Apple I-Phone

Introduction

Apple Inc. is a multinational American corporation with a focus on designing and manufacturing consumer electronics and closely related software products. Apple develops, sells and supports a series of personal computers, portable media players, mobile phones, computer software, and computer hardware and hardware accessories. As of March 2008, the company operates more than 2000 retail stores in five countries and an online store where hardware and software products are sold. Apple employs over 20,000 workers worldwide and had worldwide annual sales in its fiscal year 2007 of $24 billion.

After the tremendous success of Mac PCs and iPods, Apple announced the iPhone in January 2007. iPhone is an aesthetically designed Internet-enabled multimedia mobile phone. It has a multi-touch screen with a virtual keyboard and buttons. The iPhone’s functions include those of a camera phone and a portable media player (iPod), in addition to text messaging and visual voicemail. It also offers Internet services including e-mail, web browsing, and local Wi-Fi connectivity. It is a quad-band mobile phone that uses the GSM standard, and hence has international roaming capability. It supports the EDGE (2.5G) data technology. A newer version of iPhone 2.0 is expected to be rolled out in June 2008. The main enhancement of the iPhone 2.0 is that it will be capable of operating on the faster 3G cellular networks.

The iPhone was first introduced in the United States on June 29, 2007 with much media frenzy, in the United Kingdom, Germany and France in November 2007, and in Ireland and Austria in March 2008. iPhone will soon systematically be introduced to Asia and across all other continents through a form of exclusive partnership with single local wireless company. For this project, I will only focus on the iPhone in the United States from June 29, 2007 to March 31, 2008.

Costs

According to iSuppli.com, the cost of iPhone is ranged from $246 (for 4 Gigabyte model) to $281 (for the 8 Gigabyte model). Please see the cost breakdown assessment below. The two models offered are completely identical in terms of size, design and functionality. The only difference is the memory: one unit has 4 Gigs, while the other has 8 Gigs. The price difference of a 4Gigs vs 8Gigs memory chip is about $35. However, Apple is charging consumers an extra $100 to get the 8Gigs model instead of the 4Gigs model. That means that Apple can earn an additional $65 dollars profit if they sell the 8Gig unit. Any logical person would find it reasonable to buy the 8Gigs model since it is twice as much memory as 4Gigs unit and it only cost 20% more than the 4Gigs unit. In order to maximize profit, Apple ultimately pushes to sell more 8Gigs units than 4Gigs units. Pricing Strategy will be discussed later in the Demand section.

iPhone Models 4 Gig 8 Gig Difference

Selling Price $500 $600 $100 (20% more)

Cost to produce $246 $281 $35 more

Profit $254 $319 $65 more

iPhone Sales Price Break Down Table

iPhone Cost Break Down Schedule

Unfortunately, there was no long run costs data available. In order to determine the long run cost, I would have to collect cost data for each level of output and determine which level is the optimal production. Using and connecting the optimal level points, I would then be able to derive the long-run expansion path. However, due to the limited data availability, I cannot establish on whether or not Economies of Scale exists. On the other hand, I can establish that Economies of Scope does exist. For example, iPod Touch uses the same hardware and most software specs that the iPhone uses. The only difference of the iPod Touch and the iPhone is that the iPod touch does not support placing and receiving phone calls. Hence, the iPod Touch and the iPhone share the production costs. In the picture below, the iPod touch is placed next to the iPhone. The two devices look exactly the same.

iPhone vs Ipod Touch

Substitute goods for iPhone in production would be the Blackberry Curve, Palm Treo, Samsung Blackjack, Motorola Q, and any other smart phones. As iPhone increases in price due to popularity, taste changes, income increase, or any of the variables that causes price increases, suppliers will be more willing to produce iPhone than any other smart phones on the market. Complement goods for iPhone in production would be iPod Touch or Mac computer. As the iPhone’s price increases, iPod and Mac will have the same halo effect.