June 10, 2009

Note to Apple: Pssst…. This is what Commoditization Looks Like

When I was at college in the 80s (whoa, did I just give away my age?) my brother who had just graduated from college bought a brand new PC. Price tag: $2000. That’s $2000 in the 80s when the consumer had a comfortable choice of brand new cars well under $10,000. Which begs the question, how come cars are so expensive these days? But I digress. This isn’t about cars.

Back to the PC. I asked my brother to jog my memory and he couldn’t remember its exact configuration, but he did remember that it had no hard drive, worked off of a floppy disk (720K?), with a wild guess of 8K of RAM (not 8M, 8K!).

The price of a fully loaded Dell laptop in 2009: as low as $445. I won’t even get into the details of the configuration. You can practically carry your life on the cheapest laptops these days. My brother’s old PC couldn’t even handle my college reports.

That’s what commoditization looks like.

When HP launched its first DeskJet printer in the late 80s, it was the least expensive non-impact printer introduced to the market, and it ran at 2 pages-per-minute (2ppm). Price tag: $995 (again, in the 80s dollars).

For $1000 in 2009, HP sells a 30ppm networked printer with full color capability and fancy paper handling.

That’s what commoditization looks like.

Granted, there’s a huge difference between the hardcopy (printer, copier) and the PC business models. While PCs provide very little residual income for manufacturers, hardcopy equipment manufacturers count on “per box” toner revenues of at least double the MSRP of the box, more for color printers (aptly named the razor/blade business model).

Fast forward to Apple’s iPhone.

When Apple launched iPhone in 2007 (seems like much longer than that, doesn’t it?), it was the edgiest widget of the century. This time it wasn’t just the “Apple heads” that lined up around the stores to buy one, everyone wanted an iPhone. Price tag for an 8GB iPhone: $599.

Last week Apple announced it will sell its 8GB iPhone for $99, and it’s guaranteed to have a lot fancier features than the original iPhone.

Yeah, you got it. That’s what commoditization looks like.

Note, the steep price drop occurred a little over two years after the original iPhone launch. Products and services are getting commoditized faster and faster due to globalization (from cheaper development and manufacturing costs), shortened product lifecycles, and increased competition.

What’s happened is that iPhone finally has a venerable competitor in Palm Pre (remember Palm, the original widget king?). Palm Pre has compared well against iPhone, and it won’t be long before Palm and others launch even more competitive products driving iPhone prices much lower. (And they’re all guaranteed to offer “cut & paste” too! Honestly, what’s that about?)

Apple has been through this before. Its original Apple computer fell victim to PC’s popularity where Microsoft and PC manufacturers’ strategy of incremental improvements and continual price drops kept Apple’s market share perpetually at or below 10%. This time it’s different. Apple’s “one two” punch with iPod and iPhone will keep the company’s momentum forward for a while. And the business model for iPhone is similar to hardcopy products. Residual income from AT&T’s subscriptions and a massive library of third party software and iTunes revenues will keep the business model healthy for quite some time. But with tense competition both on the product price and subscriptions, expect Apple's revenues to start showing signs of erosion.

In the meantime, consumers will enjoy lower prices for handsets and service subscription costs, more advanced features, and more manufacture and service provider options to choose from. Welcome to commoditization!

Which brings me back to this: how come cars are so expensive these days?


  1. You show two excellent examples of the experience curve effect at work, an empirical observation that costs over a long period tend to drop on a (relatively predictable) power curve fit. Most silicon-dominated products show a fit along a 70% curve, which means that costs in real dollars drop 30% for every doubling of cumulative volume produced. Apple introduced the smart phone when the industry was immature - less than 100M cumulative shipments - and proceeded to establish their phone (and also boost demand for Samsung and Blackberry phones with similar capabilities); the industry has now shipped 4x the previous volume, and costs have dropped to half or slightly lower. Also remember that the current $99 retail price tag includes the carrier buy-down, so Apple's real price is likely somewhere close to $300, or half of the launch price 2 years ago.

    I have some historical prices for automobiles as well, and there have been periods when cars did behave like other commodities - for instance, the Model T was introduced at $825 in 1909, and declined in price to $290 by 1925. This would be the equivalent of $8870 in 1909, dropping to $3000 by 1925 after a production run of over 10 MM units.

    I do agree with your conclusion - the auto industry would benefit from more standardization and vertical disintegration to encourage price reductions. Not that we should all drive Tata Nanos, but the vast array of low volume designs do keep prices much higher than would be predicted for such a well-established commodity.

  2. Jose, thanks for your input and sharing the numbers. I needed to point out that once products become commoditized (as in the auto inudstry in the early 20th century), branding comes into play to reflect the "image" factor. Some products lend themselves better to branding than others (auto vs. printers, for example) and it will be interesting to see if the phone/PDA market will experience that level of branding after most offerings start looking the same.

  3. Interesting thought exercise Kat.

    Consider the automobile. Expensive. So lets make only minor "cosmetic" changes to the trim one year, or for the first few years, and maybe only "retool" every five or six years.

    Better yet, lets take the Pontiac Solstice and offer a 80% clone called the Saturn Sky. Consumers will love that! Because it will allow us to make more money. Yea for us.

    If Apple thought like GM they too would be bankrupt. Apple is Apple because they think "What would be insanely great?" And then make it. Even if kills existing sales of the old product. But it rarely does. Why?

    Because they still spend time thinking. You might recall when they shared a glimpse into their collective:

    "Think Different"