When any new technology comes out, the price point is almost comically high to compensate for research and development costs and expensive components.  Most new high technology cell phones launched by Motorola, Nokia, HTC, and Samsung are launched overseas first, where consumers are used to higher prices and people have a higher understanding of phone technology.   Cellular service providers in the United States often subsidize telephones to commit customers to contracts, insulating American cell phone buyers from the high cell phone costs that the rest of the world experiences.

Apple’s first iPhone challenged both of the common paths to market by having an unsubsidized product that didn’t have the most advanced technology, but was designed better than anything else in the market.  Apple’s first iPhone was sold exclusively in the United States and only through ATT.  The phone was directed at the consumer market and was triple the price of other consumer phones being offered by ATT and even $200 more expensive that the highest priced business phones.  Usually phone carriers will take a loss on the sale of the phone to tie a customer to a contractual obligation for service that is more profitable.

This initial price was a shock to most in the industry, but no one doubted the demand for the phone after it was officially introduced. The first iPhone did not have the best cellular technology, processing speeds or a physical keyboard, but selling on design alone, the company still believed it could get away with such a high price.

Apple’s brand is so strong that the company felt the demand could match the products initial supply based on two segments:  Apple fanboys (die-hard company followers) and early adopters.   To these followers, the “Jesus phone’s” price was not out of reach and in-line with many of Apple’s other products which are traditionally double the price of their competitors.

Only three months after the launch of the first iPhone Apple lowered the price from $600 to $400.  This move received a lot of backlash from consumers who had purchased the phone at the $600 price.  Apple had to offer a $100 return to those who purchased the original phone.  According to Piper Jaffray’s Gene Munster, before Sept. 5, iPhone sales had leveled off at around 9,000 per day, mostly at $600 a pop. Now, following the iPhone price cut, Apple is moving 27,000 per day at $400 each. This initial 200% sales surge was predicted to be unsustainable, but the price-cut did yield a stable 50% sales increase.

At the launch of the second iPhone 3G, the price dropped to $200 which was significantly cheaper than the original and the technology was now up to the speeds of its competition.  Again there was backlash from early adopters who had just paid $600 or $400 to buy the phone.  Apple tried to make this easier to swallow by allowing anyone who purchased the phone 15 days prior to launch of the iPhone 3G and upgrade, but all others were out of luck.  Anyone who wanted to immediately upgrade the phone from the old version was not penalized which was also a good gesture from ATT.  Possibly since ATT did not subsidize the first phone it was comfortable subsidizing the second for a renewal of the two year contract.

In addition to the new subsidized price, the iPhone 3G launched worldwide at the higher price.  Even in the international market, special deals were required with carriers to utilize such features as visual voicemail that are unique to the iPhone.  The price in the international markets reflected the normal unsubsidized price that international markets are accustomed to.

Competition

No phone can beat the jesusPhone.  Smartphones have been around since 2003 and earlier, beginning with the Sony Treo and a Microsoft platform called Windows Mobile.  The original market for these smartphones was for the business user , but as people look for more ways to be connected to their communications, the market has expanded.  The combination of PDA and phone has been essential to business users and in the past three years, Blackberry has dominated this market.

The iPhone will never be able to penetrate a threatening share of the business market because the majority of business users only need a small range of functions to be done excellently.  The iPhone’s focus on apps and expandability of functions has decreased the functionality of the business tools making it not attractive to big businesses.  Not having a full physical keyboard is also a major drawback to this phone.

The iPhone does have a good shot at continuing to dominate the consumer market however even with the influx of competition that is targeting the iPhone directly as the thing to beat.  Apple’s iPhone has many comparisons to the PC market in that Apple has tied its software to its hardware whereas Microsoft, Google, and Symbian operating systems can be put on many different phone manufacturers phones.

The major difference with the phone market is that Apple has allowed developers access to create applications for the iPhone that are easy to download and buy, greatly expanding the uses of the iPhone.  Previous operating system allowed the user to download programs, but the complexity of this process deterred most users.  Google and other cell phone operating system makers are now creating their own developer toolkits, but do not have the marketplace set up the way Apple does creating a massive barrier to entry in the consumer market.