The True Cost of the iPhone

This video is sponsored by Brilliant! The first 200 to use the link in the description get 20% off the annual subscription. 2018 was a rollercoaster year for Apple. In August, its stock hit two-hundred and seven dollars, making it the first trillion dollar company in history. Then, in a dramatic few months, it lost $450 billion as Microsoft, Amazon, and Alphabet passed it by. And for the first time in fifteen years, the company announced it would make less money than expected. The problem? Fewer people buying iPhones. The reasons are many: China’s slowing economy, sticker shock, market saturation. But there’s also another big factor: Apple has a new competitor. Not Samsung. Not Google. Not Huawei. …Apple! The iPhone is increasingly competing with itself. One, because we’re all holding on to them longer. But also because it doesn’t cost what you think it does. As the price of an iPhone goes up, something new is happening to its value, and it’s shaking up Apple’s entire business model. To understand what’s really going on, we need to calculate the actual, hidden price of the iPhone.

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Generally speaking, there are two ways you can get rich selling things to people: One, you can play the numbers game – Sell a gazillion small things for a few cents profit each. Think: Gas stations, grocery stores, and, on a good day, Amazon. Sure, you’ll probably lose money at first, but sell a few more and now you have the power of scale. Lower costs, higher margins. Look at you! Or, you can sell a few really expensive things. Ever wondered why your town has like three mattress stores for every one person? They’re always empty and yet somehow still keep the lights on. Well, that’s because a few feet of foam doesn’t cost thousands, or even hundreds, of dollars. 50, 60, 90 percent of a mattress is pure, king-sized profit. It only takes a few sales a month to stay in business. And, therefore, disruption. But a few companies, the really, really successful ones, manage to do both. If you can make hundreds of dollars on each item, sell it thousands of times an hour, and convince those same people to buy again in 12 months, AND make us want to line up with a smile on our face for the privilege of doing it, well, now you have a $265 billion a year business. The iPhone is, arguably, the most successful subscription service in history. You can bet Apple will announce a new model, or three, every September, like clockwork, just as surely as you know they’ll name it something weird.

The problem is, technology is getting really good. So good that a lot of people are thinking “Why do I need a new one?” Some of us care about Portrait Mode and dual optical image stabilization, but, for most people, checking Twitter and using WeChat is the same on the Phone XS as the X, and 8, and 7. You’re invited to the blue bubble club regardless. According to analysts, the average person waited three years to upgrade their smartphone in twenty eighteen. This year: four. Of course, phones are a little bit weird in this respect because so are humans. The iPhone isn’t just a tool, it’s a status symbol. According to researchers at the University of Chicago, the best predictors of wealth in 1992 were: owning an automatic dishwasher, a fireplace, and oooh, a garage door opener. Hi-tech! Today, it’s owning a passport, an iPhone, and iPad, which have a 70% chance of correctly guessing whether you have a high income. Owning the newest model signals you have a grand of disposable income to spend every year. Add some AirPods and you won’t even hear the sound of the money leaving your bank account. But that only works if this year’s iPhone looks different from last, and Apple only really changes its design every other year. So, here we are. People are losing their appetite for frequent upgrades, but Apple certainly hasn’t lost its appetite for money. Which means, of course, higher prices! Selling half as many phones isn’t such a problem if they’re all twice as expensive. The cheaper iPhone has slowly crept from $649, to 699, to 749, today. The more expensive XS now starts at nine ninety-nine and goes all the way up to $1,449. Of course, that’s only if you’re lucky enough to live in the U.S. And yet, revenue is still down. Something’s missing. To make sense of this, we need to answer the question: How expensive is the iPhone, really? There’s plenty of back-and-forth on whether the iPhone is, quote, worth it, but what isn’t really debated is that, in general, it’s higher-priced than most other smartphones from most other brands. Being selective about which price segments it sells to is pretty much written in Apple’s DNA. There’s no $300 MacBook not because it’s impossible but because that’s just not what it’s about. And with prices going up even higher, it would seem that’s never been more true. But sticker price isn’t the best way to measure actual cost. In fact, it’s pretty misleading. Phones aren’t consumable. Unless you pull a Black Mirror, they’re still worth something in a year or two. The price of something like a house accounts for how much it’s expected to gain or lose in value. Usually, the structure itself depreciates – styles change and wood rots, but the land underneath it appreciates. Which, side note, is why tiny houses aren’t investments. The land they sit on is often leased, not owned, and therefore, it only loses value. Basically, you’ve just bought a house-shaped RV! Anyway, unless your phone was signed by the ghost of Steve Jobs himself, it’s more like a car – its value goes down. And fast. But not all phones are the same. On average, iPhones lose 45% of their value in the first 12 months. Samsung phones, 62%. and Google, 81. That may sound a little unfair – Apple only makes premium devices, while Samsung’s average might be skewed by a few low-end outliers. So, let’s look at specific models. A year later, the Samsung S8 lost 58% of its value. The Google Pixel XL, 82, and the OnePlus One 94%. Meanwhile, the iPhone 8 still lost only 45. That’s a difference of hundreds of dollars. And that’s before the record-setting iPhone X. In September 2018, only a week before the XS was set to be announced, the X was still worth $679. It lost only 32% of its value. Taking this into account, we can calculate a rough Total Cost of Ownership. A thousand dollars upfront, minus 679 for selling it a year later, gives us a real cost of $320. That’s $26 a month to always have the latest and greatest. Now, to be fair, sticker price does matter. If next year’s iPhone cost $20,000, and sells 12 months later for $19,900, it would be a bit disingenuous to call it a $100 phone. But, of course, resale value is still very important. And here’s why: Because used iPhones are now worth more, more people are selling them. Higher supply. Meanwhile, more people want the new design but don’t necessarily want to spend a whole month’s rent. Higher demand. The result: a huge, thriving, secondary market. Amazon and eBay are flooded with iPhone X’s. Which means the new phone has to compete with its still-pretty-good last generation. In other words, Apple is, increasingly, competing with itself. And the better today’s iPhone, the harder it’ll be to compete against, used, next year. Now, if you’re an investor, this all sounds pretty bad. Like, sound-the-alarms bad. Remember, the iPhone alone accounts for 60% its revenue. Any other company would fight this tooth and nail. So, what’s Apple doing? Not only are they not fighting it, they’re actually embracing it, making the iPhone last even longer. Instead of buying a whole new phone because you can’t get 3 hours on a charge, they’ve made it easier than ever to just replace the battery. And while Android phones often receive only two years of software updates, iOS 12 runs on all these devices, going all the way back to the 2013 iPhone 5s and the first iPad Air. Even better, it actually speeds up your phone, it’s no longer a tradeoff of slow-as-molasses for new features. Or, let’s be real, pressing “Update” so it’ll stop bothering you. All of this is awesome for you and I, but isn’t it a terrible business idea? Not necessarily. Unless you buy from, second-hand phones don’t directly put any money in its pockets, but Apple has other ways of making a profit. New or used, you still buy apps, You still subscribe to Apple Music, Apple Video, iCloud, and so on. The iPhone is a gateway to things like the iPad, Apple Watch, and AirPods. Even if you buy none of these things, you’re still useful to Apple. Google, for example, pays an estimated $9 billion a year just to be your default search engine. Nine BILLION. That’s the GDP of Haiti for one switch to be flipped. User base means control and control, ultimately, means money. In other words, things like services can make up for lost sales. It’s sort-of the in-app purchase model applied to the iPhone as a whole. In the long term, Apple needs to move its focus away from the iPhone and towards new platforms entirely. Augmented reality glasses are the future. As we saw in 2018, this transition won’t be easy. But it’s the best, and really only path forward. Because, the truth is, what’s happening now is normal. Everything before was an anomaly. A very profitable one. An easy one for companies to get used to. But, still, an anomaly. From 2007 until fairly recently, the stars were perfectly aligned – technology was moving incredibly quickly but still always left enough to be desired for next year. The smartphone was in its growth period. But the average people buying a new phone every year or two just isn’t sustainable. Not economically. And not environmentally. Phones should last years and years, go through two or even three owners, and then, gracefully, be recycled. The future is one where a few of us buy the latest phone, take good care of it, and then give it back to Apple, or sell it second-hand. The problem is, selling your phone is, kinda the worst. How do you know when to sell? And for how much? So it ends up just sitting in a drawer somewhere. Dave, over on Here’s the Bad Version has an idea for a solution: An app. You’d scan your phone when you buy it, tell it how often you wanna upgrade, and then it sends you a notification when it’s the best time to sell. I’m 100% serious when I say I think this could be a multi-million dollar startup, someone just needs to program it. You could design the app to make predictions about how the value of your phone might change in the future, for example, with the machine learning course on Brilliant, which teaches you, step by step, intuitively, with its computer science and math courses. Their Computer Science Algorithms course will teach you the concepts behind how you might design the app to scan the iPhone’s barcode and then generate an eBay listing when the user is ready. In my programming classes, I noticed that I learned a lot faster when I was actually making something versus when I was just studying arbitrarily. Plus, it’s just more fun to make something. Brilliant thinks the same way – instead of “Here’s this new concept, now just store it in the back of your head”, its Daily Problems give you a real, interesting problem to solve using your new skills. Use the link in the description to sign up for free and get started today. The first 200 people to do so will also get 20% off the annual premium subscription so you can view all the Daily Problems and take all their problem-solving courses. And after you sign up, don’t forget to go watch Dave’s video.

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