The $1,500 iPhone

The next (last?) stop on the march towards ‘Apple Prime’…

$1,449. With the launch of the latest iPhones, that’s the price of the current top-of-the-line model (the 512GB variety of the iPhone XS Max). And that’s assuming you live in a place with no sales tax. If you do, that price is going to be well over $1,500. For me, it’s closer to $1,600 — $1,572.17 to be exact!

So yes, this latest iPhone is expensive. Insanely expensive even, to borrow from Apple’s parlance. Or is it?

First, I think it’s important to acknowledge how we got to a world of $1,500 phones. When the iPhone first launched in 2007, the top-of-the-line version (8GB) was $599.¹ That was on-contract with AT&T (the only carrier offering the device at the time). There was no subsidy at first.² It was a price so laughably high relative to other smartphones at the time that Steve Ballmer famously… laughed at it! “$500?! Fully subsidized with a plan?!”

Everyone makes fun of that quote in hindsight. Myself included, quite often! But the reality is that the price was too high. Which Apple quickly acknowledged with a price cut “for the holidays” — $599 magically became $399.³

With that, Apple was off to the races. But, as it turns out, even that price was too high. With the launch of the second generation of the device, the iPhone 3G, Apple took the price down to $299 for the highest-end model (16GB). This was just months after they released a 16GB version of the original iPhone for $499. The difference? Apple started playing ball with the typical (at the time) carrier subsidy model.⁴

So, in the course of one year, we went from the cheapest iPhone costing $499, to the cheapest new model costing $199. A year later, Apple started offering the previous year’s model for $99. It seemed like things were heading in the right direction… Technology gets cheaper over time, right?

Hold that thought…

This continued up through 2011, when Apple started allowing the carriers to offer two-generations-old models of the device for free with a contract. It was this same year that the price of the top-of-the-line device started to rise again. Previously, the highest-end device was always sold (subsidized) for $299. With the iPhone 4S, Apple offered a new 64GB model for $399.

$399 stood as the (subsidized) high watermark for a bit. Until a 128GB iPhone 6 Plus came in at $499 in 2014. Back at the $500 price point, and with carrier subsidies falling out of favor, we were really back to the races.

The next year, Apple was selling the high-end iPhone 6S for $849. The year after that, the Plus model was up to $949. The creep towards $1,000 (pre-tax) continued gradually until the iPhone X of course shattered the ceiling last year.

The “cheapest” iPhone X was $999. The most expensive version was $1,149 — $200 more than the top-of-the-line iPhone 8 Plus the year before.

Which brings us back to this year, where Apple has decided to blow the doors off in what I think can only be described in a “how high will they go?” test of their market… Again, the 512GB model of the iPhone XS Max is $1,449 — $300 more than the top of last year’s line.⁵

And here’s the thing: people are going to suck it up and pay this price. A lot of people. People like me. Three main reasons for this that I see.

First, yes this is more expensive than most laptops these days. Hell, it’s even more expensive than some Apple laptops. But this is also a device that all of us use a lot more than our laptops. And whereas you used to be able to make the case that the laptop was far more powerful than the smartphone, you can’t really make that argument anymore. If Apple stuck all of the latest iPhone internals inside a MacBook, is there any question they could charge $1,499 for such a device? Or that they would? And so perhaps I should say when…

Second, a few years ago, Apple rather quietly rolled out their iPhone Upgrade Program. I believe the only reason they haven’t touted it more is because a third-party handles the financing right now (Citizens One in the U.S.). If and when Apple starts to do this themselves,⁶ say, as part of an “Apple Prime” package, we’re going to hear a lot more about this.

It just makes sense. I do believe this year may be an aforementioned test of Apple’s customers willingness to pay insanely high prices for a phone. I can’t see the trend continuing with the $2,000 iPhone. But actually, I can! It will just be obfuscated by monthly payments. Just as it used to be in the days of carrier subsidies! But this time, such payments will be going directly to Apple.⁷

Again, this is already happening for those of us on the iPhone Upgrade Program. And it means there is no $1,500 iPhone, it’s more like a $60/month iPhone. And you can easily talk yourself into it because thanks to being eligible for a yearly upgrade to the latest iPhone, you’re never paying full price for a device. Instead, if you do the math (which most won’t), you’re paying roughly half the cost for the top-of-the-line model over that year.

Of course, you’re also paying Apple in perpetuity! And this monthly bill is only going to go up as they bake in AppleCare (which they do), theft protection (new this year!), and eventually all sorts of other goodies: iCloud storage, Apple Music, Apple Television (the service, not the box), etc.

This is how Apple truly becomes a services business. And it’s happening in front of our very eyes.

But wait, there’s — yes — one more thing. The third reason why this all works ties back to the beginning. If Apple had released a $1,500 iPhone from day one in 2007, it wouldn’t have just been Steve Ballmer laughing. The market would have laughed Apple out of the room, and perhaps out of the industry.⁸ Imagine Ballmer. Now imagine him on laughing gas. Again, the original iPhone was $599, and the price had to be cut in half almost immediately to make it viable. $1,500 would have been a coffin nail for the device in 2007.

But in 2018, it’s just going to push up Apple’s ASPs, and as such, their stock price. And Apple can now get away with this because they did so ever… so… slowly. Again, after resetting the price and expectations over the years.

I’m not sure when Apple realized and started executing upon this gradual price increase strategy. My best guess is just after 2011, when the top-of-the-line price started inching upwards again. Perhaps (almost certainly?) not coincidentally, this was the same year they let carriers subsidize old models down to $0.⁹ Apple let the lowest iPhone hit the bottom in order to set the top-of-the-line on a trajectory towards the stratosphere.¹⁰

And it worked, rather beautifully.¹¹ Now, I believe, the $1,500 iPhone offers a glimpse into Apple’s next phase. The $99/month, forever, iPhone.

¹ Adjusting for inflation, that’s about $730 in 2018 dollars.

² And Apple actually got a cut of every customer bill!

³ And Apple had to give all of us who paid full price a gift card…

⁴ No more cut of every AT&T bill for Apple!

⁵ To drive the point home, if the trend continues, next year’s top-of-the-line iPhone will cost $1,849…

⁶ At the very least, Apple could and should be running the front-end and handle more the experience of such a service, which they currently do not. We can argue about the banking side of the equation!

⁷ Not to mention continued payments to the carriers for cellular service, as a different payment.

⁸ See also: what happened when Amazon tried to launch a truly ridiculous phone… It failed spectacularly despite Amazon being Amazon. Despite owning the number one channel for buying anything online!

⁹ Also perhaps coincidentally (or not!) the year when Tim Cook fully took over the reins of Apple following the passing of Steve Jobs…

¹⁰ “I said, ‘that is the most expensive phone in the world!’” Ballmer went on to say in 2007. And he was right! But little did he realize that this would one day be the point! And something to aspire to!

¹¹ Remember too that there’s a whole world out there beyond the U.S. market. And while an Apple subscription model may eventually work everywhere, the high end of the U.S. market is most… primed. Meanwhile, the “low end” iPhones are getting more attractive over time and their price points are inching up as well, albeit much more slowly than the high end of the line…