Apple’s Pricing Advantage

Tuesday, 9 November 2010

Earlier this week I linked to this piece by Larry Dignan on tablet pricing. Dignan wrote:

When Apple CEO Steve Jobs launched the iPad it wasn’t clear how aggressively these newfangled devices were priced. Now we know because Android tablets and other rival tablets can’t hang on pricing.

Linking to it, I wrote:

Today’s Apple has turned the pricing story on its head. Used to be the knock against Apple was their kit was overpriced. Now, even putting quality aside, competitors can’t match Apple’s prices.

This is not the case with Macs vs. Windows PCs. The switch to Intel processors has largely made the Mac price competitive with PCs, comparing comparable hardware, but the vast majority of PCs sold are not comparable to Macs in terms of hardware quality and design. It’s fair to argue that a typical PC costs significantly less than a typical Mac. I’ll get back to PCs, but for now, let’s consider only consumer electronics: iPods, iPhones, and iPads.

Phones are a funny business because of subsidized pricing. When you buy an iPhone 4 for $199 from AT&T, you’re not really buying it for $199, because you’re agreeing to an expensive two-year service contract. But when you look at unsubsidized phone pricing — see the small print at the bottom of Apple’s iPhone comparison page — you can see the real prices: $599/$699 for the 16/32 GB models, respectively.

These prices compare quite well to the competition. The Samsung Galaxy S — a decent choice for the current “Best Android Phone on the Market” title (check back next week, though) — costs about $600 unlocked from Amazon, and has only 8 GB of built-in storage. The HTC Desire costs just under $600. Google’s Nexus One, while they were selling it, cost $529.

Now, there are some differences when you take subsidized pricing into account. There are buy-one-get-one-free deals for many Android handsets; there are no such deals for iPhones. The HTC Droid Incredible, with no contract, costs $530 at Amazon. With a new two-year Verizon contract, it’s free. Those subsidized discounts are about the commodity nature of the Android platform, and the cut-throat competition between competing Android handset makers. The unsubsidized prices make clear, though, that they aren’t undercutting the iPhone on real prices.

(I’d argue that the lower subsidized prices of many Android phones compared to the iPhone is really about the handset makers’ relative bargaining position against the carriers. A carrier that wants the iPhone has one option: negotiate with Apple. A carrier that wants some good Android handsets can play HTC, Samsung, LG, Motorola, and whoever else against each other.)

Now consider traditional (pre-Touch) iPods. Nine years later and the iPod is still the best-selling digital audio player in the world, by a long shot. You can find cheaper ones, but not by much.

The best example of Apple’s price advantage, though, is the iPod Touch. I would love to buy a $229 Android device that’s the equivalent of the iPod Touch — i.e., something pretty much just like a high-end Android phone but without the phone (and without the contract). Three years and 30 or 40 million iPod Touch sales later, there remains no such Android device. I suspect the main reason is that no other handset maker can afford to make one. (I also suspect that the relatively low price of the iPod Touch suggests that Apple could afford to charge much less for unsubsidized iPhones.)

Lastly, consider the iPad. The first batch of competing tablets are coming with 7-inch displays. They say it’s because they think that’s a better size. Steve Jobs, making an appearance on Apple’s most-recent quarterly financial analyst call, said it’s because 7-inch displays are cheaper, and no one else can afford to match the iPad’s price with a comparably sized touchscreen display. Given that Verizon is selling the Galaxy Tab for $599 — just $30 less than the equivalent iPad — my money goes to Jobs’s explanation.

iPods, iPhones, iPads. Across all of them, Apple’s prices are either comparable to, or lower than, their competition.

So what’s the difference between these devices and the PC industry? A few things, and they all work in Apple’s favor.

First, Apple is the world’s leading volume buyer of a precious, expensive component: flash storage. They get better prices and priority availability from suppliers. They also enjoy volume purchasing advantages with other components — touchscreen LCDs, wireless networking chipsets, etc. — but flash storage is the most volatile, and the one where Apple has declared itself the number-one buyer in the world. Plus, Apple is a marvel of operational efficiency. Try to find someone, anywhere, to offer anything other than effusive praise regarding Tim Cook’s job as COO at Apple.

But there’s another major factor at play, which I believe is more important than volume pricing. It’s about design and build quality. Apple’s competitors in the consumer electronics space are, at least for now, all trying to compete at a high level with regard to design. HTC, Motorola, Samsung — their Android products are nicely designed and well-built. One can argue that they’re not as good as Apple’s products, but they’re in the same ballpark.

Whereas with PCs, the mass market PC makers have always been content to build products way below Apple’s standards for design and quality, and consumers were (and largely remain, today) content to buy them.

PCs, especially historically, were compared based on technical specs. An awful lot of PCs have been sold to people who never even looked at the enclosure — only the specs. That’s not how the game is played in consumer electronics. Nobody knows what kind of CPU they have in their phones. (Where by “nobody”, I mean “no regular people”.) Apple doesn’t even publish CPU specs for iOS devices, nor publish how much RAM they contain.

With computers, again, it’s fair to say that the typical Mac costs more than the typical Windows PC. That’s not true for mobile devices, which means Apple gets to compete mostly on factors like design, user experience, and branding. In short, the nascent mobile computing market has much more in common with the traditional consumer electronics market than it does with the PC industry,¹ and that works very much in Apple’s favor.