ED#182 : Why Are Apple iPhones So Expensive?

Whenever Apple releases a new iPhone, it has become inevitable for rabid Apple and Android fans to trade barbs in a childish display of fandom rivalry. In the past few days, Facebook and blogs have been replete with taunts and jeers on both sides. It was not good enough that they didn't like the rival platform, they had to make sure the other side knew how much they hated their platform. Check out some of their work when Apple launched their new iPhone 6 and iPhone 6 Plus smartphones :

Frankly, the differences between an Apple iPhone and an Android smartphone have diminished in recent years, with both platforms borrowing features and ideas from each other. The gap is set to reduce even further as both Google and Apple make up and cross-license for everyone's benefit. Whatever features that are unique to a particular platform will eventually be introduced in the competing platform, so arguing about who came up with which feature first is nothing more than a pissing contest.

That's what we want because it gives us the freedom to choose between the two platform without worrying about losing some key feature we cannot do without. However, even when both platforms offer the same set of key features, one thing will remain certain - Apple will always price their iPhone models at a premium. That brings us to arguably the most vitriolic opinion that Android fans have about the Apple users - that they are all rich idiots who are getting fleeced by Apple into paying a ridiculously high price for the iPhones especially since they are using "dated" hardware or "older technology".

Well, we are not going to go into why Apple iPhones are not using "dated" hardware or "older technology" in this editorial, but we are going to address this perception that Apple users are stupid to pay so much money for a smartphone.

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Why Pay So Much Anyway?

First of all, the Apple iPhone is more than just a smartphone. When you purchase an Apple iPhone, you are purchasing the iPhone ecosystem as well - everything from access to the 1.2 million apps (as of June 2014) in the Apple App Store to the free iMessage, FaceTime and iCloud services. Android users may argue that they have similar features but what they have is sometimes a pale shadow of what the Apple iOS platform currently offers.

For example, the Apple iPhone can automatically and continuously back itself up to iCloud, so that if something bad happens, the user can restore the entire contents of the iPhone using nothing more than an Internet connection. You don't even need to use iTunes on a computer to perform this backup and/or restore process. No Android smartphone can do that, although we have no doubt they will eventually implement something similar.

You are also buying "software assurance" in the form of iOS upgrades and updates. The recently released iOS 8, for example, was made available for the following devices, immediately and simultaneously :

• iPhone 4S (3 years old) or newer
• iPad 2 (3 years old) or newer
• iPad mini Gen. 1 (2 years old) or newer
• iPod touch 5th Generation (2 years old)

Google also releases Android upgrades on a periodical basis. However, those upgrades are not available for all Android smartphones (even if they are of the same generation), and often, they are made available long after Google releases them. This is due to the fact that the Android platform is "highly fragmented" - there is a wide variation in hardware features and packaged software, as well as manufacturer preferences. This has resulted in significantly slower or shorter "software assurance", especially for older or less popular models.

Google released Android 4.4 "KitKat" at the end of October 2013. It took HTC about 4 months to release it for their popular HTC One (M7) but they took an extra 2 months to release a KitKat update for their Desire 601 smartphone. Even that's considered fast. ASUS, for example, took a full 8 months to release an Android 4.4 "KitKat" upgrade for the PadFone 2, and more than 10 months to release it for the PadFone Infinity and the Fonepad Note 6.

So when someone considers the cost of a platform, it should be done holistically because when you buy an Apple iPhone, you are really buying an experience. Apple iPhone users (generally) want a smartphone that "just works". They do not care so much about specifications as much as they do the experience using the iPhone. They do not care so much about the number of features as they do the experience of those features that are available. For that, they are willing to pay top dollar.

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Why The iPhone Is Never Going To Be Cheap

Many people consider Apple elitist for selling the iPhone at very high prices, and there's no doubt they have the highest profit margin in the industry. However, their profit margin isn't an accurate reflection of their nett profit per unit. What most people forget is that the price of each iPhone includes a lot of ancillary costs, so comparing the profit margin of Apple vs. Android is like comparing apples to oranges (pun intended).

Android manufacturers can get away with low margins and therefore, lower prices, because Google provides the Android OS free of charge. On top of that, Google finances the infrastructure for services that they provide on the Android platform, like Google Hangout and Google Drive. With the exception of any custom software or services provided by the Android smartphone manufacturer, everything on the Android platform is being financed and maintained by Google.

Apple, on the other hand, has development teams working on the iOS operating system and supporting software and services like iTunes, the App Store, iMessage, FaceTime and iCloud. They also build and maintain their own infrastructure to support those services. All that comes at significant cost. Apple's massive 500,000 sf data center in Maiden, North Carolina, for example, cost a whooping US$ 1 billion to build.

Apple also designs their own processors for the iPhone - a cost that no Android manufacturer has to bear. On top of that, their processors cost more to make because they have a lower production run than the Qualcomm Snapdragon processors that most Android devices use. All-in-all, the costs of the parts used to make an iPhone are consistently much higher than that of an Android phone. Here's what research firm HIS calculated as the cost of manufacturing the new iPhone 6 :

Picture courtesy of iFixit

As you can see, the production cost of the Apple iPhone 6 is higher than what some Android smartphones are selling for, even if they have similar or even better specifications on paper. This is why the iPhone will always be more expensive than comparable Android smartphones, even if Apple somehow sees it fit to sell it at production cost.

If you tack on their substantial ancillary costs, you can see why Apple has to sell their iPhones at a premium. The research firm HIS calculated the iPhone 6's profit margin as 69%, but that does not include ancillary costs. Apple's nett profit is certainly much lower once you factor everything in, albeit still much higher than the industry norm.

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Does This Mean That Apple iPhones Are Better?

No. I've said it many times before, and I will say it again. Both platforms have their pros and cons, and they are getting closer in capability, as they leapfrog each other in features. Whatever new idea or feature that's introduced in one platform will eventually make it to the other platform, so it would be stupid to insist that one platform is significantly superior to the other.

It is this convergence of features and capability that will eventually limit Apple's reach. If you can get a decent Android smartphone with all of the key features you need at a much lower cost, it will be harder for many users to justify paying a premium for the Apple experience. Ultimately, it all depends on the kind of user you are, and how much you are willing to pay. You won't go wrong with either platform, and don't let anyone tell you otherwise.

You can now buy the iPhone 6 and iPhone 6 Plus smartphones and accessories from Amazon.com.

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