Every time Apple announces a new iPhone, there is an inevitable backlash over the exorbitant price. How does Apple get away with charging such a significant premium for its phone when there are plenty of other affordable, quality phones out there? More importantly, why do buyers keep paying so much for Apple’s hardware? Asymco‘s Horace Dediu believes he has the answers to both of those questions and a few more that might explain how the entire operation works.
Dediu’s answer to the first question is simple: “The obvious answer to why Apple asks so much is because it can. Anybody would if they could.” As for why we continue to pay so much for the iPhone, the answer is a little more complicated. First off, most buyers don’t pay more than $500 for their phones. On contract in the U.S. and other top markets, the entry-level price for an iPhone 5S is just $199. It’s the phone carriers that pay the upfront costs, so now the question shifts to them.
“Why do so many operators pay so much for Apple’s phones?” Dediu suggests that the iPhone carries with it an inherent value. When someone purchases an iPhone from a carrier on contract, he or she is more likely to subscribe to a higher revenue data plan as well, which brings in a profit for the carriers. Dediu also claims that $10-15 of an iPhone owner’s phone bill goes to paying off the phone. By the time a two-year contract runs out, the phone has nearly been paid for in full, and that’s before adding up other costs associated with owning a smartphone.
Dediu concludes by discussing a term economists have coined for products like the iPhone, servitization, which is when products begin to become indistinguishable from the services they offer. ”[Apple is] not in the business of selling phones. It’s in the business of enabling and creating services.”