Why Is Apple Going “Downmarket” Such A Surprise?

With the announcement of the new iPhone 5C and 5S, I’ve seen a few pundits talking about the “unprecedented move” of Apple going downmarket with a cheaper, but new, phone. Some see this move as a risk for Apple, since some feel it could tarnish their premium image. Here’s the problem with that line of thinking: it ignores the facts of Apple’s history, and their constant move “downmarket” in other product segments. This isn’t the first time Apple has aimed lower instead of higher when it comes to price point for a new product.

Apple Works In Reverse

Most companies aim their product at the lowest price level or margins, and then work their way up. Clayton Christiansen discusses this phenomenon in his book, The Innovator’s Dilemma. The premise is that companies start at the bottom, and work their way up. But in moving up-market, they often leave the lower-price/margin part of the market open for competitors. This can create an opportunity for those competitors. Those new competitors can eventually displace the incumbents.

Apple doesn’t work that way. Apple aims for the top of the market first, going after the high price/high margin segment, before moving down into the lower margin areas. With some exceptions (during the dark days between Steve’s stints at the company), Apple has done this with virtually every product. They did it with the original Macintosh. Steve brought this mode of operation back when he returned in 1997. But the most telling in this was the iPod.

The iPod started as one of the most, if not the most, expensive MP3 player on the market at the time. It didn’t have the same breadth of features. Other players offered more storage. With some exceptions, all of the others were priced lower. But that didn’t stop the iPod from rocketing to the top of the market. Had Apple conformed to the “they only sell premium product” label that so many attach to them, that would have been the end of it. The lower-priced units would have slowly taken over, and the iPod would have been an MP3 player on the margins of the market.

Apple, however, moved downmarket, first with the iPod Mini, then the iPod Nano and iPod Shuffle. Rather that be content with the high margin part of the portable media player market, Apple broadened their reach with far cheaper models, based on flash memory instead of hard drives. The only part of the market Apple ignored with the absolute basement with virtually no margin. This approach kept the iPod at the top of the heap for MP3 players for almost its entire run. The iPod is still on top, but it’s at the top of a diminishing market.

Start At Top And Move Down

Apple has done this consistently since 1997. Start at the high end, and work their way down. They did it with the MacBook, they did it with the iPod, and we’ve seen some moves in this direction with the iPad and iPhone. Up until the iPhone 5C, the usual approach was to simply keep a reduced number of configurations of the current model and drop the price. That happened when the iPhone 4 came out (the 3GS was simplified and price reduced). It happened again with the 4S (the 4 price was lowered, and the 3GS became the “free” phone), and once more with the iPhone 5 last year (iPhone 4 was “free” with contract, the iPhone 4S line was simplified and the price dropped).

This time around, they moved back to a model more akin to what they did with the iPod. We see two new models, one high-end and one mid-range/entry-level. The existing iPhone 4S continues to soldier on, now as the “free” phone under contract. This is almost exactly, step-for-step, how new iPods were released. The only difference is that, with iPods, the previous models were discontinued, and sold at a discount while inventories lasted.

Stop Talking About Surprise And Risk

The iPhone 5C isn’t a surprise. It isn’t a risk to Apple. It won’t tarnish their brand, or diminish the premium image that Apple continues to try to project. It isn’t unprecedented. To borrow from Battlestar Galactica, all this has happened before and it will happen again. Perhaps the only “surprise” is that it took as long as it did for Apple to go this route for the iPhone. Apple only waited 2 years after the first Windows-supported iPod (the first that was available to the broader market), and 3 years after the very, very first iPod shipped, to introduce the iPod Mini. Today’s move comes more than 6 years after the first iPhone was released.

Apple may decide to take this same approach with iPads, with an announcement for updated or new devices likely coming in October or November. So far, the iPad playbook has followed the iPhone playbook: introduce a new device, discount the current generation and possibly keep the previous generation around as the entry-level model (free under contract in some cases). Given that Apple has returned to form with the iPhone, the question is will we see the same with an upcoming iPad announcement?

Again, people need to stop talking about the risks to the brand, and how “unprecedented” this move is. It isn’t. Facts and history do not support this assertion.

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