iPhone X.(Photo: Apple)
USA TODAY goes to the Apple hands on room to check out the iPhone X, 8 and 8 Plus and Apple Watch. USA TODAY
FOSTER CITY, Calif. — Usually, the introduction of an amazing new product is a cause for celebration. In the case of something like a new smartphone, the technology lust factor kicks in, people start planning for their purchase, and the eager countdown for the official release begins.
With the announcement of the very impressive new iPhone X, however, Apple is potentially facing an interesting dilemma. The issue is Apple also introduced some other new phones, the iPhone 8 and iPhone 8 Plus, that they also need to sell in large quantities. To many observers, however, the unique edge-to-edge screen design and advanced capabilities of the iPhone X make the iPhone 8 look, well, not nearly as compelling.
Sure, iPhone 8 has some nice new capabilities, including wireless charging, but the real question is, who’s going to want to buy the iPhone 8 if they can get the iPhone X?
Of course, one quick response is that at a starting price point of $300 less, the iPhone 8 is clearly targeted for more price sensitive buyers. The average selling price for iPhones right now is in the $630 range, which means that even the entry-level 64 GB iPhone 8 is priced slightly above what most iPhone buyers currently spend.
But pricing is a funny thing. According to the public numbers of the major U.S. carriers, a large majority of U.S. consumers don’t pay the full price for their phones at purchase time. While the days of subsidies are long gone, most consumers are on extended pricing/leasing plans for their smartphones, which means they’re paying something like $25 to $35 per month for their phones.
In fact, this is exactly the argument Apple and others have used to say that the somewhat shocking $999 price point for the iPhone X isn’t as bad as it first appears. If you’re used to paying a monthly amount for an existing phone, then it may only be $10 a month more to afford the pricey new model.
This argument cuts both ways, however, because it potentially further reduces the incentive to go for the less expensive model, especially when it looks relatively similar to last year’s iPhone 7 and other existing models. To be clear, the iPhone 8 has some key improvements over the iPhone 7, such as the powerful new A11 Bionic chip powering the device, but from a distance it doesn’t look much different. The iPhone X, on the other hand, is clearly a very different, unique and much more capable phone.
Because Apple has not only kept the iPhone 7 and 7 Plus in its line, they’ve also reduced the prices on them, the obvious question for those upgrading from older iPhones is, if I’m not going to go for the new design, why not go for a less expensive one that, for the vast majority of people, will be just as good?
In fact, probably the most surprising slide of the entire Apple event was the one that showed how many different models and different price points Apple will have in the market this fall. From the $349 iPhone SE to the $1,149 iPhone X with 256 GB of internal storage, it’s unquestionably the widest range the company has ever offered.
While Apple has taken some hits for extending smartphone prices up to and beyond $1,000, the company also clearly recognizes that in order to stay as the market share leader in the U.S. (and keep a strong presence in other parts of the world), they clearly need to hit a wide range of price points.
Even with the popular smartphone extended payment plans, some of the down payments required, as well as some of the monthly bills are just too much for many individuals and families, particularly if there are multiple phones in the household.
Plus, as we move to a world where more of the products and capabilities we want are delivered “as a service” the concern of “death by a thousand cuts” becomes very real. Sure, $10 a month for one service may not sound like much, but combine it with lots of other $10/month services and you’re suddenly talking about real money.
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The challenges for Apple come down to two main issues: availability and quantity. First, it’s not at all clear that Apple will be able to meet the demand for the iPhone X for some time. Rumors of production challenges have been rampant and the fact that the phone won’t officially be available until early November clearly suggests there must be some issues in manufacturing the kinds of quantities they need. So, the question is will eager iPhone upgraders be willing to wait for what could be a long time, will they choose to go with an 8 instead or will they opt for a less expensive “older” version? The impact of those decisions for Apple’s iPhone business could be profound.
From a numbers perspective, the iPhone represents nearly two-thirds of Apple’s revenue and, as the most valuable company in the world, that translates to a lot of phones and a lot of money.
Last year, the company sold more than 210 million iPhones worldwide and generated iPhone revenues of $136 billion. This year, those numbers are both expected to increase. If the iPhone 8 doesn’t sell in large quantities, it could be tough to achieve those targets.
Ultimately, the problem of having an amazing and pricey new product that lots of people want to have is probably not the worst issue a company can face.
However, by having such a large gap between the iPhone 8 and iPhone X, Apple may have inadvertently put themselves in a challenging position for some time to come.
USA TODAY columnist Bob O'Donnell is president and chief analyst of TECHnalysis Research, a market research and consulting firm that provides strategic consulting and market research services to the technology industry and professional financial community. His clients are major technology firms that include Microsoft, HP, Dell and Qualcomm. You can follow him on Twitter @bobodtech.