Profits come first with new iPhones, iPod Touches

"For some users, there's never enough memory," Greg Joswiak, Apple Vice president of Worldwide iPod and iPhone Marketing, said in yesterday's press release announcing memory-enhanced versions of the iPhone and iPod Touch.

Apple is banking on it.


The new model of the iPhone boasts 16 gigabytes of storage capacity, twice that of the existing iPhone. The catch: you'll pay a $100 premium for that extra 8GB of memory. Apple will continue to sell the 8GB version for the same price, $399, with the new one going for $499.

The iPod Touch got a similar upgrade. The existing 8GB and 16GB Touches do not otherwise change and will be sold at the same prices ($299 and $399) while a new 32GB model will go for $499.


Here we see Apple applying a lesson it learned with the introduction of the iPhone last year. Recall that originally Apple sold a 4GB model selling for $499 and an 8GB model priced at $599. Just two months later came the infamous $200 price cut on the 8GB model and the elimination of the 4GB model, which wasn't selling nearly as well.

Apple learned that 1) the original iPhone price was too high and 2) most customers willing to buy a premium mobile phone also were willing to pay an extra $100 for the model with the most storage.

Fast forward to yesterday. Instead of following the pricing strategy it typically uses with new Macs and iPods -- offering beefier specs for the same price as the models they replace -- Apple is offering static prices on existing models while counting on the extra memory to entice customers to fork out $100 more.

Silicon Valley Insider did some math based on iSuppli's breakdown of the cost of the iPhone's components and calculated the 16 GB iPhone will reap a profit of $201 versus the 8GB model's $141. (I'm ignoring the AT&T contract factor, since it provides the same profit in both cases.)

On one hand, this move is good for Apple as a company and good for AAPL shareholders because it gooses the iPhone's profit margins. But it stinks for customers, who aren't really getting $100 worth of added value with the new models. Flash memory is not that expensive. Silicon Valley Insider surmised that Apple's profits could be even higher than its estimates, assuming that flash memory prices have dropped further since iSuppli did its analysis last July.

Why might Apple do this? I'm guessing that the ever-growing number of unlocked iPhones – for which Apple does not collect any revenue from a service contract with one of its partner cellular carriers – has thrown the strategic planners in Cupertino for a loop.

Apple has tried bullying customers to preserve that lost revenue by bricking unlocked iPhones with software updates. But that was a public relations catastrophe. Perhaps fearing damage to its relationships with its partner cellular carriers, Apple also has passed on another option -- selling unlocked iPhones at a higher price.

Beyond the problems with preserving high profits, Apple's lofty goals for making the iPhone/iPod Touch into "the first mainstream WiFi mobile platform" means it needs to sell a lot of both in 2008.


So we get new models with premium prices based on a solitary improvement (albeit an alluring one) provided by a component Apple can obtain increasingly cheaply.

Small wonder Apple's customers sometimes can't decide whether they love the company or hate it.