Apple Doesn’t Need a $250 iPhone (Premium)

Mark Gurman is a trusted source for Apple rumors, thanks to his insider access. But he should leave the analysis to the professionals: The last thing Apple needs is a $250 iPhone that would cheapen this premium brand and hamper revenue growth.

It’s not clear what drove Gurman down this editorial path, but he opined at length about this fantasy solution to the problems he says Apple is now experiencing with the iPhone in his Sunday newsletter. But we know from history—not just Apple’s but also the history of a particularly relevant me-too competitor—that making a cheap iPhone won’t work.

Here’s the setup: Thanks to long-overdue regulatory issues in multiple countries, its perceived latest to generative AI, no viable new product categories (a long-time fixation for Apple followers), and slowing iPhone sales, Apple’s in a bit of a bind. The company is set to announce its next quarterly earnings on May 2, and iPhone sales are expected to fall for the fifth time in the past six quarters. Gurman believes something has to change.

On the one hand, a bit of hand wringing may be warranted. In the most recent quarter, the iPhone directly delivered almost 60 percent of Apple’s overall revenues, but the real story there is a bit more nuanced: Because so much of Apple’s other revenues rely on the iPhone, especially Services, it’s fair to speculate that far more of Apple’s revenues—maybe something north of 90 percent—are tied to this one product.

But on the other, we’re forgetting the sheer size of the numbers here. Apple earned a profit of almost $40 billion on revenues of about $120 billion in that quarter, and its two biggest businesses, iPhone and Services, delivered a combined $99 billion of those revenues. Both businesses grew, with Services experiencing double-digit growth.

Yes, IDC just reported that iPhone sales fell almost 10 percent in Q1 to approximately 50.1 million units. So it’s reasonable to expect Apple to deliver similar news, albeit from a revenue perspective—on May 2. But a 10 percent drop-off in iPhone revenues when compared to Q1 2023 would put that figure at about $48.7 billion, which is hardly the makings of a disaster. (Most companies would kill for this problem.)

Gurman, IDC, and others blame numerous factors for the current slowdown in iPhone sales, some familiar and long-lasting and some new. China is cracking down on foreign brands. The pace of iPhone upgrades (as with all smartphones) has slowed. There are no more carrier subsidies. iPhone prices keep going up (this one seems self-inflicted). The economy is “shaky,” which is more perception than reality. Even COVID, that be-all boogeyman, gets an almost nostalgic call-out. Toss in all the uncertainty not previously—regulatory and legal attention in multiple jurisdictions, Apple’s apparently lateness to generative AI, and the company’s inability to find major new sources of revenue thanks to the failures of its smart car and VR headset initiatives—and it’s looking bad.

“It’s also clear that Apple is giving consumers less reason to upgrade,” Gurman says. “Let’s face it: Apple’s flagship product hasn’t changed all that much since the iPhone 12 was released in 2020. And, before that, there hadn’t been any major upgrades since 2017. The days of getting a big iPhone revamp every couple of years are very much over.”

I feel like we’ve been having that same conversation for years. But Apple has made up for its inability to deliver a major new hardware device by going all-in on services and accessories: Services is Apple’s second-biggest business by revenues and its fastest-growing, and Wearables, Home and Accessories isn’t far behind. With customers upgrading their iPhones less frequently, Apple can wring more money out of them in the interim via subscription services, AirPods, Apple Watches, and the like, Gurman says.

Yes. But Gurman misses some of the key nuances of this reality. For one, when those customers do upgrade to a new iPhone, that’s not “just a cherry on top,” it’s monumental, specifically because the average selling price of an iPhone keeps going up. And perhaps as importantly, all the Services sales, and most of the iPhone sales now fall into a crucial financial bucket that Apple and its investors cherish: Stable, regular income each month instead of the sporadic bursts of revenue that would previously come from annual sales. These sales are now core to the business.

To make his case for changing things up, Gurman throws out an odd claim, that Services revenues have “ground to a halt.” That’s odd because Services revenues grew 11.3 percent, 16.3 percent, 8.2 percent, and 22 percent in the previous four sequential quarters. And the YOY comparable for that most recent quarter, with 11.3 percent growth, was just 6.4 percent. Services revenues are up and down, I guess. But they have not ground to a halt. There is steam left in that engine.

Leaving that aside, Gurman has a plan: “If Apple wants to get serious about emerging markets,” it needs to sell an iPhone for about $250, far less than the $400-ish starting price of the iPhone SE.

Now, why would Apple want that?

As Gurman admits, that’s “not something Steve Jobs would probably do.” But “going downscale could be what the company needs right now.”

It is not.

Make no mistake, going downmarket is something Steve Jobs would literally never do. And it is something that today’s Apple would likewise never do either. It’s just not a good strategy for a luxury brand. And Apple is very much a luxury brand, not because all of its products are expensive relative to the competition, but because Apple only completes in the high-end of the market. Apple doesn’t do cheap.

It tried, one time. The “unapologetically plastic” iPhone 5C, released in 2013, was a notable failure, and it is perhaps equally notable that this product arrived two years after Steve Jobs passed, as it’s impossible to imagine him OKing such a thing.

To be clear, the iPhone 5C failed because it was purposefully cheapened, not just with lower-costs plastics, saving it money, but with the previous year’s phone internals (saving it more money). The iPhone SE, meanwhile, addressed those problems and has always offered a different value proposition: Modern (for the day) iPhone innards combined with proven (even beloved) form factors. Yes, previous or “older” form factors. But premium, too. Not plastic.

Apple’s current strategy makes sense for a premium brand: It offers several new iPhones each year, keeps select versions of the previous two generations in market, and provides an iPhone SE at the low-end. These products span a range of starting prices that accommodate almost any budget, from the $429 iPhone SE all the way up to the $1999 iPhone 15 Pro Max across 6 different models. And if you’re an Apple fan, come on. You know the need here isn’t a new pricing tier, but rather new form factors with folding displays.

Anyway, to make the shift Gurman suggests, Apple would have to … think differently.

“Apple would have to forget about its vaunted profit margins and simply chase revenue and market share,” he writes. “The move could help build the company’s brand in the developing world, and Apple could eventually upsell those consumers to pricier devices. Along the way, more of them will get hooked on Apple services and apps.”

Interestingly, Gurman’s sources have already told him what I’ve said here: Apple does not want to dilute its premium brand. But he makes another factual leap by claiming that the $699 M1 MacBook Air it is now selling through Walmart somehow shows that Apple is open to new ideas. That’s not what it shows: That MacBook Air is no different than the years-old iPhone 13 and iPhone SE it also sells (and you can buy much older iPhones through wireless carriers in Mexico and, I’m sure, elsewhere). This is not new. It’s just more of the same.

But it’s also better than that.

The thing that makes the M1 MacBook Air so compelling—to both Apple and those new-to-Apple customers who could never afford a new model—is the same thing that makes selling older iPhones so special. These products are still viable years later, and while that fact hurts Apple because of slowing upgrade cycles, it also benefits Apple because this company, unique among its competition, sells an incredible range of older product versions alongside its new products. This reality burnishes Apple’s premium brand and is its own form of word of mouth. This is a virtuous cycle that can only be enjoyed by a company that doesn’t just make expensive products, but makes high quality premium products. You don’t screw with that.

“There are billions of people in the world who don’t use Apple products, and that might not change without a more affordable option,” Gurman writes, channeling arguments people have been making for decades. “The biggest single opportunity may be India, where Apple [is] already expanding.”

There are billions of people in the world who don’t use Apple products. And there always will be. But the solution for those markets—whether it’s India or any other emerging market—is right there in place. Apple’s already doing it. And worrying about a specific price point is, well, missing the point: That math has already been done, and Tim Cook has checked and rechecked it. He understands the point at which some volume of cheap products undermines a smaller market of more premium products, and then destroys the brand from within. Say what you will about the man, but he’s got this.

Anyway. I promised a comparison.

As a Microsoft watcher for 30 years now, I’ve witnessed a nonstop and escalating cavalcade of Apple envy that included, but was not limited to, Windows 95 (the elegance of macOS), Windows Vista (the technical superiority of Mac OS X), Plays for Sure and Zune (iPod and iTunes), Windows Phone (iPhone), Microsoft Band (Apple Watch), and many others. But the grossest and most obvious example, of course, is Surface: The successes of the MacBook Air and iPad, in turn, finally pushed Microsoft over the edge to compete with its best partners.

Don’t take my word for it: Apple envy is all over Steven Sinofsky’s book ‌ Hardcore Software: Inside the Rise and Fall of the PC Revolution, and it’s even weirder and more explicit in his more recent his Hardcore Software blog.

Leaving aside the coopetition issues, Surface is nothing less than Microsoft emulating Apple with minimalist, premium products. It started off as a bid to show the world what it felt the iPad should have been and then turned into a broader but unsuccessful effort to try and define new form factors. Along the way, Surface, for one shining quarter, briefly became a billion-dollar business. And then it quietly faded again without ever turning a profit, as it pushed a strategy of diversification that included, and then relied on, far too many low-end products tagged with “Go” and “SE.”

Microsoft put a stop to the bloodletting last year and recast Surface as a premium brand again, reducing the model count significantly and killing off all but the most essential models. My suspicion is that the scaling back will only continue, but that story has yet to be written. For now, we know that Microsoft tried to go downmarket with Surface and failed. Just as it had done with Lumia, its Windows Phone line. Back-to-back defeats.

I know. Apple isn’t Microsoft. But that’s why it won’t make this silly and obvious mistake.