Apple Cuts Prices Strategically

Apple Cuts Prices Strategically
By Peter Burrows

A $99 iPhone and cheaper MacBook Pro laptops are announced in tandem with the new, pricier iPhone 3G S. Apple also expects higher profits from apps

Throughout the recession, Apple (AAPL) watchers have wondered whether the consumer electronics giant would release cheaper products to appeal to today's thrifty consumers. With sales of many products from other companies in the doldrums, the conventional wisdom goes, Apple could walk off with huge slices of market share for everything from Macs to iPods to iPhones if it would just lower their prices.

Apple ended the suspense at a company event for software developers on June 8, cutting the price on the most recent version of its iPhone and some versions of its MacBook Pro line of laptops. But far from slashing prices willy nilly, Apple made targeted cuts likely to help it win share without sacrificing the earnings gains that have powered an 80% increase in the stock price since mid-January, to 140.

The most dramatic move was to cut by half the price of today's iPhone 3G, to $99. Piper Jaffray (PJC) analyst Gene Munster speculates this cut will double demand for the phone—as occurred after Apple cut the price on the original device to $199 from $399 in June 2008. Apple's most recent reduction came two days after rival Palm (PALM) introduced its much-hyped Pre smartphone for $199. "I figured Apple would come in at closer to $149," Munster says. "They're clearly hungry for market share, and they don't want to give the Palm Pre room to breathe."

Even as it gains share, Apple is unlikely to sacrifice much margin. Analysts believe the profit margin on the $99 device will be roughly as cushy as in the past. Apple is benefiting from falling component prices as demand for displays, memory chips, hard drives, and other components dries up.

And given Apple's confidence in its ability to create hit products, the company has a penchant for convincing suppliers to give it even better prices in exchange for agreeing to buy up lots of units well into the future. Says one partner who asked not to be identified, "They got a very sweet deal from us, because we want to be in their future products." The huge increase in iPhones shipped will let the company better spread some fixed costs, such as for software development and advertising, over more revenue. Analysts figure that AT&T (T), the exclusive partner for the iPhone in the U.S., will pay for some of that $100 price drop, so as to lock customers in to the lucrative two-year sales contract. AT&T spokesman Mark Siegel says "the impact [of the subsidy on AT&T's bottom line] will be minimal," though he declined to elaborate.
Little if Any Impact on Gross Margins

No doubt, there are fewer dollars of profit on a $99 product compared to one that sells for twice that amount. But Apple also announced a faster, pricier new model that could help make up the difference. Called the iPhone 3G S—"the S is for speed," Apple marketing chief Phil Schiller told the crowd at San Francisco's Moscone Center—the device will cost $199 for a model with 16 gigabytes of storage and $299 for a 32GB model. Given that the additional 16GB cost only $24 or so, Apple is clearly keeping plenty of profit by charging $100 more, says David Carey, an analyst at tech consultancy Portelligent.

Apple can also expect a rising tide of profits from software. The company takes 30% of the sales from programs sold in its App Store.

Source :http://www.businessweek.com