Apple Moves Upmarket Because It Can

Apple's new, large phones may retail for more than $1,200 in Europe, suggesting the company wants even wider margins. Its fans will still pay, and love it.
never mind the functionality, feel the width.

While the rest of the world speculates about upcoming changes to Apple's product line -- a smartwatch? a giant iPad? -- southern Europe agonizes about a different kind of leak. An employee of the Spanish telecoms company Telefonica has reported that Apple is planning to sell its new, large-screen iPhones for 950 euros ($1,253) apiece.

That's the rumored price for the mammoth 5.5-inch screen version. In Italy, it may even reach 980 euros. The 4.7-inch model may be offered for 750 euros. If true, Apple is upping the stakes in its bid to remain the most profitable producer in what is now a commodity market. As long as the Cupertino company is able to sell millions of devices at prices that reflect nothing but the brand's cachet, it doesn't have to care about its shrinking market share: it will continue to skim the cream while rivals sweat every dollar.

The strategy has worked so far. Two weeks before its next iPhone announcement, Apple still sells an unlocked, unsubsidized iPhone 5s for a minimum of $649. Its materials and manufacture cost just $199, according to a teardown analysis by IHS Technology. Dividing the $450 profit by the retail price delivers an implied margin of 69 percent, according to the IHS calculations.

The Samsung Galaxy S5, one of the iPhone's major Android competitors, can now be found for about $580, and IHS Technology says its parts and manufacture cost $251.52, for a 56.6 percent implied margin.

The S5 -- way too expensive compared with flagship offerings from the likes of China's Xiaomi or perennial Korean competitor LG -- is a decent machine whose screen is an inch bigger than that of the iPhone 5s. Its two batteries last longer than the Apple product's single source, and its camera's resolution is twice as high.

Comparing specifications is pointless, however. After receiving hundreds of insulting messages every time I have the gall to question Apple's superiority, I am convinced its products are cult objects made in heaven as far as its fans are concerned. Apple adherents don't care about the Samsung provenance of the "revolutionary" 64-bit processors in their phones: to them, anything the company touches is sanctified, be it a Qualcomm camera module or a Bosch accelerometer.

Apple would be stupid not to use this incredible -- and, after three years without a truly innovative product, inexplicable -- competitive advantage. Its devotees will believe anything: That a $1,200 phone costs so much because it has a sapphire screen, because it's bigger than before, simply because it's the new iPhone. Tell them that using sapphire only adds about $15 to the cost of the phone, or that the Galaxy S5's 5-inch screen costs $63 compared to $41 for the iPhone 5s's 4-inch one -- not a major difference considering the fat margins -- and they will shrug: Apple wins.

The Apple cultists know they're paying premium prices, and they love it. Last year, the research firm Strategy Analytics tried to assert that Samsung's mobile handset business had overtaken Apple in profitability. Fan site Appleinsider immediately published an angry, and correct, rebuttal. The brand's loyalists want Apple to reap its rewards and enjoy profit leadership: Somewhat illogically, it reinforces their belief that they're doing the right thing by overpaying.

Apple is not about to disappoint. Historically, the company has maintained retail margins of about 70 percent, not counting logistical and advertising expenses: 68 percent for the basic iPhone 5, 70 percent for the 4s. If the leaked price of 950 euros is true, margins may be headed even higher, signaling an uncompromising "premium" marketing strategy -- reinforcing the cult rather than building a rational offering.

Meanwhile, for consumers seeking functionality -- and who, with the latest Android software, need no longer compromise on the user experience -- Apple's handsets make less and less sense.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.