Apple (NASDAQ:AAPL) is releasing iOS 11 today ahead of the iPhone 8 and 8 Plus launching on Friday. In doing so, Apple will immediately create the largest augmented reality (AR) platform, which CEO Tim Cook is so excited about that he wants to "yell out and scream." Accordingly, he marked the occasion with an interview on Good Morning America. (Alas, there was no yelling and screaming; Cook maintained a calm and collected demeanor.)
At the same time, the forthcoming iPhone X is making all sorts of headlines for its blockbuster $1,000 price tag, which jumps up to $1,150 for a model with 256 GB of storage. Responding to a viewer question, Cook attempted to justify the premium price tag.
$1,000 is a "value price"
Here's Cook's justification (starting around the 6:07 mark in the video above):
It's a value price, actually, for the technology that you're getting, and as it turns out, most people are now paying for phones over long periods of time, so very few people will pay the price tag of the phone initially. Also, most people actually trade in their current phone and so that reduces the price further. And some carriers even throw in subsidies and discounts. And so when we look at it, the phone -- the iPhone in particular -- has become so essential in our daily lives, people want it to do more and more and more, and so we built more and more technology in to be able to do that.
The chief executive has some valid points here. Few consumer electronics product categories have this type of structural financing built into the purchasing process. As the subsidy model died in the U.S., the installment model rose to prominence as a substitute, and carriers consciously tie any potential discounts and promotions to that installment model to achieve the same retentive purchases.
For example, a carrier might offer a generous trade-in value for your old iPhone, but spread that value out over 24 months via monthly bill credits. In the subsidy days, you got a huge discount on the phone, signed up for a two-year service contract, and had to pay out a hefty early termination fee if you canceled. The end result is comparable.
In contrast, this type of financing is not automatically included with most other big-ticket gadget purchases. Sure, you can find ways to finance a $1,300 MacBook, but it takes a little bit of extra legwork. One of the oldest psychological games in the book is spreading out a product's cost in order to make it seem more affordable. Paying $1,000 today seems like a lot more than paying $42 per month for 24 months ($0 down!), for example. Even the trade-in process is now deeply integrated at the carrier level, also in contrast to other types of purchases where you usually have to manually sell your old item to recover the value. (Bonus perk: Regular trade-ins also feed iPhone supply into secondary emerging markets at lower price points.)
The key is that Apple can reliably expect that the vast majority of iPhone purchases will be spread out over two years with installment plans, offset in part by trade-ins, which is not always the case with other product categories. This only further strengthens Apple's already strong pricing power. Simply put, the entire smartphone purchasing experience has evolved so much in recent years that everything is efficiently streamlined in order to remove as much friction as possible. Apple is simply taking full advantage of this lack of friction. It also helps Apple's case that smartphones have indeed become the most important (and most personal) computing device for many people.
Regarding the amount of technology that Apple is packing in, the most significant new features are the TrueDepth camera system and edge-to-edge OLED display. That OLED panel itself is the greatest cost driver. It's worth acknowledging that Apple could be taking a pretty big hit on hardware margins overall, so the company is arguably actually making a sacrifice in profitability to deliver that "value price."