The Case for a Low-Cost iPhone

This post was originally published on Wired.com in October 2013.

The main surprise of Apple's product announcement this fall was the lack of a low cost iPhone. Almost all analysts had predicted a low-cost unit to accompany the 5s. What Cook, Ive and Federighi delivered was a LOWER cost unit. $100 dollars lower. Not enough to significantly differentiate the product category, and definitely not enough to break into the APAC markets. Apple will sell phones in Asia, sure, but they won't gain noticeable marketshare distributing luxury goods.

Cook presented an argument: Apple products are an experience. These are iPhones. 2004 Jobs quotes likening Apple to BMW and Mercedes Benz were surfaced. Essentially, Apple reasoned, there was no way for them to introduce a unit at a lower price-point without sacrificing the very quality of product that makes them Apple.

What. A. Cop out.

The implication is that low cost (say, $0 with contract in the US and $400 in China, as opposed to the $733/$864 the 5c is retailing at) means low quality. Ironically, Apple is best equipped of all smartphone producers to compete at that end of the price range. Their vertical integration would have allowed them to produce a much better unit at a lower manufacturing cost than Samsung, Xiaomi, HTC, Nokia or Blackberry could achieve. But Apple obstinately insisted that it would be impossible to make a good (Apple-y) product at that price.

I disagree. Apple has no choice but to enter the low-end of the market if they want to be able to continue to produce quality, integrated products. The market position that allows them to continually set new standards in both software and hardware will be threatened if they ignore the biggest and most rapidly growing parts of the mobile market. Completely ceding control of the lower-cost device segment to the competition could allow competitors to strip Apple of the integrated design and manufacturing position its spent decades cultivating.

Remaining isolated in the luxury goods segment of the mobile handset market is devastatingly short-sighted. Steve Jobs helped Apple be successful by leveraging both a deep understanding of technology and of people to make tools that fit a long-term vision of the computer industry. Ignoring user needs, present or future, is a great way to be disrupted.

Appleyness

Analyzing this argument inevitably leads to a deconstruction of the core experience of an Apple product. What technical components lead to such a consistently unique, but coherent perspicacity in design? Ask a consumer what's special about their iPhone, and they're likely to tell you "it just *feels* different." This has always been partly ephemeral; often times a testament to the prowess of their product development, and other times an opaque defense for sub-par offerings. Many are bullish that it comes back to [design qualities that are unmeasurable](http://stratechery.com/2013/clayton-christensen-got-wrong/). To me, it always comes back to this 1980 Jobs interview shared by the Computer History Museum:

"Right now, if you buy a computer system, and you want to solve one of your problems, we immediately throw a big problem right in between you and your problem: learning how to use the computer... What we're trying to do is to remove that barrier.

The reason that Apple has a chance of solving that problem, versus a lot of other computer companies we all know that are much, much larger than we are now (although we're catching up) is that our whole company, our whole philosophical base, is founded on one principle: that there's something very special and very historically different that takes place when you have one computer and one person. Very different than if you have 10 people and one computer."

A young Jobs is making the case for personal computing, and setting the stage for a revolution in human-computer interaction. And for every bit more personal the Apple II was than the ENIAC, the iPhone is again compared to any clamshell or desktop device.

In 2013, the implementation of this vision falls primarily in the realm of "user experience." This is more than the responsibility of designers: experience is contingent on performance, and there are countless optimizations the user is never aware of that enable the functionality of the interface. Screen resolution and touch responsiveness are contingent on hardware improvements. Apple optimized for this with vertical integration and the current Federighi/Ive marriage.

From a very, very general perspective, that is Apple's product strategy: optimize experience by synergizing full-stack development and production, from the lockscreen animations down to transistors. Cook, and Jobs before him, would like us to believe this strategy is their sole motivator, the only yardstick by which they size up decisions. They hope we'll ignore a near-tautology, and we mostly do:

Strategy is realized through tactics.

You cannot implement product strategy in a vacuum. Even if you launch proprietary retail locations, other devices are still on the market. Even if you say these products were produced to be "unapologetic" and "magical," they will still be benchmarked by analysts and consumers alike in the current technology landscape of the present. Sure, the average consumer will not perform a conscious analysis like an industry professional or superuser. But the only cognitive process by which a person can understand something novel is to contextualize it in their previous understanding of the domain, in this case, device range. This is especially true when you are delivering incremental improvements within a pre-established product category (if you are introducing a new or redefining a category to the consumer, a la iPhone 2007, this rule applies less). And so, we arrive at the importance and necessary existence of tactics.

If you chart price trends in the computer industry over the last decade, Apple is always a deviation above the average, and chronologically behind the declining price. This was true of PCs and media players from 2000-2010 and has been true of smartphones and tablets since the iPhone's introduction in 2007. Powered by Android and driven by consumers in Asia, the average retail price of a smartphone has gone through the floor in the last few years. Moore's Law and manufacturer optimizations (even Intel is coming around) are helping drive down production costs.

This is a constant trend in computer verticals. A new technology product is introduced at a high price to a small group. Functionality, performance and manufacturing optimizations continue, distribution increases and average pricing decreases. Product lines expand to capture more value and more consumers, as Ben Thompson articulated so well. These basic market rules apply to mobile, but I'm not suggesting any more analogy to the PC industry.

Smaller, More Personal Computers

"Smartphones have few parallels to PCs. People that keep talking about smartphones evolving like PCs are just so clueless." - Steve Cheney, Forbes.

Cheney's point is that mobile devices are far more personal than "personal computers" (desktop and clamshell) ever were, and their widespread connectivity and ergonomic flexibility will make the market exponentially larger. I wholeheartedly agree with that, and it ties back closely to Jobs' words in 1980. Unfortunately, I think its a point Apple misunderstood with their recent release.

Mobile is highly personal, it's context aware, and it's ubiquitous. CDMA and GSM networks are getting exponentially more robust. Mobile is truly the next mass media communication paradigm. These factors are far more important than the exact interface elements and features of a home screen. Mobile computing is going to be far more widespread than Apple's second-most successful handset line, mobile media players, were.

Past Precedent

Apple understood the reach the iPod line had, and diversified it more than they had ever done with another product. The iPod was first introduced in October of 2001. By October of 2004, there were 3 products in the line: the fourth generation iPod, the iPod Mini and the iPod Photo (the existence of which Apple has tried to sweep under the rug, but it happened. By October of 2005, there were 5 products: the fifth generation iPod (with video playback), the iPod Nano, the iPod Mini, the iPod Shuffle and the iPod Photo (which would shortly be discontinued, but replaced by the Classic and Touch in 2007). Ignoring flash memory and colors, that is already twice as many products as in the current iPhone line. The iPod Shuffle was introduced in 2005 at $99, dropped to $79 in 2006, $59 in 2009 and $49 in 2010. That initial range diversification was also last decade, and 4 years after the original iPod release. The original iPhone was released 6 years ago, and Moore's Law has had an extra decade to accelerate. Not to mention portable media players were just an early step towards mobile.

The dynamic timeline below shows most Apple hardware releases since 2000. Scrolling left will help illustrate product (and pricing) diversification in the iPod line, and the complete lack of diversification in the iPhone line. Going even earlier, you can observe fragmentation in clamshells (more recently, MacBooks, and, earlier, the iBook and PowerBook lines). It is also worth noting here that "phone" pricing style varies widely by international region, and the amount of device cost absorbed by the carrier and the format in which it is passed into monthly plan rates changes. Ben Evans has a succinct summary of international differentiation], and I've tried to visualize it for the most recent iPhones here.

 

Select Apple product releases and pricing from 2000 to the present. Notes on how this timeline was put together at the end. (UPDATE:  The service I used to put together an interactive timeline exploration of Apple product pricing from the 90's through the present no longer exists. If you examine historical pricing for iPod's and various Apple laptops, you'll get the idea.)

The point is that mobile is bigger than most realize. Everyone is focused on the space and, as Semil Shah says, it's still under hyped. Part of this is a positioning issue: some people think the phone industry is growing. In reality, the computer industry is eating the entire telecom industry. This is not a niche segment, and we are just at the beginning. The room for product differentiation on top of the core feature set is HUGE. The mobile revolution is not about flat vs skeuomorphism, or whether Silicon Valley's latest shopping app is available on iOS or Android. It's not about which OTT messaging app will win. We're at the tip of the mobile iceberg. and the things devices need to get right are the basics.

In a note-taking app, the core-functionality is specific and narrow, so particular tiny elements of the interface and interaction design are crucial. This is somewhat true of devices at the more saturated end of the market. The demographic that chose between S4's and HTC One's and iPhone 5's, and already have 5s's. This is the demographic Apple already has a good hold on, and the only one they acknowledged in their recent release (the 5c was a nod to the slightly less engaged or affluent. Early sales have been sub-par but it will be a hit as the go-to phone many upgrade to throughout the year).

A cheaper iPhone might not have had fingerprint ID and slow-motion video and 64-bit ( which really did help expand the possible functionality for the future, like the m co-processor). But there are other ways to innovate down the market too, like Apple did with unibody plastic. They used their amazing in-house silicon and industrial design and manufacturing groups to create a unique, new and less expensive product. But it was an obnoxiously conservative step and not a true down-range play so much as a lateral step. The 5c is just a new look for the original 5, with optimizations in manufacturing that save costs for Apple.

So, from Apple's perspective, what were the dangers of introducing a cheap iPhone this September?

The chief risk would be ruining the "Apple experience." Many people hang the iPhone's success on the unquantifiable design edge Apple has. Cracks in this facade are not acceptable, underscored by the notorious silence and secrecy of One Infinite Loop. The iPhone was a revolutionary re-invigoration of this status. It was badly needed in 2007 as the iPod line fragmented and clamshell notebook releases were increasingly incremental and expected.

However, I think the initial success of the iPhone had as much to do with being the first product to clearly present all the functionality of modern mobile devices to the user. Don't get me wrong; that's a triumph of technological innovation and product design. The best tool has to combine power and usability, as Jobs emphasized. But timing and positioning, the tactical elements, are as important as the strategy.

Feature phones had apps, and even browsers, but poor design and bandwidth restrictions rendered them an afterthought. App development was not an attractive proposition when collecting user payments was painful. With the original iPhone, Apple did what Jobs described in 1980: got out of the way and allowed users to easily see the power in their hand. But even the first unit didn't kill all birds: it infamously had no copy/paste, no outside apps, and other limitations. As network bandwidth improved, basic functionality was expanded, and developers were invited into the ecosystem, Apple redefined the category for consumers. Again, view this as the computer industry swallowing phone manufacturers, not Apple making a phone.

Apple's key differentiation is design, which, in the wild, is the experience of the user. The new functionality presented by the experience of the mobile device is exponentially more important than the differences between iOS6 and 7. The only segment this may not be true in, again, is a saturated demographic of already-super-users.

When internet adoption was still in its infancy, most didn't wait until we could role fiber optics out to the world to protect the "experience." The new network presented so much amazing functionality that we plugged as many people in however we could, and we still are. Project Loon, Google X's project to bring Wi-Fi to parts of Africa using hot-air balloons, is an example. The experience of Google products is much worse on low bandwidth internet, and they make less money (serve less searches). But they understand the first step to growing their business is growing the number of nodes on the network. This is how mobile should be viewed, too.

Most people reading this might care about parallaxgate, and the length of transition animations and the object-creation performance improvement with the ARM64 (again). But the vast majority of users do not. Technologists know they are not the majority, but it is worth the constant reminder that our perspective is not the consumer's. Cognitive scientists who study consciousness have a rule: never trust introspection as evidence of how the mind works. Its important those of us who examine user experience and consumer behavior follow the same heuristic.


This chart from Localytics is a good reminder of the superuser bubble many of us live in, physically or through digital content:
The superuser bubble, visualized.


A lower end product could've exposed so many more people to the magic functionality of mobile, of being connected anywhere and a device that fits seamlessly into more parts of a user's life than previously possible. The number of people getting mobile computers (as opposed to feature phones) for the first time is a way bigger opportunity then people upgrading an old iPhone. Apple is better than any other computer or operating system maker at engagement. If anyone could make a less expensive mobile device that yielded a first-rate experience, it's Apple. And I have to believe with the amazing innovative power of their vertical teams, the money they have on hand (10% of all non-financial corporate cash in the world), and the proven ability to redefine consumer technology categories, they could've produced that iPhone this year.

The differentiation-on-design strategy Ben Thompson presented as an alternative to Clay Christensen's Theory of Low-End Disruption is not limited to the highest end of the market. Apple's vertical integration would have allowed a product so unique it essentially could've redefined that category. Xiaomi device activations are growing at an astounding rate, and they're not producing at Apple-level quality, by their own admission. If anything, it would be even easier to differentiate on superior user experience at an end of the market where design is lacking. Additionally, Apple has a precedent of product range fragmentation, and of shipping slightly different products to the APAC markets (including multiple iPhone releases). Again, this wouldn't have been a shocking or hard-to-imagine move. Analysts called for it.

What does Apple stand to lose by not introducing a low-cost unit?

With consumers:
Becoming a luxury brand, or more of one then they are today. The iPhone's meteoric rise has tied Apple to consumer's perception of mobile, even with the increasing power of Android. This is especially evident in China, where Apple has significant cultural influence and mindshare in the mobile device vertical, despite the fact that iPhones are very difficult to obtain there. Apple still has a lot of sway in mobile (partially because of the developer community, which I'll touch on next). If they don't crawl down from their expensive end of the market, this will change. They will be a niche player when they could've been a mainstay. We know Apple can survive as a niche producer with a defensive category of superusers (hello, 1990).

With developers:
Losing their sway with and share of the developer community. This is arguably the most significant concern. Apple has notoriously bad developer relations and opaque App store policies (people kicked out of the store without warning, no insight into how best selected, allowing some rule breaches) and have not been interested in letting people work on the app discovery problem], deprecating UDID (if you work on personalization this was a significant blow, and IDFA and IDFV are not 1:1 functional alternatives).

Android is 80% of global marketshare. The ARPU argument that iOS apps earn more than Android apps is disintegrating. Apple could do much more for developer well-being or app revenue dynamics, and the cracks are starting to show. Plus, Android just allows more functionality. The way Apple is only pushing devices that have novel functionality, and refusing to innovate down-range, Android supports a more functional and open OS. Google doesn't turn every feature into a proprietary lock-in mechanism, like taking open-standard Bluetooth Low ENergy and converting it into Airdrop/iBeacon. The battle's at the gates on this one, Apple.

With competitors:
Being late to markets where Samsung, Xiaomi and others will be thriving. The pie is growing. The rate at which it's growing is increasing. The open parts of the market are growing, and openness makes it easier for consumers to switch and port their data around. If Apple attempts to break into the lower end later, it will be hard to convince users to switch to their proprietary, lock-in software ecosystem. iCloud has struggled to gain traction among devoted iOS users, it won't fare better when Apple is attracting users away from Android or MiUI. Additionally, as Apple's share of mobile continues to shrink, they will probably make the walls to those services increasingly high to try and hang on to their user base and promote Apple-only benefits.

Where's the fire?

I am not arguing Apple is on the brink of failure in mobile. Clay Christensen infamously has predicted iPhone demand collapsing or being disrupted. Ben Thompson's refutation of this is great, and there are two other factors I'd add:

1. Growth of the market insulates them from the cost of loss in market share. Android has been growing faster for years but Apple is still doing fine. Eventually, this will catch up with them, but for now, iPhone sales are growing.

2. Barrier to entry, or barrier to establishing a supply chain. Apple has been making computers, and small, personal computers, for along time. Their established vertical integration, from external suppliers and manufacturers as well as internally from software through silicon and polycarbonate plastic. It's not easy or trivial to establish these relationships and market position. HTC's recent supply-line struggles highlight this.

That being said, it is clear the average mobile user in 5 years isn't going to be able to afford an iPhone, if they even can now. In this industry, there are "narrow windows of opportunity but long lead times." Don't ignore the users.

Apple has no choice

Mobile is growing, and Apple needs to grow with it. I'm presenting the case for Apple harnessing the network effect: get on the mobile market rocketship. No way, the longtime Apple fans cry. Apple has never ascribed to that strategy! That's Google. Look at the walled garden and its success. Look at Apple II's! When Microsoft was king, everyone wanted Apple to license Mac OS. That was clearly a bad idea, because look at Apple now!

Its not about being growth-focused. Its not about acquiring more new users and activations. They must grow with the mobile market to defend their ability to be Apple.

Apple's reasons for not releasing a cheap iPhone this month (retaining Appleyness) are the same reasons why they HAVE to enter this part of the market. If they don't, they will lose the position that allows them to differentiate their products. Other producers will catch up on end-to-end integration. Google has built out a world-class design team and purchased a handset maker. Xiaomi device activations are exponentially growing and they won Hugo Barra. None of this is approaching Apple's level of integration, but they're certainly inroads.

Their sway with manufacturers will decrease. Their sway with developers will decrease. The tactics that allow the implementation of their design-differentation strategy are founded in end-to-end integration. As long as they remain ahead, they can defend this position. Software features like iMessage, Airdrop and iCloud lock users into their platform. Their product lead allows them disproportionate power with developers and manufacturers.

If they ignore this exponentially growing part of pie, their moat will evaporate. They will essentially give away unit sales revenue, new user activations, and bargaining power to competitors. Ability to have sole control over chip fabbers will go away, and other companies (Xiaomi, Motorola, Samsung) will be able to get closer to rivaling the end-to-end integration, even if its just with Android forks (Cynogen).



Mobile OS share by country, February 2013.


Additionally, loss of overall marketshare damages Apple's proprietary software ecosystem lock-in play. If the majority of users aren't on iOS, iMessage loses its appeal. iBeacon is less interesting when other devices have general BLE ability. When every device has Rdio and Spotify, iTunes Radio is not a headline product announcement. This is compounded and accelerated by earlier concern about loss of the dev community. If this all sounds alarmist, and farfetched, take a look at the percentages column of this chart]. In the second episode of Cubed, Ben Thompson suggests Apple and Google's current mobile strategies are based on their long-term vision for the evolution of personal computing. That perspective must be global, and I'm not sure Apple's is.

Apple isn't likely to change their tack on this soon, given they somewhat explicitly took a stand against it this release cycle. But, time will tell. Christensen is probably wrong, and I doubt Apple will fail in mobile. But, again, as Semil pointed out, mobile is UNDER-hyped. We're just at the beginning. If Apple carries this strategy up the vertical part of the growth curve, it's going to hurt them the same way early Microsoft hurt them.

The reason the "c" wasn't for "cheap" is the same reason Apple must get in on this part of the market. Otherwise, they will demonstrate a fundamentally flawed misunderstanding of mobile, its benefits and its future, or an unreasonably short time horizon for a company of their scale. In that 1980 interview, Steve Jobs was talking about building the best tools possible for the average person. He understood that usability was an important component of functionality in the eyes of the user. That was a source of his notorious perfectionism. He wanted to build the best computer for the present, keeping in mind a good understanding of the future. The choices that led to the iPhone 5s and 5c seem more like fashion product strategy than computing strategy. I don't think Apple avoided lower-cost phones because they couldn't be made acceptably usable. Their motivations were like that of many large, publicly traded companies: to minimize risk and maximize margins. That was short-sighted, and if perpetuated, Apple will pay the price through disruption.

Retreating to the high-end of the market is not an option. **For Apple to continue designing and operating as Apple, they have to expand their product range in mobile. I wish the 5c had actually been cheap.**

UPDATE: February 2, 2014

I'll just leave this quote from Benedict Evans' weekly newsletter right here:

"Apple's quarterly results came out and were a little below expectations: sales of 51m iPhones are not dramatically higher than last year's 47.8m. Mac sales are doing well, as are iPads, but the narrative of the last year or so hasn't changed: there are only so many people on earth who can buy a $600 phone, and the 5C didn't change that positioning. Apple is camped out at the high end and so far seems pretty secure there (market share continues to rise, indeed) but growth has slowed right down and it is hard to see another product leading to another doubling of revenue. But then, at $174bn revenue in 2013, doubling revenue is a challenge for anyone. Link"

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Timeline notes and thoughts:
Thanks to EveryMac for awesomely comprehensive historical Apple product specs.

* Note the iPod line fragmentation and clamshell PC fragmentation. In 2003, their was 4 different aluminum PowerBook G4s and as many iBooks.
* After 2003, I stop tracking the PowerBook and iBook. From 2003-2005 (when they were discontinued) they continued to fragment with incremental performance improvements and dropping prices. The same happened with MacBooks after 2007: little pricing change and few major features. The number of MacBook releases in 2009 is overwhelming but there are no major features to report. Plenty of evidence here to support Apple is not opposed to fragmentation (like the MBP 15" getting updated in 2008 and the 17" equivalent not appearing until 2009).
* Note the different instances of Apple shipping unique iPhone products to China in 2009. Also note the relatively high pricing of devices in these markets. To understand mobile internationally, you need to read understand how plan/device pricing structure works. It is very different outside the US than here.
* When comparing different 5c/5s models, if pricing was the same I condensed even when product SKUs were different (like Japan vs US models, China Telecom vs Unicom phone, etc).
* Exchange rates calculated from current figures on 9.28.2013
* Skipped some releases were only thing that changed was memory, but pricing and range diversity were consistent
* Stopped tracking clamshells after 2009.
* A slash between prices indicated the only difference was flash memory.
* Apple has always sucked about flash memory and pricing!
* Prices are list release, unadjusted for inflation since 2000.

*Thanks to Sam Cunningham, Albert Nichols and Chris Bulger for edits. Swimming through 4500 words of unedited material is not fun and I'm lucky my best friends are so generous with their time.*