Let’s call it Newton's First Law of Gadgets. Tech objects tend to get cheaper over time. When the Macintosh was introduced more than 30 years ago, it cost $2,495 -- $5,700 after accounting for inflation -- for a barely functional hunk of beige.
The (fake) law breaks down, however, when met by the external forces of iPhone fairy dust. In Apple's first full fiscal year after the smartphone went on sale in 2007, Apple generated an average of $580 in revenue for each phone it sold. And now? The average revenue for each iPhone was $691 in the quarter ended Dec. 26.
Even at a time of high anxiety about iPhone sales -- which slowed to a molasses-like 0.4 percent growth in Apple’s holiday quarter -- part of Apple's magical realism is its ability to get people to pay luxury prices for commodity goods.
Sales of iPhones may decline this year for the first time in history. Apple CEO Tim Cook declined to discuss this possibility on Tuesday but he acknowledged iPhone sales will fall in the March quarter--the first ever decline for the iPhone business. I repeat: For the first time ever. It is time to panic about iPhone sales. But even if we've permanently passed peak iPhone, the enduring price premium will let Apple continue to gobble outsized revenue and profits.
Defying global smartphone trends, the iPhone price gap is getting wider. Overall, the average sale price of a smartphone powered by Android software fell by about 33 percent over three years -- to $215 in late 2015 from $319 in 2012, according to research firm IDC.
Prices fell as global demand for smartphones exploded during those years and as the mobile boom grabbed people from countries like China where fierce mobile competition has forced down prices. During that same period -- when Apple's sales in China also exploded -- the average iPhone price stayed roughly the same, at $685.
The Android-iPhone price divide is exacerbated by the diversity of Android smartphone makers. Some companies target the same lofty corner of the market as Apple, while others aim squarely at the low-cost smartphone masses. Still, Apple's relentless focus on that high end and its ability to keep charging consumers more money are the biggest reasons why Apple sells just 14 percent of the world's smartphones yet grabs more than 90 percent of all industry profits.
A big shift was the introduction in September 2014 of the larger screen iPhone designs, which ushered in higher average sale prices for iPhone models. Since the iPhone 6 models went on sale, revenue growth from the iPhone business has outpaced unit sales growth in each of the last six quarters, including in the three months ended in December, according to Bloomberg data. Before then, unit sales had grown faster than iPhone revenue for 10 consecutive quarters.
That's not to say all is well with Apple. Did we mention iPhone sales may decline for the first time in history? An Apple that generates two-thirds of its revenue from a flat-to-falling iPhone business is hardly the definition of peak health. It sure looks as if Apple’s growth gravy train is over, though Apple has made fools of many of us who previously predicted an end to Apple's go-go days.
Apple's share price is already reflecting a breakdown of the growth machine. The company's shares have fallen 29 percent from a closing high in February to Tuesday’s market close. That has wiped out about $227 billion in shareholder money -- equivalent to the market value of Wal-Mart or the annual gross domestic product of Portugal. And the whole stock market is ill with the Apple share price flu.
The biggest question mark about Apple and its luxurious prices: Can they last? What is the impact on iPhone price tags as more used smartphones hit the market, either from the increasingly popular upgrade programs in established mobile markets, or in untapped smartphone markets like India?
Apple's premium means the company typically grabs a small slice of overall product sales, whether in personal computers, tablets or smartphones. Being a bit player has hardly mattered to Apple. To the price premium victor go the spoils.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
The real technology phenomenon known as Moore’s Law is a big reason for my fictional technology law.
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