Apple's iPhone versioning

Tomorrow, Apple look set to introduce some new iPhones including an iPhone 5S (its flagship) and an iPhone 5C. The latter is seemingly a break from the past. From the rumours, it will be a lower cost iPhone but with colourful options possibly targeting the Chinese market where Apple finally signed on China Mobile as a distributor.

Because it has been “the market” that has called for Apple to release a lower cost iPhone, there has been much speculation on what the price of that phone will be.

To recap, Apple has always ‘versioned’ the iPhone — that is, had a lower cost and high cost version. For instance, right now the prices on the iPhone 5 are:

  • 16GB, $199 (with contract), $649 (unlocked)
  • 32GB, $299 (with contract), $749 (unlocked)
  • 64GB, $399 (with contract), $849 (unlocked)

See how pretty it is. $100 increments for each doubling of storage space.

Now, for the last few years, Apple has also “versioning on the past” by selling older versions of iPhones. The pricing of these are:

  • iPhone 4, 8GB, $0 (with contract), $450 (unlocked)
  • iPhone 4S, 16GB, $99 (with contract), $549 (unlocked)

Not quite as pretty as for some reason the iPhone 4 unlocked isn’t $449! Thanks to Asymco, we can see how this latter strategy has played out over time.



You can see here that the lowest cost iPhone has actually fallen — in other words, over time there has been an increasing spread between the flagship iPhone and the lowest cost iPhone. In other words, Apple has increased the degree of versioning over time.

Now Apple could have gone another year with the smaller screen iPhone 4S as the low cost phone and that still might happen. But it could also be the case that Apple have decided to use the iPhone 5C to standardise screen sizes. This is important for developers. In that case, the degree of versioning may actually decrease this year.

Ben Thompson has another theory. In my reading, he seems to believe that there is some importance attached by consumers to having the “newest” model. In his post, he sketches (literally) out a versioning/price discrimination analysis of Apple’s iPhone pricing. If I translate this into normal economics, a model of an iPhone is a bundle of characteristics. It involves processing speed, screen size, storage and, of course, the Apple brand (and iOS ecosystem). To that he adds another “the newest.” He argues that consumers will pay a premium for having the latest model. This is more or less independent of having the latest and best model. Consequently, by releasing an iPhone 5C and using that has the lower end version rather than past iPhone models, Apple will be able to charge a premium for that. So it won’t be a $0 phone and instead will be something more.

However, this seems surprising to me. For this theory to work out, it must not be the case that the consumers who want the latest are correlated with their desire to have the best. My guess is that instead these are highly correlated. In other words, the consumers willing to pay a premium for the latest are not willing to pay a premium for the iPhone 5C.

Thus, I would favour a theory of standardisation. Apple are more likely to standardise screen size, Siri and other things like finger-print access because this will help stimulate the developer ecosystem. This is just cleaning up following a successful change in iPhone design last year. And with that change we will see a similar set of versions and price points as in the recent past.

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