"Apple just need to lower their price"

This full thread is from @stevesi. Steven Sinofsky is one of the best strategic thinkers and this thread talks about the topics I blogged yesterday.

  1. What's the typical way for a luxury brand to broaden its appearl.
  2. How does a platform make money?
  3. How does players on a platform make their money?
  4. How has Apple avoided been bogged down by the partners?

(I'm re-typing everything again so I get to appreciate his points better. Steven, or twitter, owns his tweets. Not me. )

  1. Apple has long known it is missing the boat on providing low priced phones --- strategic mistake to cede "low end" to Android. Or raised prices too much/soon. Then it must be an easy answer to just lower prices or make low priced phones. Ack! Harder than it looks.
  2. Pricing is much more sophisticated than this. Pricing not only says who can afford your product but also establishes a brand, determines channel & more. Many say Apple is a luxury brand; certainly they focused on that.
  3. PC v Mac really showed the weakness in appealing to luxury brand in a volume driven market. High prices were the undoing of the Mac from the very early days. Going back to 1990, height of Apple, PCs sold at 10X the Mac run rate. But Macs had much higher margins per device.
  4. While available software was a big part of that 10X, reality was that a Mac computer also cost substantially more than a PC, and depending on configuration was often 2X the price. Everyone knew. Apple/Jobs refused to license Mac System enabling cheaper Macs (one approach).
  5. PC strategy was low everyday prices for PCs. BUT there was a catch or three --- really important to think about relative to iPhones pricing. PCs were made up of hardware, OS, chips. To have low prices Intel and Microsoft benefited from an ecosystem that "raced to the bottom".
  6. Intel and Microsoft held on to most of the profits in selling PCs (and MS w/Office). The retailers and PC makers had very slim (to zero) margins for two decades. Often PC hardware seemed like a suckers bet.
  7. The first key to having low priced offerings is that you have to have a set of partners who are willing to compete on thin margins in order to bring the product to market. Very tough for one player to be the high margin and low margin players. Race yourself to the bottom?
  8. The second key thing PCs benefitted from was a channel that allowed distribution by price maintaining price walls - business PCs could be expensive/sold direct (ThinkPad); consumer PCs sold as a bundles with high margin components useless as business PCs. (Dell's Inspiron and Optiplex etc.)
  9. Buying a PC was a complex navigation through model line selected by segment (Big Business direct, SMB, individual, Education, Government). Then each form factor was "good, better, best". Byzantine. That's how you offer low prices and avoid everyone paying and have some margin.
  10. Plus that is where crapware comes from --- those partners need some way to make margin. Adding software, selling screen real-estate, and so on are the only tools remain that allow for partners to make something when hardware and OS are fixed.
  11. This is how business always does premium+low priced offers, eg clothing where brands stand for luxury but aspire to mass market. Brands like Calvin Klein, Ralph Laruen, Armani w/ topi tier labels (like Purple) at select channels or direct. BUT also have mass market/discount.
  12. Each of those distribution points is a different label, different quality, and so on. No retailer that carries Purple will carry Sport or RL. They might want to but they won't be allowed to --- distribution constraint that is carefully managed.
  13. So when people say Apple needs a cheaper phone there are many questions to answer beyond the "get over yourself" luxury brand issue. What is distribution constraint? What partner absorbs some cost to leave margin? What is the branding?
  14. Easy question --- would a cheap phone be sold and supported in Apple stores side by side? How would the rest of the customers feel about more crowds and tougher appointments competing with people who paid half as much? Sell one phone against another --- how?
  15. This doesn't even have to be a product question which most people jump to --- sure remove fancy camera, memory, storage,e tc. But these are all hardware items that competitive products will simply add and market against --- "buy our android phone with portrait mode".
  16. Apple is constrained by software because apps need to work on all devices --- something that Apple has stretched further than Windows ever did (watch to phone to tablet, and soon Mac). ISVs/devs will never embrae API differences at different price points.
  17. Consumers bemoan Windows 10 Home, Pro, Enterprise. Insane energy goes into trying to have features that don't fragment developers and OEMs (drivers, etc) and can be deployed efficiently while alos maintaining price differentiation. That's literally the entire Windows business.
  18. The levers available to do cheaper products are not all available to Apple. Those that simply say they have a pricing problem need to solve for the product, the distribution, the branding, and more.
  19. Big companies become enormously consternated over brand value props, channel conflicts, and so on. Where Apple avoided all of these was owning them all. The downside of owning them all is this limits responding to the challenges.
  20. At Microsoft we always reminded ourselves that you don't sell 300M of something at one every day low price. Most all energy was to maintain price floor. AMAZINGLY Apple managed to sell over 200M of something per year at pretty much one every day high price, then increased price.
  21. Anyone that thinks Apple is unaware of the challenge and has not sketched out ideas, tested them, and thought about them immensely is crazy. Literally this consumes a company or at least has been the past year.
  22. Example --- I can't count how many times Windows/Office toyed with "lite" versions. Fewer features cost less. DUH! Imaging such product and everyone wants it. How do you market it? What brand is it? How much revenue do you forgo? Is it freemium? trialware? annoying?
  23. Literally the constant drumbeat from the press, partners, channel was that PCs were too expensive, Windows or Office too expensive. No matter what the price was. Also Intel hearing the same. Magic for Intel/MS was getting others to cave --- who caves for Apple?
  24. I once ran the numbers on selling just one SKU of Office rather than the seemingly infinite number. It was literally billions of dollars of lost revenue immediately and more over time --- leaving revenue on table PLUS alienating customers at both high end and low end.
  25. What does all these mean? Apple may or may not have a "pricing" or "price point" or "structural"/secular challenge. For sure just releasing a cheap phone doesn't make all better. All takes place in context of lots of cheap/bad competitive phones. Lots to consider.