Apple Watch: Sept 5th Announcements

I find it interesting that the vast majority of the journalists, analysts and pundits view the price reduction for the iPhone which was just announced as a “panicky” move responding to weak iPhone sales. They also see the $100 rebate to previous buyers as a negative. I see these things another way.

Before the iPhone was released, there was widespread concern among Apple investors that the iPhone would cannibalize nano sales in particular, if not iPod sales overall. Knowing this was a possiblity, Apple moved to prevent the phone from eating into iPod sales the only way they could; by pricing it high enough that it didn’t compete directly with their other products. But don’t take my word for it: estimates from iSuppli indicate that there was approximately $300 in profit in each iPhone at launch; an unheard of margin, even for Apple. There is only one explanation for why Apple priced the phone so dearly initially; preservation of sales for their established products.

Apple then, on September 5th, completed a transformation of the entire iPod line around the iPhone. The nanos dropped in price and gained video capabilities. The touch was released without the phone components but with additional capacity over the iPhone. The Classic was released at double its previous capacity, and Apple was finally free to price the iPhone where they originally would have had they not been concerned about losing iPod sales. The complete iPod line, including the iPhone, fits together cohesively. It’s almost as if Apple planned it that way.

And what about that $100? That $100 is probably going to cost Apple very little in the end. As has been noted by gizmodo, among others, there’s not much you can buy for $100 in an Apple store. Earbuds? iLife ’08? a shuffle? A lot of the people are going to use that $100 and buy bigger ticket items, and it’s going to be pure gravy for Apple. I wouldn’t be suprised if, after all is said and done, that $100 ends up costing Apple something closer to $15 per person, on average. IF they’ve sold 1 million iPhones, that’s $15 million..but remember that they got $300 in profit out of each sale. $300 million in profits and $15 million in rebates? Those are the kind of numbers that I, as a shareholder, can get behind.

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