iPhone price cut will help Apple to remain at the top

USA: iSuppli Corp. has been following Steve Jobs’ announcements regarding changes to Apple Inc.’s iPod and iPhone lines today and has made the following observations:

Apple’s price cut on the 8Gbyte version of the iPhone will help Apple Inc. maintain its market leadership in smart phone and feature phone sales in the United States. Apple slashed the price of the 8Gbyte iPhone by $200, to $399, and ended sales of its 4Gbyte iPhone. Although some have speculated the move comes in response to disappointing sales of iPhone, iSuppli’s consumer research indicates that the iPhone outsold all competing smart-phone and feature-phone models in the United States in July on an individual basis.

iSuppli’s teardown research indicates that Apple was generating a robust hardware margin at its previous pricing, and will still be profitable at the new pricing.

Apple announced a new version of the iPod nano, which adds video playback capability to the product. The new nano features a larger two-inch display with 204 pixels per inch. Apple’s move to add video capability to the nano is not surprising, given consumer attitudes. For example, iSuppli’s sell-through research indicates that 64 percent of U.S. consumers have at least some interest in using video on their MP3 players. Nearly 10 percent of U.S. consumers were already using video by the end of 2006.

iSuppli also is forecasting that 69 percent of MP3 players will support video by 2011, with shipments of flash-based video players growing 91 percent annually.

"One surprising aspect of the new nano is that Apple emphasized video at the start of its event today but did not follow through by announcing any content-related development for video," said Chris Crotty, senior analyst, consumer electronics, for iSuppli. "Historically, Apple has coordinated hardware and content launches more effectively. An announcement involving video may have also diffused any of the potential fall-out resulting from Apple’s recent quarrel with NBC, which will no longer be distributing its content through iTunes."

Apple’s continuation of the iPod Classic seems like a stop-gap measure, perhaps until the company can add enough flash memory at an affordable price to provide high-capacity options. It raises the question of why a company would offer its best display, needed for videos—particularly movies—without employing the corresponding high storage capacities useful for video storage. Why was Apple against the idea of an iPod Touch with a hard drive? It seems like Apple had anticipated flash prices being lower and being able to offer higher capacities for the iPod Touch.

The addition of Wi-Fi to the new flagship iPod, the iPod Touch, is not surprising given what competitors like SanDisk and Microsoft have already done with their products. At first pass, however, Apple’s Wi-Fi implementation is more powerful than those of its competitors, Crotty said. In the Personal Media Player (PMP) market, Apple has not been the leader in adding features like video and Wi-Fi. However, the company has executed better after adding a particular feature, whether it’s Wi-Fi for the iPod Touch or the high-resolution display for video on the new nano.

The announcement of the partnership with Starbucks ties into Apple’s longtime iPod strategy, i.e., using content at break-even to support sales of high margin players and increase switching costs among its customers.

PC