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Can We Blame the New iPhone's Mediocrity on Inflation?

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Tags Money and BankingValue and Exchange

10/10/2017

Apple held its 10th anniversary iPhone press event on 9/12. As expected, the tech giant released new iterations of their decade-old smartphone as well as the new iPhone X. Whereas the media has focused on innovation and technology, the event also tells another story: how the company uses the perception of innovation as a strategy for dealing with inflation.

Yes, inflation. This is despite the fact the consumer tech market generally – and accurately – is characterized as deflationary: new generations of improved and innovative devices are released at a rapid pace and sold at unchanging or even falling prices. In other words, we get better and cheaper computers and other tech gadgets. But even though price deflation accurately describes this industry, it is not unaffected by inflationary pressures on prices due to the Fed’s quantitative easing.

Consequently, Apple needed to find a way to jack up prices for their devices to maintain profitability. But with the consumer tech market being extremely competitive, even a market leader cannot simply raise prices without potentially losing market share. Being Apple, they find a solution in marketing.

The Marketing

The iPhone set a standard ten years ago both in terms of the look-and-feel of the smartphone and the pricing. Throughout the past decade, the dollar price of premium smartphones, including the annually updated iPhone, has remained basically the same. With only very few exceptions, premium smartphones sell at a standard $700-800.

The price tag of the new “iPhone X,” starting at $999, signals that it is different. It also has a different design than previous generations of the device, doing away with the “home” button and with a front made up of an almost-bezel-less screen. While much of the technology (including face-recognition login, wireless charging, and the almost-bezel-less screen) is old news to users of Android and Windows phones, it is new to iPhone users. And by skipping ahead to 10 and using Roman numerals, it is clear that Apple wants us to think of this device as something much more than an incremental update. As Apple prefers to call it, iPhone X is “the future of the smartphone.”

In addition, Apple releases an incremental update to the iPhone just as expected – with version number 8. But, as tech reporter Paul Thurrott notes, it “should have been named iPhone 7S and iPhone 7S Plus.” Why skip ahead to 8 for a device that isn’t more different from the iPhone 7 than iPhone 6s is from the iPhone 6? To further underscore the novelty of the iPhone X.

These are all marketing tricks that contribute to the same end: to make the $999 asked for the basic configuration of iPhone X to appear reasonable. In reality, Apple has increased the price of its latest generation iPhone by 25% – and nobody seems to have noticed!

Shrinkflation

The world’s leading producer of smartphones Samsung has already started increasing the price of some of its top-of-the-line devices. Samsung offers a wide range of smartphones with different market segments and thus already takes advantage of price discrimination. So increasing the price is less of an issue than it is for Apple, with only the iPhone (albeit in two sizes).

Had Apple been in another business such as groceries, they would likely have adopted another strategy to deal with inflation: “shrinkflation.” As is common for packaged groceries, periods of price inflation do not initially lead to higher prices but to reduced content. Consumers are highly price sensitive to such goods, which, especially considering the competitive dynamic, means a higher price would jeopardize market share and profits.

But technology is different, and it is especially different for a company like Apple, which has defined the premium segment for smartphones and rakes in over 90% of total profits despite controlling less than 20% of the smartphone market in terms of devices sold.

Apple thus needed to find another way to raise prices for their smartphones in the premium segment without losing market share. History has shown that Apple’s consumers are more than willing to pay for what is perceived as an innovative device. What the company revealed on 9/12 suggests that version X is the new standard for iPhone, to be followed by updated versions in 2018. Marketing the smartphone as a new type of device, Apple’s consumer base is more likely to accept the (much) higher price.

A Reason for Raising Prices

Apple is (in)famously dependent on the iPhone for the company’s profits. Thus, disappointing sales of recent iterations of the iPhone is a very troubling trend for the company. This is in itself a reason to reinvent the device and provide the market with something perceived as new. But perhaps more important is the monetary situation and its implications for business. Central banks throughout the West have kept interest rates artificially low in a futile attempt to force the economies to recover from the financial crisis ten years ago by basically printing a lot of money.

New money hits the economy unevenly and at different times, with those receiving the new money first being able to buy goods using the new and cheaper money but paying old-money prices. Similarly, those receiving the new money last are forced to pay the adjusted new-money prices with old money, that is, before benefiting from the inflow of new money. For the economy overall, the inflow of money has two effects: redistribution of wealth from late-receivers of new money to early-receivers, and overall higher prices compared to what otherwise would have been the case.

While Apple’s leadership is unlikely to be well-versed in Austrian economics, the company’s strategies must include an ability to quickly respond to changes in the economy – and this includes formulating probable scenarios and preparing for them. Unlike mainstream economists, business leaders and entrepreneurs develop an intuition for how the market economy works, which guides them to make judgment calls about where the economy is going. This intuitive understanding is often remarkably similar to the theories of Austrian economics, but tend to remain tacit.

It should be obvious that Apple has considered how the Federal Reserve’s “quantitative easing” will impact their business, and that their analysis goes well beyond the political rhetoric of Ms. Yellen’s press releases. It is also likely that the company has already experienced the effect – higher prices – in their global supply chains, or that their suppliers have flagged that they will soon need to increase prices.

Knowing that prices will be higher than previously expected, which follows from the fact that the money supply has been greatly inflated, Apple concluded that they can no longer rely on offering new iterations of the iPhone at the expected price. Instead, they needed to find a way to charge a much higher price, thereby insulating them from present and future price inflation in production. And they needed to do this without losing customers. The solution is the iPhone X, the “future of the smartphone.”

Per Bylund is assistant professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Website: PerBylund.com.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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