Tuesday, 19 September 2017

Why Is The iPhone X So Expensive?


The iPhone X was revealed with much fanfare in Apple's new Cupertino HQ last week- but it wasn't just the personalised poop emojis, the wireless charging or the new display that stole the headlines...



The all-new iPhone X was proudly revealed by Apple CEO Tim Cook as the "biggest leap forward since the original iPhone". The device, which marks the 10-year anniversary of the iconic smartphone, features an all-new bezel-less OLED display, 'Face ID'- the most advanced facial recognition technology on a smartphone- and other new updates such as wireless charging.

Not only was iPhone X arguably the biggest leap in technology since the original iPhone, but it was in fact the greatest leap in price- at $999 dollars, it became the most expensive mass-market smartphone ever, $230 up from the iPhone 7 Plus. This significant price increase, and the landmark of the iPhone X becoming the first ever thousand-dollar smartphone, remains a significant talking point of the new device- and most of the coverage around the price has been negative. So, why exactly have Apple made the iPhone X so expensive?

The most obvious contributor to the increase in sale price is the increase in the cost of production. According to GSM Arena, the X costs $412.75 to produce- compared to the $220 production cost of the iPhone 7. This drastic increase in cost is the result of a significantly larger, OLED display, a new glass material, and also a larger standard storage of 64GB for the base iPhone X.

Interestingly, the only place Apple could source the new OLED display was from its smartphone rivals Samsung- no doubt, the Korean firm will have exercised this monopoly power to try to reduce the margins of its competitor.

The new design and technologies of the iPhone X has also limited production capacity. This is rumoured to be one of the reasons why there have only two colours offered at launch, as well as why the actual sale date is in November, despite the announcement coming in early September. As basic economics dictates, a lower supply is likely to induce higher prices, as people clamour to not miss out on this latest iPhone.

While this price increase is rather drastic, people often forget that it's not the first time Apple have introduced devices at a high price. Apple believe that the iPhone X is a whole new device- an iPad Pro to the iPad that is the iPhone 8, or a MacBook Pro to the iPhone 8's MacBook. This is especially evident when you see that the prices of the iPhone 8 and 8 Plus have actually increased from the iPhone 7 and 7 Plus.

The first MacBook Air (top) was succeeded by a
more successful and affordable generation.
Source: Engadget
Historically, new Apple products as revolutionary as the iPhone X have provoked controversy due to their costs- the first generation MacBook Air, the 2015 MacBook and the Apple Watch are just three such devices. Experiences from these products have arguably given Apple the confidence to set a high price for the new iPhone. Where successful, Apple have been able to sell high volumes at high prices- and in slightly less successful cases, such as the launch of the first MacBook Air, Apple reduced prices over time as the new technology introduced became standardised in its line-up.

Apple knows that many people unwilling to pay $999 for the iPhone X will opt for the cheaper iPhone 8 instead- and this doesn't necessarily present a financial loss to Apple, given the lower production cost of the latter device.

And Apple also knows people will still buy the iPhone X. The massive marketing buzz around the product, and the sheer difference it represents from the usual iPhone lineup means that the device is undoubtedly going to sell in high volumes. It's likely, in fact, that the higher $999 price will be attractive to many customers. At a sub-conscious level, the round pricing of $999, essentially a thousand dollars, the idea of having a thousand dollar device will appeal to people who may want to own the device as a status symbol as well as a phone.

This type of product is known as a Veblen good- a product for which demand increases with price, in contrast to standard economics. At a sub-conscious level, the round pricing of $999, essentially a thousand dollars, the idea of having a thousand dollar device will appeal to people who may want to own the device as a status symbol as well as a phone.

A high pricing brings other potential smaller benefits for Apple. For example, when people spend as much as $999, the smaller purchases seem even smaller, and thus more appealing, to the buyer. For example, spending $100 on Apple's new AirPower wireless charging station seems less of an expense when you've spent $999 on an iPhone X than when you've spent $500 on a previous generation iPhone.

So while the increased production costs have introduced a necessity for Apple to raise the sale price of the iPhone for the new iPhone X, the decision to increase the price to as high as $999 is likely to prove a shrewd business decision for Apple, especially given the release of an updated iPhone 8 at a cheaper price. What remains to be seen, however, is whether Apple will eventually reduce the price of future generations of the iPhone X, as its technology becomes standardised in the iPhone range, or whether Apple is preparing the market for a shift to a new level of price for smartphones.
Mohammad Lone Editor