Apple’s Lower Prices Are All Part of the Plan

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(Courtesy of The New York Times)

Something unexpected has happened at Apple, once known as the tech industry’s high-price leader. Over the last several years it began beating rivals on price.

People who wanted the latest Apple smartphone, the iPhone 4S, were able to get one the day it went on sale if they were willing to wait in a line, spend at least $199 and commit to a two-year wireless service contract with a carrier.

Or they could have skipped the lines and bought one of the latest iPhone rivals from an Apple competitor, as long as they were willing to dig deeper into their wallets. For $300 and a two-year contract, gadget lovers could have picked up Motorola’s Droid Bionic from Verizon Wireless, or they could bought the $230 Samsung Galaxy SII and $260 HTC Amaze 4G, both from T-Mobile, under the same terms.

Apple’s new pricing strategy is a big change from the 1990s, when consumers regarded Apple as a producer of overpriced tech baubles, unable to compete effectively with its Macintosh family of computers against the far cheaper Windows PCs. But more recently, it began using its growing manufacturing scale and logistics prowess to deliver Apple products at far more aggressive prices, which in turn gave it more power to influence pricing industrywide.

Apple’s innovations — including products like the iPhone, iPad and the ultrathin MacBook Air notebook — are justifiably credited for their role in the company’s resurgence under its chief executive and co-founder, Steven P. Jobs, who died on Oct. 5. But analysts and industry executives say Apple’s pricing is an overlooked part of its ability to find a large audience for those products beyond hard-core Apple fans. Apple sold more than four million iPhone 4S smartphone over its debut weekend.

People can still easily find less expensive alternatives, with less distinctive and refined designs, to most Apple products. Within the premium product categories where Apple is most at home though, comparable devices often do no better than match or slightly undercut Apple’s prices. “They’re not cheap, but I don’t think they’re viewed as high-priced anymore,” said Stewart Alsop, a longtime venture capitalist in San Francisco.

Apple declined to comment for this article.

Prices in the ultrathin notebook category are an illustration of Apple’s strategy. While there are much cheaper laptops for sale, ranging all the way down to bargain-basement netbooks that cost a few hundred dollars, Apple’s MacBook Air has become a hit among computer users seeking the thinnest and lightest notebooks available. The product starts at $999 for a model with an 11-inch screen.

On Oct. 11, the Taiwanese computer maker Asus introduced its answer to the MacBook Air, a sleek device that uses Windows. But it was unable to undercut Apple; the Asus computer also starts at $999. Samsung’s wafer-thin Series 9 notebook, with comparable features, costs $1,049.

The computer maker Acer, however, began undercutting the cheapest MacBook Air this month with an $899 ultrathin notebook, the Aspire S series, that has a bigger screen.

The original MacBook Air catered to a more rarefied audience when it came out in early 2008, priced at a whopping $1,799 for a model with a 13-inch screen. A year ago Apple revamped the notebook to make it thinner and smaller and reduced its entry-level prices to $999 and $1,299 for models with 11-inch and 13-inch screens. Jean-Louis Gassée, a venture capitalist and former Apple executive, said there was a “collective gasp” at how low Apple priced the new MacBook Air.

The aggressive pricing, analysts say, reflects Apple’s ability to use its growing manufacturing scale to push down costs for the crucial parts that make up its devices. Apple has also shown a willingness to tap into its huge war chest — $82 billion in cash and marketable securities last quarter — to take big gambles by locking up supplies of parts for years, as it did in 2005 when it struck a five-year, $1.25 billion deal with manufacturers to secure flash memory chips for its iPods and other devices.


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