Remember When a New iPhone Cost $199? (Premium)

10 years ago, a brand new iPhone cost $199. Today, an iPhone XS Max starts at $1099. What happened?

There are theories. But the fact remains that the original iPhone, released in 2007, got off to a slow start, in part because of its incredibly high price (for the day) of $500, or $600 for a usable model. Microsoft’s Steve Ballmer infamously mocked the iPhone for its high pricing, and despite ongoing misunderstandings about his comments, he was right.

And we know he was right because Apple quickly dropped the price by an incredible $200 just two months after the iPhone went on sale. Think about that.

I hope by now that this history is well understood. But one thing I had forgotten as well is that Apple wasn’t done cutting the price of the iPhone. In 2008, when it announced the second iPhone, called the iPhone 3G, Apple cut prices yet again. And this time, the iPhone 3G started at just $199. Fully $300 less than its predecessor at launch.

“The iPhone started off at $599 for an 8 GB iPhone,” Apple’s then-CEO Steve Jobs explained during his WWDC 2008 keynote. “It now sells for $399, for an 8 GB iPhone. And we want to make it even more affordable.”

The thing is, Apple had to make it more affordable. The iPhone just wasn’t selling very well, contrary to all the history rewriting that has occurred since. And while lowering the price was only one factor—bringing it more carriers in the US, and to more countries helped a lot too—doing so was the central factor in helping iPhone become the phenomenon it is today.

“I’m really happy to tell you [that] the iPhone 3G is going to sell for $199,” Jobs said to cheers. “At just $199, we think that the iPhone 3G is going to be affordable for almost anyone.”

Now, I’m no fan of a room full of professional reporters and less professional bloggers breaking out into applause when Apple says anything during what is essentially a press conference. But this pricing structure warranted that applause. What a wonderful, consumer-friendly price point.

(* See the update below about contract vs. no contract pricing.–Paul)

What’s also interesting about this 2008 event is that Apple’s upgrade pricing structure hasn’t really changed over the years: It cost an additional $100 to upgrade from 8 GB to 16 GB in 2008. And today, most of Apple’s iPhone storage upgrades still cost $100 extra too.

Likewise, Apple offered an additional incentive for the most expensive 16 GB model: It would also be affordable in white. That never actually happened—Apple later came through on this promise a year later with the iPhone 3GS—but the firm still uses the same psychology today with its upgraded iPhone models. Pay more, get more.

So. How does Apple even justify today’s sky-high iPhone prices? As this product has become ever more successful, Apple has simply jacked up the prices. I’m not an economist or even particularly good at managing my own money, but it seems like achieving the scale that Apple has should result in ever-lower prices. I’m not convinced that today’s iPhones are more expensive for Apple to make than were the models of a decade ago. And the product’s small and contracting market share would normally drive any other company to offer this product for less, not more.

I suppose we could debate various theories. But I’ll just keep my opinion simple and vague: Once Apple achieved a certain volume—and to be clear, the iPhone is literally the single best-selling smartphone family in the market despite its small overall market share—it simply repositioned the product as it did the Mac, to being purely a premium product. A premium product with heady margins and ungodly profits.

This is the Tim Cook way. Remember, Tim Cook isn’t a product guy, he’s a process guy. He got to where he is by moving Apple’s manufacturing out of the United States, mostly to China, to save money, and by optimizing the supply chain and every aspect of Apple’s business. Cook talks about saving the world and other nonsense. But the business is optimized for Apple, period. And selling iPhones for more, rather than selling more cheap iPhones, is more profitable. Apple is the most successful business in the world. This focus on optimization is why.

And I’m not criticizing this approach at all, though I will further discuss the financial impact of buying an iPhone XS (or, even worse, an XS Max) separately, and soon. As Steve Jobs once explained in a post-keynote Q & A over a decade ago, Apple only competes in a certain part of a given market. So while its competitors may sell products for less, when those competitors do sell products with similar specs/features, they tend to cost the same as Apple’s products. This was true of the Mac. And it’s true now of iPhone.

Today, Google and Samsung, in particular, are competing with iPhone on functionally, of course. But they are also matching, or nearly matching, the iPhone’s price too. With Apple escalating the iPhone price range yet again this year, it will be interesting to see how these and other companies respond.

Regardless, you can kiss off any notion of a $199 iPhone happening again. Today, the cheapest new iPhone you can buy is $750. Or, if you don’t mind using two-year-old technology, you can get an iPhone 7 for $450. It’s not going down from there, folks.

* UPDATE: As a reader pointed out in the comments, the iPhone 3G prices cited above were with contract. So you’d still pay for the device, implicitly, over two years (or more, in some terrible cases) as part of your cellular contract. When Apple eventually offered the iPhone 3G for sales sans-contract a year later in 2009, the price was $599. That’s still well below the cost of the base prices of iPhone XR ($750), iPhone XS ($999), and XS Max ($1099). But not as dramatic as I originally thought. That said, there is still an interesting thing to be said around the cost of acquistion: When you bought an iPhone in 2008, you paid at least $200 up front. Today, you could pay nothing up front. But the phone itself is still more expensive. So it’s a win-win: It’s easier for you to buy and it’s more profitable for Apple.

Thanks! –Paul