Apple hits price ceiling with iPhone and doubles down on services

Apple Music has overtaken Spotify in the US and TV+ is squaring up to Netflix

 

Apple is the margin-leading premium player when it comes to smartphones. But at its annual hardware launch event, the iPhone maker unveiled an aggressive pitch to expand its user base with new pricing options for the latest smartphones, iPads and Apple Watches.

The cost of buying a new iPhone has been climbing consistently – Apple unveiled the first $999 (€906) smartphone in 2017 followed by a $1,099 version last year – as the market has matured, and the company had to find another way of making up for the gap left by fewer consumers upgrading or replacing their devices. But on Tuesday, Apple’s shift in strategy was palpable, even as the technology improvements were modest.

The company has made a concerted effort to boost its offering in services, from music and gaming to movies and streaming TV, in a bid to ensure existing customers stick with the iPhone and to better lure potential customers into its widening ecosystem. More than 420 million people now subscribe to a range of its offerings, with Apple Music having overtaken Spotify in the US for paid music streaming services.

“For rivals the only big margin they get is when they sell hardware,” said Ben Wood, chief of research at CCS Insight. “But even if you’re using a three or four-year-old iPhone, Apple is still getting money from you whether it’s the iCloud service, or Apple Arcade on games or Apple TV on content. That’s a pretty unique position.”

The new products announced, however, were criticised for only featuring iterative improvements, and the company failed to launch a 5G-capable smartphone.

Apple told fans it was delivering on promises with huge advances in the quality of its products, but the pricing of the new items indicated that the company has hit a ceiling – at least for now.

iPhone 11 Pro Max

The iPhone 11 Pro Max, the new flagship triple-lens camera device with a 6.5-inch screen, will start at $1,099, the same entry price as the company’s most expensive iPhone. This is the first time in years that Apple has not raised the price of its top end phone.

More significant, the entry-level iPhone 11 will start at $699, or $50 less than the price at which the iPhone XR debuted a year ago. The cost of the iPhone 8 has also been cut to $449, a $150 reduction that highlights how Apple is expanding its smartphone portfolio so its services reach the broadest array of people.

Daniel Ives, analyst at Wedbush, said Apple had retrenched after a period of “pricing hubris”. He estimated that one-third of iPhone users plan to buy a new smartphone in the next 12 months, and said Apple was pricing its products to keep them. In China alone, he said, there are up to 70 million iPhone users expected to upgrade soon.

“The goal is to put an iron fence around their services,” he said.

The Apple Watch, which has a 46 per cent share of the smart watch markets, according to Strategy Analytics, was also updated with the Series 5 featuring an “always on” screen that does not require a flick of the wrist to show the time. It starts at $399, while the price of the older Series 3 model was cut to $199, from $329 when it launched two years ago.

The Apple Watch has a 46 per cent share of the smart watch markets. Photograph: The New York Times
The Apple Watch has a 46 per cent share of the smart watch markets. Photograph: The New York Times

“That’s a huge move,” Mr Wood said. “It’s going to be a freight train of a product in the holiday shopping period.”

Apple portrayed its latest iPad as a laptop replacement with a host of features for productivity and gaming. The 10.2-inch Retina display iPads have three times the pixels of the best-selling laptop and two times the processor performance, Apple said, and prices start at $329.

Streaming service

The new pricing strategy was most evident in Apple’s new TV+ streaming service – to which it has committed more than $6 billion for original programming – and Arcade, its portfolio of 100+ games exclusive to Apple devices.

Both have a four-week trial period and will then each cost $4.99 a month – a “crazy” price equal to that of a single movie rental, said chief executive Tim Cook.

By undercutting the likes of streaming rivals such as Netflix, which charges $12.99 a month, Apple is expected to draw in more users and make the pitch that its TV service will work best on its devices even though it is not exclusive to them.

“I don’t think anybody was expecting such an aggressive price point,” said Carolina Milanesi, analyst at Creative Strategies. “They make people think, ‘You know what, it’s a cup of coffee at Starbucks’.”

She added: “I don’t think there’s a negative brand connotation in being aggressive on a services price point. With hardware, especially if you’re Apple, there’s always a concern about going too cheap - devaluing the brand - but that’s not the case in services. Nobody is going to look at Apple TV+ as a cheap service; they just view it as affordable.”

But Apple is still making a clear play for the premium end: a top-end iPhone with 512GB of memory costs $1,449. The Apple Watch now comes in titanium models beginning at $799, with a ceramic model starting at $1,299 and a refreshed line-up of Hermes edition models ranging from $1,249 to $1,499. – Copyright The Financial Times Limited 2019

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