue, locking their friends into iMessage, buying apps, maybe learning Swift in the classroom, etc.

ScooterComputer

WOW am I glad that you said that, @mjtsai! For years, this false dichotomy that the opposing sides of the PC market is high margin Luxury Brand vs death-spiral race-to-the-bottom has persisted… yet that's just absurd, and I'm glad you said it. Apple has done their best when they sold computers with great –value–, IMHO. The example of the first iBook pricing is somewhat deceptive; firstly because the market at the time was still primarily desktops and the iMac had that covered with a $999 model, and secondly because PC laptops at lower prices than that at the time were pretty junky and clunky so the iBook was a fairly good value even at that price point.

What ever happened to Apple being an aspirational brand NOT because of the brand itself but because of the power that their products had to make the REAL aspirations of the users come true? It is rather sad that Apple has transformed as a company, and as a community, from one who wanted to provide their customers the power to be their best to one that builds the priciest status items that their customers can hope to afford some day. The company's ideology seems to skip a few of the most important steps in the process of success.

@ScooterComputer Yes, as I recall the first iBook was a really good value. It cost more, but not that much more, and it was clear you were getting a lot for your money.

@foresmac
Claiming there are faster computers now than the 1999 iBook, well, okay, that's expected, but prices actually got even cheaper for a while before creeping back up again. If you want to make an argument based on inflation, I would happily give Apple more leeway. Otherwise, @Michael Tsai has it right. If we go back even further than the MacBook Air era, the last iBook started at less than $1000, Intel models come out, boom, back up over $1000. In fact, pretty much every system went up in price after the switch to Intel. Not to mention I remember $799 G3 iMacs in 2000ish which is even further back.

The fact that Apple cannot design lower cost products that offer excellent value is a design flaw, full stop. Jean-Louis Gassée was a high-right advocate that almost destroyed Apple in the late 1980s. I would not expect him to understand in the least. The LC really did grow marketshare and frankly the Mac would be dead without lower cost models at that time period. The LC and similar models were diametrically opposed to the Gassee preferred designs. Look, SGI is no more, Sun is no more…neither adjusted to figuring out value added on increasingly commodity markets.

Since I had my epiphany in 2011 that life in the Apple ecosystem would be unsustainable for myself going forward, I have increasingly enjoyed the use of low cost, perfectly adequate tools that just make me happy to be around. Not "happy because I have to justify the purchase cost" but actually just a joy given the price to value ratio is outstanding. Nothing is perfect, it is all a matter of tradeoffs but I feel like a reasonably savvy shopper and tend to extract excellent value from my purchases. With Apple, I felt the trade-off was, "this product is great except this and that" and the price was too high to have "this and that" be a trade-off.

@Nathan,

Pries went up with the switch to Intel because intel chips cost quite a bit more. If Apple is greedy for making around 40% profit margins, then what is Intel, which makes 60% margins? For instance, the 2014 Mac Mini - base model cost $500. The CPU, by itself, cost $315 (when bought in bulk). So basically half or more of the cost of the computer went to Intel.

For a long time, Apple offered a set of features on their Macs that were exclusive or nearly so - so that while you could always get a cheaper generic laptop, if you wanted a laptop with firewire, of a certain thinness and weight, with a certain battery life, or with good quality screen, etc, then your options narrowed down considerably, and Macs were a very good value when compared to to other laptops with the same feature set.

But the competition kept upping their game in an effort to peel away some of Apple's share of the premium market, so Apple had to up their game as well. Eventually, somewhere between 2012 and 2016, they ran out of premium features to add that really mattered to programmers and web designers. Thus the current malaise among readers of this blog.

I think somewhere along the line Apple had changed their gross margin from 50% to 60%. All while delivering less value. On the opposite side, you have Chinese manufacture who are used to Razer thin margin. All of a sudden the price gap became far more noticeable. It is the same with both iPhone and Mac.

And I have pointed out numerous time, Apple used to operate on 10- 15% Net Profit margin pre iPhone issues. Post iPhone, they went for Profit Margin and it has been margining a ~20% margin ever since.

The problem with Affordable luxury analogy is that it doesn't take into account of minimum viable user base.i.e You could operate Burberry with 1000s of customers only, because it could be small. It isn't the same with technology, you cant develop your own OS if you only have 100s of users. You need Scale, and one reason why technology tends to be monopoly or duopoly.

For iPhone, it seems to be doing OK. On rough estimate, Apple has roughly 20% of non China Smartphone market ( usage, not sales ) share, and generate roughly 40% of App Revenue. So as a ecosystem this is definitely sustainable. Although I would much prefer the market share to be 25 or 30% just to be safe. The Mac however, does not even enjoy 10% of worldwide PC marketshare.
And some of its options were deliberate to maximise profits, such as memory and NAND. The iMac still ship with an HDD FFS.

I really wish there is a decent iPhone, not just old model, but a properly designed with price of $499/ $599 in mind . And MacBook Air drops to $899 range. It doesn't need to get any lower, but it would seriously damage its competitors and gain a lot more market shares. I would just want them to aim for at least 25 to 30% market shares.

> Yes, as I recall the first iBook was a really good value. It cost more, but not that much more, and it was clear you were getting a lot for your money.

The first iBook was good value but I'd argue that the white iBook from 2001 was even better. The first iBook was too constrained on many levels (performance, screen resolution and more) but the white iBook solved those issue and it was just awesome, you could even use it as a professional work laptop.

I would even say that the value was better than almost any other Mac, but you can't compare the price alone. You have to look at the current laptop market at the time. If you wanted a small, light but capable laptop the white iBook was the best value of the entire market, as I recall it. The PC laptops that where cheaper where also huge and heavy and the PC laptops that was small and light were high end and twice the price (like Sony Vaio). My girlfriend at the time were a PC user, but she switched to Mac with the white iBook, not because she thought Mac was better (as I did) but purely based on value. She couldn't find any similar sized PC laptop at the same price.

@Adrian Yep, the first white iBook (before they started using the cheap looking plastic) was really great.

@Ed

"or iPhone, it seems to be doing OK. On rough estimate, Apple has roughly 20% of non China Smartphone market ( usage, not sales ) share, and generate roughly 40% of App Revenue. So as a ecosystem this is definitely sustainable. Although I would much prefer the market share to be 25 or 30% just to be safe. The Mac however, does not even enjoy 10% of worldwide PC marketshare."

While a fair response what gives me pause is the need to specify "non China Smartphone market". That's a huge market right there! If you count China, Apple's iPhone had 12%ish of the global market in quarter one of 2019. That's not much higher than Mac market share, right? Usage share could be higher so there's that silver lining but still…

@Glaurung
Intel processor pricing is a fair point, but I would rebut with AMD, on desktop at least, was still competitive back in 2006 during the Intel switchover. Apple did not have to single source their processors. Then again, we all know AMD has occasionally had problems fulfilling their orders. So maybe Apple needed Intel for scale? Mobile at the time is a different story, probably fair to state Intel was ahead of AMD on mobile devices during that time frame.

Yet, fair point to make about pricing. Thank you.

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