by THE NEW YORK TIMES
12:53 PM Oct 24, 2011
Producing objects of desire without a price premium over competitors has proven a winning combination
NEW YORK – Something unexpected has happened at Apple, once known as the tech industry’s high-price leader. Over the last several years it began beating rivals on price.
People who wanted the latest Apple smartphone, the iPhone 4S, were able to get one the day it went on sale if they were willing to wait in a line, spend at least US$199 (about S$250) and commit to a two-year wireless service contract with a carrier.
Or they could have skipped the lines and bought one of the latest iPhone rivals from an Apple competitor, as long as they were willing to dig deeper into their wallets. For US$300 and a two-year contract, gadget lovers in the United States could have picked up Motorola’s Droid Bionic from Verizon Wireless, or they could bought the US$230 Samsung Galaxy S II and US$260 HTC Amaze 4G, both from T-Mobile, under the same terms.
Apple’s new pricing strategy is a big change from the 1990s, when consumers regarded Apple as a producer of overpriced tech baubles, unable to compete effectively with its Macintosh family of computers against the far cheaper Windows PCs. But more recently, it began using its growing manufacturing scale and logistics prowess to deliver Apple products at far more aggressive prices, which in turn gave it more power to influence pricing industrywide.
Apple’s innovations – including products like the iPhone, iPad and the ultrathin MacBook Air notebook – are justifiably credited for their role in the company’s resurgence under its chief executive and co-founder Steve Jobs, who died on Oct 5.
But analysts and industry executives say Apple’s pricing is an overlooked part of its ability to find a large audience for those products beyond hard-core Apple fans. Case in point, Apple sold more than 4 million iPhone 4S smartphone over its debut weekend.
People can still easily find less expensive alternatives, with less distinctive and refined designs, to most Apple products. Within the premium product categories where Apple is most at home though, comparable devices often do no better than match or slightly undercut Apple’s prices.
“They’re not cheap, but I don’t think they’re viewed as high-priced anymore,” said Mr Stewart Alsop, a longtime venture capitalist in San Francisco.
Prices in the ultrathin notebook category are an illustration of Apple’s strategy. While there are much cheaper laptops for sale, ranging all the way down to bargain-basement netbooks that cost a few hundred dollars, Apple’s MacBook Air has become a hit among computer users seeking the thinnest and lightest notebooks available. The product starts at US$999 for a model with an 11-inch screen.
On Oct 11, the Taiwanese computer maker Asus introduced its answer to the MacBook Air, a sleek device with a brushed aluminum body that uses Windows. But it was unable to undercut Apple; the Asus computer also starts at US$999. Samsung’s wafer-thin Series 9 notebook, with a comparable set of features, costs US$1,049.
The computer maker Acer, however, began undercutting the cheapest MacBook Air this month with an US$899 ultrathin notebook, the Aspire S series, that has a bigger screen.
The original MacBook Air catered to a more rarefied audience when it came out in early 2008, priced at a whopping US$1,799 for a model with a 13-inch screen. A year ago Apple revamped the notebook to make it thinner and smaller and reduced its entry-level prices to US$999 and US$1,299 for models with 11-inch and 13-inch screens.
Mr Jean-Louis Gassee, a venture capitalist and former Apple executive, said there was a “collective gasp” at how low Apple priced the new MacBook Air.
The aggressive pricing, analysts say, reflects Apple’s ability to use its growing manufacturing scale to push down costs for the crucial parts that make up its devices. Apple has also shown a willingness to tap into its huge war chest – US$82 billion in cash and marketable securities last quarter – to take big gambles by locking up supplies of parts for years, as it did in 2005 when it struck a five-year, US$1.25-billion deal with manufacturers to secure flash memory chips for its iPods and other devices.
By buying up manufacturing capacity ahead of time, Apple forces its competitors to scramble for the parts that are still available, raising costs for their products, analysts say. Apple is the biggest buyer of flash memory chips in the world, according to the research firm iSuppli.
Mr Gassee said Apple’s pricing decision on the MacBook Air made it clear that Apple’s management of its supply chain had become a “strategic weapon”.
Another example of that was Apple’s decision to price the entry-level iPad at US$499 when it was introduced early last year, hundreds of dollars lower than many analysts expected.
“I think everyone was stunned at the cost of the iPad,” said Professor John Gallaugher, who works on information systems at Boston College. “It was a very competitively priced device.”
For a time, Apple’s biggest competitors were unable to go below the iPad’s price with their own tablets. When Motorola’s Xoom tablet hit the market in February, the cheapest model available without a wireless service contract was US$800. Motorola later released an entry-level model with more storage than the least expensive iPad, priced at US$599.
After lacklustre sales, Apple’s major competitors are now finally undercutting the iPad on price, though it is not clear how sustainable that approach is. Motorola recently announced a plan to offer an entry-level Xoom tablet for US$379 at Best Buy stores for a limited time. After Hewlett-Packard, having missed sales goals, announced plans to discontinue its TouchPad line of tablets, it dropped the price of its cheapest model to a fire-sale US$99.
The most credible challenge to the iPad is likely to come from Amazon’s US$199 Kindle Fire tablet, which goes on sale next month. While analysts say they believe Amazon will lose money on each device sold, the Internet retailer’s plan is to use the device to encourage purchases of other Amazon products and services, like e-books.