The iPhone’s Funny Price

Microsoft CEO Steve Ballmer on the iPhone, during an on-stage interview at the CEO Forum with USA Today’s David Lieberman:

There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60 percent or 70 percent or 80 percent of them, than I would to have 2 percent or 3 percent, which is what Apple might get.

Strong words, and an awful lot of competitive FUD packed into one short paragraph. A few points to keep in mind:

The original iPhones will start at $499 and $599 this June. Future models will be both cheaper and more powerful. Look at what happened with the iPod, which started at $399 in 2001. The average selling price for an iPod in Apple’s just-reported Q2 2007 was about $160; a year ago, it was about $200. 1

There’s a difference between “phones” and “smartphones”. I have no idea how one draws the line, but a good rule of thumb is that smartphones are expensive and regular phones are free (with plans) or very cheap. Apple isn’t trying to sell 10 million phones by the end of 2008; they’re trying to sell 10 million smartphones.

According to Wikipedia (citing Canalys), Windows Mobile currently only has 6 percent market share of the smartphone market, far behind Linux’s 17 percent and way behind Symbian’s 72 percent. Again, that’s just for smartphones, not mobile phones in general.

I can appreciate that Ballmer — along with every other executive from companies competing in the smartphone market — is sick of questions about the iPhone. It’s hard to respond to questions about a competing product that hasn’t shipped. My response would simply be “We’ll see.”

Back in January during an interview promoting the Vista rollout, Ballmer offered his initial reaction to the iPhone: “$500! Fully subsidized! With a plan! I said that is the most expensive phone in the world. And it doesn’t appeal to business customers because it doesn’t have a keyboard which makes it not a very good email machine.”

In response to that, I wrote:

Here’s how it’s going to go. Starting now, Microsoft will mock the iPhone. They will mock the price, they will mock the closed software platform, and they will say that phone users demand and crave the wide variety of products in the Windows Mobile market. But behind the scenes, they’ve already started working on a Zune clone of the iPhone. Remember their old party line on music players?

When asked during this week’s CEO Forum interview when we can expect a Zune phone, however, Ballmer said:

It’s not a concept you’ll ever get from us. We’re in the Windows Mobile business. We wouldn’t define our phone experience just by music. A phone is really a general purpose device. You want to make telephone calls, you want to get and receive messages, text, email, whatever your preference is. The phone really is kind of a general purpose device that we need to have clean and easy to use.

You can never take someone’s statement that they’re never going to release some certain product to mean that they really have no plans to build that product. (Steve Jobs is rather famous for this — declaring repeatedly, right up until Apple releases something, that Apple isn’t going to build such a thing.) With a statement like Ballmer’s above, it could mean exactly what he says. But it could also mean that they’re thinking about it or even working on it, and that they don’t want anyone to know about it yet. Even an Apple-style “We don’t comment on upcoming product plans” response would lead everyone to think Microsoft was working on a Zune phone, because everyone knows Microsoft loves to talk about upcoming products.

But I’m now inclined to take Ballmer at his word here: that whatever their plans for the Zune, they don’t include an iPhone competitor, and that Ballmer genuinely doesn’t expect the iPhone to sell particularly well.

I’ve stashed away a slew of “iPhone doubter” links over the last few months from various pundits and analysts, and the iPhone’s price, by far, is the most frequently cited reason for predictions of doom in the marketplace.

Some of these pundits and analysts are morons. Ballmer, however, is a very smart man, but what he’s saying about the iPhone is going to make him look stupid if it’s successful. He clearly doesn’t get what makes the iPhone so appealing, and his dual obsession with the price and business users is baffling.

Maybe I’m the moron, but the way I see it, if the iPhone’s initial price is wrong, it’s too low, not too high. Don’t compare it to other smartphones, which, yes, nearly all cost less than $499 when purchased with a plan. Compare it instead to the prices of the iPod.

Wikipedia has a chart showing every iPod model Apple has sold, with prices. High-end iPods have sold for $399 and $499 until 2005, when prices started dropping. Even today, though, an 80 GB iPod sells for $349. And Wikipedia’s chart neglects to mention that when the iPod Photo debuted, it sold for $499 and $599 (40 and 60 GB, respectively).

There are millions of people who have already spent $399–599 on an iPod within the last few years. With the exception of storage capacity, the iPhone does everything these iPods do, and, well, a whole lot fucking more. Why wouldn’t these same people think about spending $499 or more on an iPhone?

Think about how much people would spend on a next-generation iPod that does everything the iPhone does but without the phone: Wi-Fi networking, camera, full-size touch screen, OS X with email and web browsing. Apple could (and might) sell that for $499.

Is the iPhone a sure thing? No, of course not — because we haven’t seen it. But the only ifs are technical: Is the battery life at least adequate? Does the multi-touch display work well? Is the gesture-based UI as fun to use in real life as it looks in the demos? Does the music player work about as well as an iPod? Is the hardware reliable? If the answer to those questions is yes, I don’t see how there’s any question that Apple is going to sell them as fast as they can make them. (And do you want to take bets that the $599 model outsells the $499 one?)

This misplaced concern over the iPhone’s price — which, I implore you to keep in mind, is the initial pricing — goes hand-in-hand with the idea that the iPhone is in trouble because it won’t appeal to businesses. Yes, there’s a market for smartphones targeted at business users. Hello, BlackBerry. But most people don’t get any sort of mobile phone — let alone a nice expensive one — from their employers. The only people I know who get free smartphones from work are people high enough on the ladder that they can easily afford to buy as many $500 gadgets as they want, and many of them already plan to buy themselves an iPhone. On the other hand, most people I know have spent at least $249 on an iPod for themselves.

Why worry about the iPhone’s appeal to corporate IT? The iPod isn’t marketed to businesses and Apple has sold 100 million of them. The iPod is marketed to people, and the iPhone is, too. RIM sold 2 million BlackBerry devices in its most recent quarter; Apple sold 10.5 million iPods in the same period.

And there’s a huge, fundamental difference between these two markets. Businesses, typically, want to buy the cheapest things possible for their employees to use. When buying for themselves, people want to buy the nicest things they can afford.

As for Microsoft, I think there’s a good chance Apple will quickly pass them in phone OS market share — say, within two years. Apple’s in a good position here. So long as they sell enough iPhones during the first year or so that it isn’t considered a flop — which seems to be a sure thing, frankly — even if they remain behind Microsoft in terms of market share, Apple can say, “Well, hey, we just got started in this market.”

But if Apple actually draws even with Microsoft within a year or two — what’s Microsoft’s excuse? This is a market Microsoft has been after for a long time, going back to when Windows Mobile was marketed as Windows CE, a.k.a “WinCE”. (Who comes up with names like that? Wince?) Why not treat the mobile phone market as a consumer market like the Xbox and Zune?

Microsoft, Palm, Motorola, Sony, the other phone carriers (and maybe even Cingular, too) — the executives running these companies clearly have no idea how much the software user experience matters when you’re trying to create a gadget with iPod-like appeal. If they did understand, they wouldn’t have spent the last decade selling phones with such crummy UIs.

We’ll see how long Steve Ballmer thinks the iPhone’s price is funny.