Apple Pivots to Cheap: Will Customers Pay Premium Prices for an Inferior Smartphone?

According to Qualcomm Apple is planning to move to inferior Intel Modems for their next generation of premium smartphones. Qualcomm modems currently outperform Intel Modems by a significant margin on a number of critical metrics. In fact, Intel is so far off the performance bar with Qualcomm they currently only enjoy 6 percent of the market. This is problematic for the leading luxury phone in the segment because it looks like Intel is massively cutting phone performance for its customers to ensure a higher margin (to get this deal Intel I believed to have basically bought Apple’s business resulting in little or negative margins for this business).

This means that future Apple customers will be paying a premium for a phone that will perform in line with phones half or less of the cost given the expected performance. The connection (streaming, talking etc.) will be more in line with bargain smartphones in the sub $300 range than smartphones in the $1,000 range. Or, if this was a car, this would be like buying a Porsche that had a Miata engine.

The Power and Problem of Lock-In

This reflects the power and problem with a lock-in platform. Customers really don’t have a choice as the vendor can cut costs and capabilities in the service, device, or software and still increase prices because the switching cost—the cost to change to another service, device—or software is excessively high.

So, a company like HTC can’t do this because the cost to switch to Samsung or Motorola is relatively low. Android customers—if faced with the same behavior—would simply choose not to buy the offending phone and switch to one of the other vendor’s similar products.

However, what often happens is the vendor doesn’t realize that this isn’t absolute. If customers get aggravated enough they will incur the cost. Back in the 1980s, IBM’s management believed that they were selling the equivalent of “air” and that customers would pay anything IBM charged. They did for a few years, but increasingly got upset that IBM was charging more for less and eventually they jumped en masse. IBM’s brand went from the most valuable in the market at the time to having negative value (this means, for the same price, they preferred unbranded products over IBM’s) and the company almost went under. IBM ended up firing their then CEO John Akers (who ironically wasn’t aware of this bad IBM behavior) and replacing him with the only outside CEO IBM ever hired.

IBM will likely never make this mistake again in my lifetime and has since aggressively moved to open source hardware and software to assure they never again are ever tempted to abuse locked in customers because they realized that this resulted in behavior that could kill the company.

In Apple’s defense they are between a rock and a hard place given what just happened to Facebook because they couldn’t grow quickly enough for the market and took a massive hit in valuation. Apple is unwilling to let margins erode. Given sales of iPods, Apple Watches, and particularly the Home Pod have largely failed to pick up much of the slack of a slowing iPhone market, Apple was largely forced to leverage their lock-in to milk customers for funds. But, part of the reason they aren’t that competitive with phones anymore is because of this exact behavior. So, they are now on a spiral that—unless they can get another break out product—will eventually result in customers fleeing from the product and will slow—likely significantly—customers moving to the platform. (For some reason customers really don’t like paying more for less).

By the way, Tesla is another company experiencing serious margin problems, but they currently are just abusing suppliers not customers. But, it is leading many to wonder whether that company will survive and the risk it might go under is likely scaring customers away from the car at the moment. Why this is important is that Tesla and Apple customers are often the same customer and if a lot of Tesla customers get screwed they are likely to see the parallels in Apple and flee the brand prematurely because—while both companies are approaching the problem differently—both firms are showcasing what looks like a similar problem (Apple, unlike Tesla, has massive reserves and is unlikely to fail, but the customers of both companies are likely to feel abused, driving increased concerns about Apple).

Smart iPhone buyers learned to ask for the Qualcomm version of the iPhone over the Intel version some time ago even though Apple was crippling their Qualcomm phones (because even crippled the Qualcomm phones outperformed their Intel counterparts). Removing the Qualcomm option is clearly not in the customer’s best interest.

Wrapping Up

This behavior never ends well, and it is fascinating to see Apple—which is one of the most well-regarded brands—put customers at risk this way. But, this is often a problem when a founder leaves a company, or in this case dies. Those that follow simply don’t understand what that founder did to make the company successful. Recall when Steve Jobs left the first time, Apple nearly went under because of this same lack of understanding (they just didn’t get the power of Jobs’ ability to pitch “magical” products). Cook has been far better at appearing to keep Apple performing than his predecessors, but he is still falling into that same old lock-in trap and eventually he’ll undo much of what Jobs did in recovering the company. There is little “magic” left in the brand, and, I expect—except for the most loyal Apple customers—most will get tired of paying Porsche prices for Miatas.

Expect competitors like Samsung to point this out a lot when the next iPhone launches. By the way, I doubt this will reflect well on Intel either as it will tie the brand to inferior products and Intel Inside was positioned as a premium brand. Tied to inferior modems Intel will mean substandard and this perception has a high probability to bleed to their other products which would make AMD, NVIDIA, and—ironically—IBM (Power) very happy.