Apple's $199 iPhone: How can it be so cheap?

Apple's announcement of a next-generation 3G iPhone wasn't a big surprise for most people at Monday's World Wide Developers Conference.

Apple's announcement of a next-generation 3G iPhone wasn't a big surprise for most people at Monday's World Wide Developers Conference. But the low prices at which the new models will debut — US$199 with 8GB of memory and US$299 with 16GB — certainly surprised me.

How could a phone with more memory, more radios (3G/GPS technology), and better battery life go for, essentially, a third of what the original cost a year ago? Sure, tech prices go down, but usually vendors hold the line on prices when they add new performance-improving features.

I surveyed a handful of experts to see what they had to say.

Price and Quality Tina Teng of iSuppli agreed that the 3G and GPS radios in the new models probably did add cost, but pointed out that other components (most notably memory) are indeed going down in price.

Gartner vice president Ken Dulaney said even the 3G radio technology probably didn't add as much cost as it might have a year ago, since most companies that make chips for cell phones are transitioning to the faster technology anyway. Increased supply means lower prices.

And Apple has also made some cost-cutting design changes, using plastic instead of metal on the new iPhone's case. Will that significantly degrade the quality? Teng wouldn't say that. "For users, what matters [are] the durability and the functionality... I'm sure they did a lot of stress tests to make sure the materials they are using now are still going to be durable."

More Than Just Hardware Sales

But Dulaney said there may be more to the price cut than manufacturing math. "There are probably subsidization issues going on here," he said. In fact, AT&T in a news release issued today hinted that it would be taking a hit on revenues from device sales in hopes of increased profits down the line from data services to what's anticipated to be a huge customer base.

"In the near term, AT&T anticipates that the new agreement will likely result in some pressure on margins and earnings, reflecting the costs of subsidized device pricing, which, in turn, is expected to drive increased subscriber volumes," the news release states. It also points out that AT&T will no longer share revenue on iPhone services with Apple, and that the cost of an unlimited data plan for consumers will rise from the current US$20 a month to US$30 a month (on top of a voice plan available for $40 or more).

Shiv Bakhshi, director of mobility research for IDC, says Apple will recoup any decline on its own margins for device sales "(a), through volume, and (b), through services I think iTunes will offer."

This business model would not have been possible a year ago, he notes. "When the iPhone was launched, it was with one operator in one country. Now it's launching in 22 countries as a 3G phone, going to 70 countries by the end of the year."

"They also have that thing called the apps store," notes Mike McGuire, research VP at Gartner. Apple CEO Steve Jobs has said developers of iPhone apps will retain 70 percent of sales revenue, which leaves 30 percent "for someone else," McGuire said.

"It's not just a hardware sale anymore — it's an ecosystem," McGuire added. "They're not just making money on the hardware."

Join the PC World newsletter!

Error: Please check your email address.
Rocket to Success - Your 10 Tips for Smarter ERP System Selection
Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Yardena Arar

PC World
Show Comments

Most Popular Reviews

Latest Articles

Resources

PCW Evaluation Team

Matthew Stivala

HP OfficeJet 250 Mobile Printer

The HP OfficeJet 250 Mobile Printer is a great device that fits perfectly into my fast paced and mobile lifestyle. My first impression of the printer itself was how incredibly compact and sleek the device was.

Armand Abogado

HP OfficeJet 250 Mobile Printer

Wireless printing from my iPhone was also a handy feature, the whole experience was quick and seamless with no setup requirements - accessed through the default iOS printing menu options.

Azadeh Williams

HP OfficeJet Pro 8730

A smarter way to print for busy small business owners, combining speedy printing with scanning and copying, making it easier to produce high quality documents and images at a touch of a button.

Andrew Grant

HP OfficeJet Pro 8730

I've had a multifunction printer in the office going on 10 years now. It was a neat bit of kit back in the day -- print, copy, scan, fax -- when printing over WiFi felt a bit like magic. It’s seen better days though and an upgrade’s well overdue. This HP OfficeJet Pro 8730 looks like it ticks all the same boxes: print, copy, scan, and fax. (Really? Does anyone fax anything any more? I guess it's good to know the facility’s there, just in case.) Printing over WiFi is more-or- less standard these days.

Ed Dawson

HP OfficeJet Pro 8730

As a freelance writer who is always on the go, I like my technology to be both efficient and effective so I can do my job well. The HP OfficeJet Pro 8730 Inkjet Printer ticks all the boxes in terms of form factor, performance and user interface.

Michael Hargreaves

Windows 10 for Business / Dell XPS 13

I’d happily recommend this touchscreen laptop and Windows 10 as a great way to get serious work done at a desk or on the road.

Featured Content

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?