The Cost Of Apple's High Price, High Margin Strategy

There is of course a cost to Apple 's high price and high margin strategy: it sells fewer phones than it would if they were cheaper. This is not a revelation of course. But where it all becomes more complex is when we discuss profits: and making profit is of course the name of the business game. There's a certain feeling that Apple's insistence on their current strategy is limiting profit growth at the company:

Apple Inc. (AAPL) is missing out on a chance to court as many as 2.8 billion new smartphone customers, many of them in Asia, as wireless-service providers balk at conditions imposed by the iPhone maker and drag their heels in signing on as partners.

Apple has announced fewer than a dozen new wireless-service providers to sell the device since September 2011, leaving the total at about 240. Holdouts represent billions of would-be subscribers in countries such as China, Japan, India and Russia, said Horace Dediu, a market analyst who runs Asymco.com. Samsung Electronics Co. (005930), Apple’s biggest smartphone rival, sells devices through almost all of the world’s 800 carriers, Asymco said.

China Mobile , and thus 700 million of those potential customers, are locked out because the iPhone is simply incompatible with China Mobile's systems. There have been stories about a possible version of the iPhone to overcome this but equally, there have been stories that China Mobile isn't willing to sign up to Apple's requirements to do so. The largest handicap being, reportedly, the level of subsidy that CM would have to provide on the handsets.

There are similar stories from elsewhere around the world. Apple insists on substantial subsidies from the airtime provider to the consumer on the price of the handset. Which is fine in those markets where such subsidies are normal. But there are plenty where they are not normal and thus the demand just doesn't fit the local business environment.

It's also true that Apple requires large commitments to volumes of sales. Smaller companies can be most unwilling to take on such risks.

None of this necessarily means that Apple should change their ways. For as above, profit is what it's all about, not volume. The thing is though, when the iPhone first came out Apple had a great deal more market power than it does now. Yet it's still, to some extent, using the structures and tactics it was when it had that greater market power. It's possible, but only possible not certain,. that relaxing some of those conditions could increase Apple's sales and thus profits. It's also possible that it wouldn't: which is of course why Tim Cook gets paid the big bucks, to try and work these things out.