Apple’s Lower Prices Are All Part of the Plan

Something unexpected has happened at Apple, once known as the tech industry’s high-price leader. over the last several years it began beating rivals on price.

People who wanted the latest Apple smartphone, the iPhone 4S, were able to get one the day it went on sale if they were willing to wait in a line, spend at least $199 and commit to a two-year wireless service contract with a carrier.

Or they could have skipped the lines and bought one of the latest iPhone rivals from an Apple competitor, as long as they were willing to dig deeper into their wallets. for $300 and a two-year contract, gadget lovers could have picked up Motorola’s Droid Bionic from Verizon Wireless, or they could bought the $230 Samsung Galaxy SII and $260 HTC Amaze 4G, both from T-Mobile, under the same terms.

Apple’s new pricing strategy is a big change from the 1990s, when consumers regarded Apple as a producer of overpriced tech baubles, unable to compete effectively with its Macintosh family of computers against the far cheaper Windows PCs. but more recently, it began using its growing manufacturing scale and logistics prowess to deliver Apple products at far more aggressive prices, which in turn gave it more power to influence pricing industrywide.

Apple’s innovations — including products like the iPhone, iPad and the ultrathin MacBook Air notebook — are justifiably credited for their role in the company’s resurgence under its chief executive and co-founder, Steven P. Jobs, who died on Oct. 5.

But analysts and industry executives say Apple’s pricing is an overlooked part of its ability to find a large audience for those products beyond hard-core Apple fans. Apple sold more than four million iPhone 4S smartphone over its debut weekend.

People can still easily find less expensive alternatives, with less distinctive and refined designs, to most Apple products. Within the premium product categories where Apple is most at home though, comparable devices often do no better than match or slightly undercut Apple’s prices. “They’re not cheap, but I don’t think they’re viewed as high-priced anymore,” said Stewart Alsop, a longtime venture capitalist in San Francisco.

Apple declined to comment for this article.

Prices in the ultrathin notebook category are an illustration of Apple’s strategy. while there are much cheaper laptops for sale, ranging all the way down to bargain-basement netbooks that cost a few hundred dollars, Apple’s MacBook Air has become a hit among computer users seeking the thinnest and lightest notebooks available. The product starts at $999 for a model with an 11-inch screen.

On Oct. 11, the Taiwanese computer maker Asus introduced its answer to the MacBook Air, a sleek device that uses Windows. but it was unable to undercut Apple; the Asus computer also starts at $999. Samsung’s wafer-thin Series 9 notebook, with comparable features, costs $1,049.

The computer maker Acer, however, began undercutting the cheapest MacBook Air this month with an $899 ultrathin notebook, the Aspire S series, that has a bigger screen.

The original MacBook Air catered to a more rarefied audience when it came out in early 2008, priced at a whopping $1,799 for a model with a 13-inch screen. a year ago Apple revamped the notebook to make it thinner and smaller and reduced its entry-level prices to $999 and $1,299 for models with 11-inch and 13-inch screens. Jean-Louis Gassée, a venture capitalist and former Apple executive, said there was a “collective gasp” at how low Apple priced the new MacBook Air.

The aggressive pricing, analysts say, reflects Apple’s ability to use its growing manufacturing scale to push down costs for the crucial parts that make up its devices. Apple has also shown a willingness to tap into its huge war chest — $82 billion in cash and marketable securities last quarter — to take big gambles by locking up supplies of parts for years, as it did in 2005 when it struck a five-year, $1.25 billion deal with manufacturers to secure flash memory chips for its iPods and other devices.

Mr. Gassée said Apple’s pricing decision on the MacBook Air made it clear that Apple’s management of its supply chain had become a “strategic weapon.”

Another example of that was Apple’s decision to price the entry-level iPad at $499 when it was introduced early last year, hundreds of dollars lower than many analysts expected. “I think everyone was stunned at the cost of the iPad,” said John Gallaugher, an associate professor of information systems at Boston College. “It was a very competitively priced device.”

For a time, Apple’s biggest competitors were unable to go below the iPad’s price with their own tablets. when Motorola Mobility Holding’s Xoom tablet hit the market in February, the cheapest model available without a wireless service contract was $800. Motorola later released an entry-level model with more storage than the least expensive iPad, priced at $599.

After lackluster sales, Apple’s major competitors are now finally undercutting the iPad on price, though it is not clear how sustainable that approach is. Motorola recently announced a plan to offer an entry-level Xoom tablet for $379 at best Buy stores for a limited time. after Hewlett-Packard, having missed sales goals, announced plans to discontinue its TouchPad line of tablets, it dropped the price of its cheapest model to a fire-sale $99.

The most credible challenge to the iPad is likely to come from Amazon’s $199 Kindle fire tablet, which goes on sale in November. while analysts say they believe Amazon will lose money on each device sold, the Internet retailer’s plan is to use the device to encourage purchases of other Amazon products and services, like e-books. Toni Sacconaghi, an analyst at Sanford C. Bernstein & Company, said the price of the iPad reflected a “mind-set change” at Apple after the introduction of the first iPhone in 2007, which started at $499. That was an eye-popping sum for a phone in markets like the United States, where people had become accustomed to getting lower-price, carrier-subsidized phones in exchange for committing to long wireless contracts.

Only a few months after the product went on sale, Apple cut $200 off the price of the high-end model of the iPhone, to $399. Apple shifted gears again in 2008 with a new model called the iPhone 3G that it priced at $199, after beginning to accept handset subsidies from its carrier partners, something it did not do with its first version of the phone. Carriers pay Apple more for the latest iPhones — around $600 each, analysts estimate — aiming to profit by locking consumers into wireless plans.

Mr. Sacconaghi said Apple’s pricing of the original iPhone and its exclusive distribution deal with AT&T in the United States at the time created an opening for Google and its handset partners to flood the market with phones running its Android operating system.

While Apple’s iPhone business is thriving, Android handsets accounted for 43.4 percent of the worldwide smartphone market in the second quarter, compared with 18.2 percent for Apple, the research firm Gartner estimates.

Many carriers now offer older Android handsets that cost customers nothing if they sign up for two-year contracts. and now even Apple is getting into that act: when it announced its latest iPhone model this month, it said its two-year-old iPhone 3GS would be free with a two-year contract.

First published on October 24, 2011 at 12:00 am