Why Apple thinks it can get away with a $1000 iPhone

When Steve Jobs introduced the first iPhone in 2007 for $599, most consumers weren’t yet in the habit of shelling out hundreds of dollars, let alone a thousand, for smart phone. At the time, most people didn’t fully experience the sticker shock because AT&T subsidized the phone and spread out payments over months or years.

A decade later, wireless carriers have all but phased out subsidies, and on Tuesday Apple is expected to make an unprecedented play for your wallet: a $1,000 iPhone X, so named for the 10th anniversary of the phone. It’s smartphone that few can afford, and with anticipated supply shortages, even fewer will be able to actually get their hands on one.

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On the surface, it’s an unusual move. Smartphones are getting better and cheaper all the time, and Apple is being muscled out of lower-cost phone market by Chinese companies such as Huawei and Oppo. And Samsung, which is Apple’s primary up-market competition, is already planning to make its (hopefully non-flammable) Galaxy Note 8 priced to compete with the iPhone X.

READ: Why you won’t be able to buy Apple’s iPhone X

So why is Apple launching a major new product — just a few months ahead of the holiday season — that much of its customer base can’t buy?

OLED screens are expensive

Organic light-emitting diodes, or OLEDs, are largely viewed as the new frontier for smartphone screens. The trouble is that Apple’s supply chain — the gargantuan link of factories and suppliers that produce iPhones in China — isn’t yet configured to produce OLED screens for a full new lineup of iPhones. So for now, OLEDs will most likely just be confined to the iPhone X.

“OLED is more costly for Apple at the moment because the volume will be limited, because there’s just one supplier — its rival Samsung,” said Carolina Milanesi, an industry analyst at Creative Strategies. “But at the same time, the iPhone X’s high price will make sure not everyone goes for it.”

Eventually, the goal is for Apple to push OLED screens down to the other, cheaper iPhones, according to Jackdaw Research’s Jan Dawson, who points out that Apple “has to start somewhere, and it has often started with one model.”

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Last year, for example, Apple introduced a higher quality “dual camera” that was exclusively on the iPhone 7 Plus — the most expensive and most limited supply phone announced last year. The dual camera is expected to be in the rest of the lineup this year.

“[Apple] knew it wouldn’t be in massive supply, so they started with it on one model and established a beachhead with that component,” Dawson said. “Apple starts small, and builds up scale slowly so they can take bigger orders. That enables them to grow and bring the component to the rest of the lineup over time.”

It’s all about the ecosystem

The fastest-growing part of Apple’s business isn’t in hardware. It’s in what it calls “Services” revenue, which is largely subscription stuff like Apple Music or iCloud that gets bought by people ensconced within the Apple ecosystem of devices and software.

The iPhone X – with its hefty price tag and limited supply — will likely get snapped up by people who are either already serious Apple customers, or would be inclined to stick with Apple because they’ve already dropped $1,000 on an Apple phone.

“If we are thinking about where Wall Street wants Apple to be, which is shifting revenue toward services, Apple needs consumers with disposable income,” Milanesi points out. “Going to consumers that can only pay for a $300 phone, it won’t help them long term. Apple is making sure that consumers with disposable income don’t look elsewhere besides Apple.”

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Apple’s superiority complex

Apple wasn’t the first company to try making a smartphone, but it’s succeeded where others failed partly because it made a much better device than anyone else. And so ever since, as more and more competitors entered the market, the company has leaned hard on its reputation as the highest quality phone maker — no matter the price point.

“Apple has lots of products that are priced over a range including ones that are not considered expensive, but they are also known to be a company that offers a great technology and sometimes that means paying extra for a higher level of quality,” said Brian Blau, an analyst at Gartner.

In this case, that “higher level of quality” could mean a few different things, such as facial recognition sensors to unlock the phone, special hardware to make augmented reality content with Apple’s highly anticipated ARKit software tools, or animated emojis.

“Apple would say ‘we want to make the best phone we can, and we can’t do it in a $750 device, so we’re creating this super iPhone’,” is how Dawson puts it. “These aren’t not mutually exclusive, motivating factors [from the business concerns], but I think some people at Apple believe this is about creating the best products you can.”