And the iPhone Wins Again

Scott Francis
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We previously addressed the newest generation of iPhones in the iPhone 3.0 (now, iPhone 3G S … however, the iPhone OS is going to version 3.0, so perhaps the title is still ok).  Now that Apples’ WWDC has come and gone, and the dust has settled (for the most part), the press coverage makes it pretty clear that Apple has been able to pretty effectively execute on its differentiation strategy: First, the major complaints leveled against the iPhone have been addressed (a series of fairly commoditized features such as cut-n-paste, MMS, opening .ics files, etc.) Second, if we revisit the product revision options open to Apple pointed out in a previous post on Apple and BPM, it looks like they fired on multiple cylinders:
  • Lower the price on the existing units – the iPhone 3G’s price has been reduced from $199 to $99.
  • Release a new, improved unit with the old (high) price – the iPhone 3G S has more memory, faster processing, better graphics, a better camera, somewhat improved battery life, tethering, MMS, etc.
  • Release more varied looks with approximately current technical specs (e.g. the colored iPod Nanos, for example) – Nothing done on this front, this time around.
  • Create new pricepoints with low-cost components – e.g. RAM.  The new, improved iPhone carries higher pricepoints for a 16Gb and 32Gb version, which represent profitable upgrades for Apple, along with a fairly inexpensive camera upgrade (they are trailing the state of the art for phone cameras by enough that they aren’t paying much for innovation in that particular area).
  • Improve the platform by adding new services or functions – the new iPhone offers the “find my phone” feature, video recording and editing, voice activation, etc.
  • Change the pricing of services on the platform – Not too many changes on this front.
  • Any combination of the above.  Check.
In particular, by lowering the pricepoint of the 3G, it appears that they’ve taken the oxygen out of the room for the competition (Palm Pre, for example).  So Apple retains the high end of the market with the new iPhone 3GS, while robbing profitability of the also rans by deploying the iPhone 3G at $99 (which itself is being upgraded by most of the improvements present in the iPhone OS 3.0).  And due to reduced component prices and volume negotiating, likely all of these phones are reasonably profitable for Apple when you include the carrier subsidies.  They’ve had time to recoup the R&D costs that went into the iPhone in previous years and are likely finding it increasingly easy to invest in future R&D against a growing revenue and profit stream. Moreover, they’ve managed to really build consensus and focus on their key differentiating points – the platform (Appstore and OS), and applications (50,000 and counting).  While there was some coverage of specifications which indicate that the new iPhone is an even better gaming platform, Apple steered clear of focusing on easily commoditized hardware components.  One article on TechCrunch bemoans the fact that upgrading from the iPhone 3G doesn’t qualify for the subsidized prices (yet), but it definitely appears to be the minority view in the press.  Another TechCrunch article paints a bleak picture for the rest of the smartphone market. In the immediate aftermath of the iPhone 3GS announcement, many wondered if Apple would sell as many as they had in previous summers.  Early signs are that all the pre-orders are sold out–  so while there may not be long lines on release day, there will be waits for the channel to fill. Apple has executed the differentiation strategy brilliantly – as they should – they’ve had a lot of practice with the iPod releases over the last several years, and it looks like a well-understood process. (I’m still looking for the rainbow color options next year… )