One of the first rules students are taught at The Harvard Business School is that it is a bad practice to sell products at a loss and hope to make up the deficit on heavy sales volume. The management at Apple (AAPL) and Palm (PALM) may be on their ways to making that mistake.
Apple cut the price of its iPhone to $99. For consumers who could not afford the handset at a higher price, the move should bring millions of new buyers into the market. That may not be good
Apple certainly makes money on the iPhone at $99. It has a bill of materials which is probably well below that, but the margins on the product are bound to be considerable compressed by the new pricing. Cutting prices once leads to the temptation of cutting again to continue to add market share. Apple does not like to see rival RIM (RIMM) out-selling it in the smartphone business. It means to solve the problem with price.
Wall St.’s concern about Apple over the last several quarters has not had much to do with revenue growth or product innovation. The chance the Apple would bring down the pricing of it premium products, taking them out of the realm of being premium problems has worried shareholders to death. The best products in the market should fetch high prices. Apple is abandoning the philosophy.
Apple move may spell the end of Palm (PALM) It is in so much financial trouble that it cannot reset the price of its Pre by half. Its sales of the new handset have to begin strong and stay strong. Apple has done a great deal to make certain that will not happen. If RIM also cuts prices, the Pre is doomed.
Apple’s gross margins for the next quarter are bound to be lower than they were in the same quarter last year. That will put pressure on the company’s share price. Even worse, it will cause anxiety about whether the Apple brand will be tarnished by pedestrian pricing of it products and whether Apple’s target has become every man instead of the man who can afford the best things even at high prices.
Apple’s move from being the Mercedes of consumer electronics to being another Chevy is likely to do that company no good.
Douglas A. McIntyre
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