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Apple Moves iPhone Into Defensive Pricing

Yesterday's announced price drop for the current 8GB iPhone 3G could be seen as Apple addressing the issue of being perceived as too pricy. Granted, that might be true for some of the Apple products. But the new iPhone price suggests something far different. Apple is undertaking the first true price war in its history, shifting into defensive pricing out of concern for market share and perceived upcoming strong competition from Palm in the handset market.

The reason for seeing this as defensive pricing is simple; iPhones now probably cost less to buy than they do to make. Portelligent has been doing its usual series of teardowns and found the following likely cost of goods:

Handset Estimated COGs
Handset COGs Street Price
32GB iPhone 3GS Currently Unknown $299
16GB iPhone 3GS Currently Unknown $199
8GB iPhone 3G $173 $99
8GB Palm Pre $160 $199
It's clear that the iPhone 3GS is not going to be less expensive than the 3G model. The latter ends up becoming a loss leader that seems clearly priced below its manufacturing cost. Even if Apple is trying to unload the older model to make way for the new, given the company's traditional focus on maintaining unit margins, this is a significant change in market positioning, and I think indicates a healthy respect for what the Palm Pre could provide in competition.

On one hand, the Pre has a lower cost at the outset than the iPhone 3G. Given that the cell phone manufacturers are often measuring costs to the hundred of a cent, a difference of more than $13 is enormous, and potentially gives Palm more bargaining room in dealing with carriers.

The Pre also has at least one significant advantage in hardware design. It puts the cellular radio components on a daughter card. Palm can turn out GSM units just as easily as it can CDMA. The company potentially has a far larger audience than Apple because it can work with virtually any carrier in the US as well as overseas. Even dealing with variations in GSM networks in other parts of the world becomes easy by swapping the board. (Available apps are an Apple strong point, and I'll be looking at that question separately later this week.)

Although the iPhone is the market leader for smartphones, this sort of flexibility and larger total native market means that Palm's growth potential outstrips that of Apple. The lowered price on the iPhone 3G is likely there to try and lock in a broader market while the company still has the marketing cache. But it shows that Apple can be put on the defensive in this market, and that any assumption of automatic iPhone dominance is misplaced.

Palm Pre image via Palm.

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