There is no question that the iPhone is being disrupted by Android copycats. As the theory of disruption states:

• an inferior product comes in, undercuts the market prices and finds its niche
• slowly, the inferior product becomes “good enough”, as the customers’ needs don’t increase as much as the products improve
• at the end, the disrupted company is relegated to an expensive niche

Facing the risk to be relegated to an expensive niche, should Apple decrease the iPhone prices?

Android phone manufacturers have done all that: with an average selling price around $200 for Android phones in 2018,  iPhones are 3x more expensive than Android ($610 on average). Meanwhile, the iOS market share of smartphone remains at 52% at best (US), stagnates at 25% in China, and is not much better in Europe. There are even countries where market entry is still happening, due to local market barriers, such as in India.

With that said, Apple reportedly rips 90% of the smartphone market, so they are not doing so bad. Actually, while increasing the prices of its flagship phones, Apple did decrease the average selling price of its iDevices, from $650 in 2015 to $610 in 2018. How is that?   And should Apple further decrease the iPhone prices ?

Enlarging the product portfolio

Actually, while pushing for $1600 phones (!), Apple also widened its product offering. As you can see in the graph below, the maximum price for the flagship iPhones is increasing every year:

However, at the same time, Apple keeps selling older models at a stable entry price, around $500:

This allows Apple to have something to sell in front of Xiaomi, Samsung and the likes. The iPhone 7 was introduced in 2016, so it is heading to its 3rd year of product lifecycle.

Outdated phones?

How can Apple, who fights for the top spot of innovation in the phone industry, can sell 3-year old models at twice the Android ASP, without hurting its brand? Believe it of not, Apple is actually 1-to-2-years ahead compared to the competition.

Or leading the race?

As you can also see from various benchmarks, the iPhone 7 has a multi-core benchmark of 5741 points in Geekbench, which corresponds to a Xiaomi Mi 8 SE (released June 2018), or a Huawei P10 Plus (released Feb 2017).  This is what allows Apple to keep its products on the market for so long: it just keeps producing old models, which have a good year before the competition catches up. And of course, Apple keeps releasing iOS updates for over 6 year-old phones. CPU speed is only one aspect of the phone performances, but battery and GPU are also to the top level, even for older iPhone models. An iPhone 7 is actually much better at running Fortnite than many recent Android phones.

So, should Apple decrease its iPhone prices? Well, it does, kind of. It is keeping a very competitive mid-market product portfolio, composed of older models. Meanwhile, it is raising the bar for the top end, maintaining margins at unparalleled levels.

How about services?

Another factor to consider is that iPhones tend to last longer than Android counterparts. Roughly 50% of iPhones are more than 2 years old, retaining an economic value a year longer than Samsungs‘ (already not the low end of smartphone). So, there would be 1 billion iOS devices out there, half of Android’s but not one third, as gross sales volumes might suggest.

With the launch of new services by Apple (News+, TV+, a credit card), it remains to be seen if Apple should enlarge its userbase in order to get additional recurring revenues. Only it can know how to maximize the value. It is bound to the price elasticity of the iPhone, i.e. how many percent more do they sell, when they decrease the price by 1%. And also, of course, the take up rate of the new services, soon to be discovered. Two very interesting numbers to find out, indeed, as time unfolds.

So to avoid disruption, Apple is changing the playing field: services may allow for more affordable iPhones, while proposing a wealth of services that no other manufacturer can match.