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Is Apple Abusing Its Pricing Power With IPhone 4S?
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Have you ever wondered how much it really costs for Apple to produce its iPhones? Based on iSuppli's analysis of previously released iPhones, with each iteration of a new iPhone release, the cost of production material went down. For example, iSuppli estimated that the first iPhone in 2007 had $218 worth of materials, iPhone 3G in 2008 had $166, and the iPhone 3GS in 2009 had $179 worth of materials. The iPhone 4 had $187 worth of materials. If history is any guide, it is expected that the recently released iPhone 4S will have similar, if not cheaper, cost basis.

Now the question is, as material costs went down, what was Apple's rationale for keeping prices flat for its iPhones at around $600 USD without contract? Or for that matter, why didn't the consumers complain? The simple answer is consumers are not a very conscious bunch. They liked those ubiquitous and expensive Apple commercials. They got serviced by an ever increasing army of tech-support and sales reps in those glossy Apple stores. And for most part, Apple did produce the best quality smartphones, which out-performed the competition. Apple also provided both the latest hardware and software. But all of this was until Apple released iPhone 4S on October 4, 2011.

The latest iPhone 4S, which was released after a 16 months gap amid a lot of hyperbole, is arguably the first iPhone which will sport inferior hardware specs in comaprison to its higher-end Android based competition.

Apple's main selling-points for iPhone 4S is that the new device has faster speed and excellent voice command capabilities. However, a deeper look would reveal that Apple intentionally avoided some of the currently "available-but- expensive" enhancements for its iPhone 4S. The company's primary focus this time was to achieve extra-ordinary profitability or margin, rather than providing its consumers the latest and greatest available technology, on the hardware side at least.

Apple probably wanted to continue achieving "economy of scale" when it released iPhone 4S using a largely unchanged form-factor. Economy of scale means producing the same technology in larger volume. This helps achieve increasing efficiency and lower production costs; ultimately leading to higher profitability and margin.

For the iPhone 4S, Apple kept the body structure and touch screen size unchanged. This means Apple's production plants will keep churning out the same structure with more efficiency at lower costs.

Let's focus more deeply on the iPhone 4S's hardware and pay specific attention to its processor, display, and memory. This is where the real contentions are.

Apple's assertion of faster processing power in iPhone 4S should not be news to anyone given the months since iPhone 4's release. Today's technology naturally allows consumers to buy faster processors, at unchanged prices, at a later date. All one has to do is just wait. Therefore, it is almost natural to expect a faster processor inside a new iPhone given the 16 months gap.

Another interesting fact Apple is not broadcasting publicly is that the new A5 processor is manufactured by Samsung Electronics. Had they made this obvious, consumers would probably have started to wonder that Samsung currently has faster processors for its own Android based smartphones. For example, the iPhone 4S' A5 dual-core processor speed is anywhere between 900 Ghz to 1Ghz, whereas Samsung's Galaxy SII dual-core processor speed is 1.2Ghz.

On Random Access Memory (RAM), it is fair to say that the new iPhone 4S lags other smartphones. For example, it is now the norm for high-end Android based smartphones to provide 1GB of RAM. There is no clear indication whether Apple's new iPhone 4S would provide more than 512 MB of RAM that the iPhone 4 provided. This leads to the conclusion that Apple is providing lesser memory than many of its Android based competition, at a time when memory costs went down significantly over the last 16 months.

Displays on the iPhone is another glaring example of Apple's appetite for outsized profit. Defying many logic, Apple decided to keep its 2 year old retina displays intact in size and quality for the iPhone 4S.

Given that technology makes constant improvements over time in the LCD/LED business, Apple's customers are now stuck with a 3.5 inch display which is arguably inferior in size and quality against more advanced but available technology. For example, currently there are Android and Windows based smartphones with 4, 4.3, and 4.5 inch displays. Some of Samsung and HTC's 2012 series smartphones will sport 4.7 inch and even 5.3 inch displays. Besides larger size, various industry commentaries suggest Samsung's "Super AMOLED Plus" displays are superior in image quality and power consumption. It is obvious that these newer and better technology is currently costlier than Apple's 2 year old retina display technology to be used in iPhone 4S. Other smartphone manufacturers are providing their consumers the latest displays absorbing higher costs. This is not an issue for Apple.

Back in 2010 when Apple released iPhone 4, industry estimates suggested that Apple spent around $25 USD for each of the "retina" displays at that time. Knowing the speed of price reduction in the LCD/LED display industry, it is fair to assume that the same display after 16 months probably costs atleast 20% to 30% less. Apple will happily pocket the extra profit that will come from such cost-savings.

Let's now focus internal storage memory. Apple's iPhone 4S will retail for $199, $299, and $399 USD in the US with a two year contracts, with varying amount of internal storage. The $199 USD version comes with 16 GB of storage, whereas the $ 399 USD version comes with 64 GB. Apple's loyal customers pay extra $200 USD to get 48 GB of storage. Such extra storage costs less than $60 USD to buy from retail stores. However, Apple forces its customers to buy the memory pre-installed, since there are no memory expansion slots in any of its products. Such memory expansion slots come standard in almost all other smartphones. Imagine the profit Apple continues to make by preventing its consumers from inserting their own storage memory.

It is beyond doubt that iPhones are of outstanding quality. It is also fair to say that now there are various other non-Apple smartphones in the market which are also of outstanding quality -- thanks to the popularity of Google's Android. However, if one looks at the pricing and cost structure of iPhones, it will be obvious that Apple excercises onerous pricing power over cell phone carriers and loyal consumers. Customers willingly paid a premium in the past for Apple products, since Apple atleast provided them with ground breaking technologies. Unfortunately, iPhone 4S will be an anamoly in this regard, as it will be the first iPhone to sport inferior hardware capabilities in many aspects vis-a-viz its latest Android based competition.

About the Author: Shafquat Rabbee is a freelance writer from New York, USA


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