John Gruber: “Speculation on the Pricing of and Strategy Behind This Year’s New iPhones”

John Gruber:

I created a bit of a stir the other day when I suggested the OLED iPhone “Pro” could start at $1,500.

Let’s take a serious look at this. $1,500 as a starting price is probably way too high. But I think $1,200 is quite likely as the starting price, with the high-end model at $1,300 or $1,400.

First, consider the problems Apple faces with any new iPhone. Here are the prices for the iPhone 7:

  • iPhone 7 32 GB: $649
  • iPhone 7 64 GB: $749
  • iPhone 7 256 GB: $849

And 7 Plus:

  • iPhone 7 Plus 32 GB: $769
  • iPhone 7 Plus 64 GB: $869
  • iPhone 7 Plus 256 GB: $969

These prices have remained unchanged ever since the “Plus” era began with the iPhone 6 models in 2014. Apple reports its company-wide profit margin each quarter, which tends to hover around 37 or 38 percent. Apple does not report margins per-device or per-product line, but considering that the iPhone accounts for around 70 percent of all Apple revenue, the margins for new iPhones almost certainly are somewhere between 35–40 percent. The exact number doesn’t really matter for the sake of this argument, so let’s just say that any new iPhone must have a profit margin of at least 35 percent for Apple to maintain its company-wide profit margin, and let’s further assume that maintaining company-wide margins in the high 30s is non-negotiable for the company.

Based on reactions to my post earlier this week, I think many people assume that the only thinking that goes into iPhone pricing is how much it costs for Apple to produce each iPhone. In other words, that the specs for the iPhone 7 were decided by how much Apple could put into them with $649/749/849 retail prices while achieving a profit margin of at least 35 percent. And that the specs for this year’s new iPhones have been set by the same logic.

But that’s too simplistic. You can’t talk about iPhone specs and pricing without considering scale. It’s not enough for Apple to create a phone that can be sold for $649/749/849 with 35 percent profit margins. They have to create a phone that can be sold at those prices, with those margins, and which can be manufactured at scale. And for Apple that scale is massive: anything less than 60–70 million in the first quarter in which it goes on sale is a failure — possibly a catastrophic failure.