Consumers Don't Want Cheap IPhones

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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This morning, the Wall Street Journal reports that Apple Inc. has told two suppliers it's cutting orders for the iPhone 5c, the cheaper phone that was supposed to fend off competitive threats from lower-cost competitors. The best guess is that even the cheaper iPhone costs too much; if you're going to pay $550 for a phone (without a contract), you're probably looking for something a little nicer than a cheap plastic case.

Sales of the extra-expensive "gold" version of the iPhone, on the other hand, appear brisk.

Apple is a premium brand for people who are willing to spend extra money for design, ease of use and, perhaps, a self-image as someone who uses Apple products. Down-market brand expansions by a premium brand are always tricky. They can work well -- luxury car makers have had great success with "entry level" versions of their products. Still, issuing a cheaper version of your premier product is a risk, because there are a lot of ways it can go wrong. You can cannibalize sales of your more expensive products, as everyone switches to the cheaper version. Or you can find, as Apple apparently has, that people don't want the cheaper version; they want the cachet of the original or a product from a different company. Worst of all, you can find that no one wants any of your products, as your down-market movement tarnishes the original brand. (This is what happened when Pierre Cardin started slapping the logo on everything, from baseball caps to cigarettes.)

Clearly, this particular move hasn't killed demand for the more expensive iPhones. But its introduction -- and failure -- tells you something interesting about Apple: It's worried that lower-cost competitors are going to leverage their position to challenge Apple on its home turf. They tried, and failed, to take the fight down-market, to a product space that's less core to their business. It will be interesting to watch what happens next.

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