By October 24, 2012

The Bean Counters Are Back At Apple

Ipad_mini_prices

It’s obvious that the bean-counters are back in charge at Apple.

Back in the day, John Scully, John Louis Gassee, and others continually maintained that consumers would gladly pay a premium to own Apple computers. This despite the fact that Microsoft Windows-based PCs had, in many cases, already surpassed the capabilities of Apple’s aging Macintosh lineup. And at far cheaper price points.

Fast forward to today, where Phil Schiller is publicly defending the iPad mini’s $329 price point, saying he believes customers are willing to pay for quality that rivals like Amazon and Google don’t offer.

“And now you can get a device that’s even more affordable at $329 in this great new form, and I think a lot of customers are going to be very excited about that.”

Is he right? Many analysts — and consumers — believe that Apple could have further tromped the competition by hitting a $299 price point. $329, for whatever reason, manages to cross a rather huge line in the sand, perception-wise.

The price isn’t two-something, it’s THREE-something.

And it’s three-something when other 7″ devices by Google and Amazon are selling for $249 and even $199.

A Difference In Design?

One major difference between the Apple of today and Apple of yesteryear is that they still have a rather impressive lead in industrial design and build quality. Previously, one beige box with a mouse running Windows looked pretty much the same as a beige box with a mouse running windows under System 7.

Unable to tell the difference between the two offerings, consumers and businesses all too often went with the cheaper computer.

It’s easy to tell the difference in build quality between an exquisitely crafted iPhone and a plastic cased Samsung. Between an iPad mini and an Amazon Fire.

But at a price point 30-50% higher, how many will marvel at the fit and finish, then sigh and put them back on the shelf? From a user’s perspective, is one 7″ touch-screen tablet running a Kindle app the same as another 7″ touch-screen tablet running a Kindle app?

The sad part is that Apple could well have eaten the extra $30 in exchange for a larger marketshare. They did not. They could have let the iPad mini further cannibalize iPad and iPod Touch marketshare. They did not.

After all, it’s long been an Apple maxim that it’s better to cannibalize your own product line than to let someone else to for you.

And that maxim is still true today… up to certain a point.

Upgrades

For that matter, Apple could have simply counted on consumers spending more money by upgrading storage and adding cellular capabilities. They did not.

Speaking of which… just why does a cellular upgrade cost $130 more? Why does adding an additional 8GB of flash storage cost $100 more? (That’s a COGS of about $8 at today’s flash memory prices.)

Forget the extra $30 Apple’s charging for the iPad mini over and above the $299 price point. How does a markup of 1,250% grab you?

These $100 dollar demarcations may have made sense five years ago, back when the first iPhone was introduced. But today?

Forget the price of the base model. This is where Apple makes its bread and butter.

Just A Pretty Face?

Then there’s the not-so-inconsequential fact that the iPad mini is limping along with the same dated A5 processor and limited memory that hobbled the iPad 2. A device that first shipped over 19 months ago.

Does it use the iPhone 5′s A6? No. Even the previous generation A5X? No.

Once again, as noted in iPad 1, iOS 6, And Apple’s Failure To Plan For The Future, Apple is building for today, not for the future. They’re using cheaper components designed to support today’s apps, and not tomorrow’s.

But are those savings being passed on to us? Apparently not. Did they use existing technologies and enconomies of scale to put pricing preassure on Amazon and Google? No.

Given a choice between market share and margins, the bean-counters of today’s Apple are reaching for ever higher margins.

A Missed Opportunity?

Others have made the case that Apple has to make a profit on its devices. That, unlike Amazon, Apple can’t rely on its ecosystem for future sales.

For which I have just one word: Huh?

We’ve already covered the device upsell.

But even without it, Apple’s ecosystem of music, movies, apps, and games is unrivaled. And if that’s not enough, Apple can also sell a plethora of cables, docks, and Smart Covers on which they also make heafty margins.

Then there are Macs. Apple’s computer market share has been climbing year-over-year for quite some time now. About five years, in fact. Just how many $1,000, $2,000, and even $3,000 computers has Apple sold to those whose first introduction to the Apple world was the Touch? The iPhone? The iPad?

The iPad mini could have been yet another gateway product. Instead, Apple is focusing on profits today, not tomorrow.

Not Just The iPad

For another example of this, consider the highly controversial 30-pin-to-Lightning adaptor.

Yes, the adaptor contains a digital-to-analog chip. But $30?

Apple could have chosen to reward early adopters of its products, to make upgrading to a new phone quick, easy, and painless. They did not. They could have given them away. They did not. They could have at least sold them at cost. They did not.

Consider the lack of an ambient light sensor in the new iPod Touch, used to enable the auto-brightness feature. When asked, Phil Schiller told a customer, “Thank you for purchasing a new iPod touch. It is a remarkable device! The 5th generation iPod touch does not have a built-in automatic light sensor (it’s just too thin!)”

Was it too thin? Or did Apple decide to save $0.10 a unit? And do so by dropping a feature that was available in the previous model?

Consider NFC. As we saw in Apple And NFC: Why Not Plan For The Future?, Apple failed to add support for NFC technology in iPhone 5. Again, the reason given was that NFC currently offers no clear benefits to users.

Emphasis on “currently”. Regardless of that fact, by eliminating NFC from the current iPhone, Apple can save another buck a unit.

Consider the new earbuds that ship with the new iPod Touch. Based on looks, they appear identical to those that ship with the iPhone 5. But rather than build and ship the same part, Apple chose to design another unit, one without the built-in microphone.

Did they decide to rely on the built-in microphone in the Touch itself? Or did Apple yet again decide to save $0.10 a unit?

Finally, witness the Browett plan to reduce headcount at Apple stores, even, and I quote, “at the expense of user satisfaction.” It’s true that the plan was reversed by Tim Cook, but only after a rather significant amount of bad press.

Calculated by square foot, Apple runs the most profitable retail stores on the planet. Yet according to Browett, they need to make even more…

History Repeats

Years ago, Steve Jobs left Apple, and the bean-counters took over. Today, sadly, Steve has departed once more.

And it appears that the bean-counters are taking over once again.

When the original iPad was released, the market was stunned by its highly aggressive price point. Prior to its introduction, watchers were afraid it might be over a thousand dollars. Then we thought Apple would shave their margins and manage to hit $800.

But when Steve showed us a starting price point of $499, our jaws dropped. Executives at competing companies fainted outright.

This was not that day.

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