Can Apple Survive its Move Toward Mass Market?

With the iPhone available for $99 and the Snow Leopard upgrade selling for a mere $29, Apple is on a slippery slope toward commodity status.
At the recent Worldwide Developer Conference 2009 (WWDC 09), Apple deviated from the norm and announced some very significant price cuts on selected products. Has the economic downturn made the Cupertino giant shift stance from high-end luxury to selling to the masses?

For years now, Apple has commanded a market position that big PC OEMs such as HP or Dell could only dream of pulling in. Apple’s user market share might still be struggling to hit 10 per cent, but nevertheless it manages to pull in an average profit margin of 30 to 35 per cent across its product lines.

By branding what are essentially bog standard PC and portable media player parts inside a box with the Apple logo on it, Apple has amassed a $25 billion dollar pile of cash.

However, you can only pull in a 35 per cent profit margin when people have plenty of cash to spare (or plenty of space on the old credit card). But times are tough and people are now far more reluctant to part with their dollars for a logo. So far, Apple has fared well, but the price cuts announced at the WWDC seem to suggest that the company has had to roll out price cuts in order to keep the tills ringing.

There were four price cuts announced during the keynote speech. First, $300 was shaved off the base price of the 17” MacBook Pro, bringing it down to a more palatable $2,499. Then an updated MacBook Air was announced, complete with a massive $700 price slash, bringing down the base price of Apple’s thinnest notebook to $1,499.

Mac OS X 10.5 “Leopard” users will be able to upgrade to OS X 10.6 “Snow Leopard” for the low price of $29 (compared to the usual $129). Finally, we discovered that the older iPhone 3G 8GB would be offered for sale for $99 along with the new, iPhone 3G S 16GB and 32GB models.

These price cuts significantly change Apple’s product line. Now the base price of the 17” MacBook Pro is the same as the base piece of the Mac Pro desktop system. The 30 per cent slashed off the price of the MacBook Air suggests that either 1) the Apple nerds have managed to cut corners significantly when putting together these skinny notebooks, or 2) the company was raking in a massive profit margin on each MacBook Air. The MacBook Air price slash is probably an attempt to boost back-to-school sales (especially since Snow Leopard won’t be out in time to help lift sales).

Then there was the $29 “Snow Leopard” upgrade for existing “Leopard” users. This is, without a doubt, Apple’s way of sticking it to Microsoft for all those “Laptop Hunter” ads that portrayed Apple as the expensive option.

Offering a $29 upgrade severely undercuts whatever Microsoft can offer, especially given that Microsoft can’t offer an upgrade to the lowest Windows edition for that price. I expect Apple to make a lot out of this in future ad spots.

iPhone Price Changes

However, the most significant price cut was reserved for the iPhone. For $99 new and qualifying customers can get their hands on the 8GB iPhone 3G handset. This isn’t the latest 3G S handset, but it’s still an iPhone, and it’s visually indistinguishable from the 3G S.

This move takes the iPhone out of the luxury bracket and puts it squarely in the mass-market bracket. The $99 price tag (excluding the hefty service contract) now makes it cheaper than all iPods except the budget iPod shuffle, which is now ironically only $20 cheaper than an iPhone 3G.

The iPhone, once the must-have accessory for those looking to show others how cool they are, has now dropped to a price point where it’s only a couple of rungs up the price ladder from free handsets.

The $99 price tag opens the iPhone up to a completely new market, but the downside is that in one fell swoop it wipes away any sense of cool or exclusivity that came with iPhone ownership. Your brand new, super shiny $399 iPhone 3G S 32GB doesn’t give you much in the way of bragging rights when the other guy has bought what amounts to the same thing for a third of what you did.

You could try explaining to folks how your CPU is faster, how you have more RAM, and how your camera can record video in spectacular VGA. I doubt you would get very far.

These price cuts will undoubtedly boost sales for Apple in the short term, but in the long term this move might not be such a good move. The problem with cutting prices is that there’s no easy way to retreat from the lower price point when the economy picks up once again.

Price cuts puts Apple on the same slippery slope as PC OEMs such as Dell, HP, Acer and Lenovo, who have crashed PC prices down to a point where it’s hard for anyone to make a profit. Apple’s only saving grace is that if you want a Mac, you’ve got no choice other than to buy one from Apple.

If you hold Apple stock, be careful. Keep a close eye on Apple’s sales and profit margins over the next few quarters. Apple has so far managed to to weather the economic storm pretty well, yet announcing price cuts at WWDC could be a sign that things have taken a sudden turn for the worst.

Tags: iPhone, Apple, Mac, Leopard

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