11/01/2007

The iPhone Legacy: Pricier Smartphones?

This article talks about the fast rate smart phones keep improving with the new iPhone. It explains how the sales growth of smart phones will be reduced because of the increase in cost for the new features. The increased costs will translate into higher priced phones and price out a lot of people. The major cost component talked about was flash memory for the programs and downloads available. If flash memory comes down in price the smart phones will not rise in price as much as anticipated.

I think the features on the smart phones have shifted the demand curve out. Before the iPhone came out, there weren’t too many people waiting in line for days over a $500 phone. It will be interesting to see how technology will change cell phones.

5 comments:

Logan said...

Flash memory is actually dropping in price and increasing capacity faster than it ever has in the past. Prices for large capacity flash memory has never been this low, and will continue. The real pressure is to make greater capacity flash memory small enough to be packed into these devices, which has become a memory race. Competitors will continue to try and out-do each other with installed memory capacity. Since this is a high-end feature, the price will be high.

The trouble with smart phones is that they are very complicated and only a few companies have figured out how to deliver the myriad of features demanded in a consistent robust yet attractive package.

The iPhone is a home run because it is exactly what all the smart phone consumers have been waiting for. That is why there is such a high price and people are willing to pay it. Other smart phones have come out at a similar high price, but have not had nearly the market reaction that the iPhone did.

Hayden said...

The iPhone has been successful because it is user-friendly. Apple continues to outperform itself before competition can get ahead of Apple. Another contributing factor to the success of the iPhone is brand loyalty. Even if other companies come out with a similar product, it won't be as successful as Apple's iPhone just because it isn't the iPhone. Apple has stayed ahead of the game, and they will more than likely come out with a much better iPhone by the time competition has caught up to the original iPhone.

Dr. Tufte said...

A piece like this needs to talk a whole lot more about elasticity, monopolistic competition, the prisoners' dilemma, and framing.

Business Week ought to know better - but the economics therein has never been good.

So, here goes:
1) My impression is that demand for these items is inelastic, so there is ample room for price increases.
2) But, it is monopolistic competition, so most of the price increases go to the first firms to market.
3) There is a prisoners' dilemma, in that the only way to win is to offer features cheaply in the hopes that others don't. The end result is lots of features offered cheaply.
4) I think this product is framed around a price of $300-500.

Put all these together, and you should not expect to see a price change on new offerings. Old ones will, of course, show big price declines.

William said...

Dr. Tufte,
I agree with you and think that the iPhone is currently inelastic, however I think over time this will change as competitors are able to copy the iPhone. Although, as you mentioned since Apple is first to the iPhone they will have a first mover advantage and will be able to capture an added advantage that its competitors are unable to.

Dr. Tufte said...

Agreed.