Apple's Aggressive Pricing Risks (AAPL, T, RIMM, PALM, S, VZ)

Apple Inc. (NASDAQ: AAPL) is having more than its share of free press from the World Wide Developers Conference this week.  The big new push here seems to be on revamping the iPhone and MacBook.  But the pull to go to Mac is where the risks also come into play.  As Apple lowers its pricing threshold, its margins at least theoretically will come down as well.  And the new pricing is so far being described as “aggressive.”

For starters, we wanted to see exactly where the current iPhones are.  By the looks of it, the current brand new iPhone 3G with 16GB Memory is $299.99 and the iPhone 3G with 8GB Memory is $199.99.  Best Buy listed a “refreshed “iPhone 3G with 16GB Memory at $249.99 and the “refreshed” iPhone 3G with 8GB Memory is $149.99.

Companies cannot exactly base “used or refurbished” pricing as the new pricing, but what exactly is “aggressive” pricing?  There was a rumor of a $99 version of the iPhone, but this seems that perhaps a more realistic price for the base model phone would be $149.99.  UPDATE TO STORY….. The base price for the existing 8GB 3G iPhone will cost $99.  That is a different price than was quoted earlier by an AT&T representative, but the news has changed since the article was written.

The real incentive for getting the pricing down is to bring in new users that buy more expensive packages, which Apple gets a cut of.  We did one more call to AT&T (NYSE: T) to see exactly what the cost is per month for the phone and data plan.  This comes out to$74.99 per month before taxes, and close to $88.00 per month after taxes.  This basic package includes $39.99 for 450 out-of-network minutes, 5,000 night/weekend minutes, unlimited minutes for mobile to mobile (inside AT&T), the $30.00 data package, and a $5.00 for up to 200 text messages.

Obviously, more premium packages are available and Apple gets a piece of all those packages.  That basic package is actually not much different than the equivalent one for the Research-in-Motion Ltd. (NASDAQ: RIMM) BlackBerry and not much different than the Palm, Inc. (NASDAQ: PALM) Treo package at Sprint Nextel Corp. (NYSE: S) or at Verizon Communications Inc. (NYSE: VZ).  Until there are more than the estimated 50,000 Palm Pre phones out there (as per JPMorgan’s estimate today) by Sprint, then the comparisons are still for educational purposes only.

But as the downside has been pointed out by many.  There is no insurance on the phone.  You wreck it, you get to buy a new one.   This is good for Apple if everyone does that, but it can act as a deterrent for those who worry about having to buy a new phone if there phone gets lost, stolen, or smashed.

Apple also said it was updating the aluminum unibody MacBook Pro line to include 13-inch, 15-inch and 17-inch models with up to 40% longer battery life starting at just $1,199.00 for the base model.  That appears to be roughly $300 per unit less.  This is still a far cry from the mega-push by Joe Public into sub-$500 computing.  We may see lower prices on other models this week, and Apple does have lower-cost computing available already.

The good news here is that Apple’s pricing is still far ahead on many items, and it still has demand.  If the company decides to start swooping down too far the price chain then it is likely to dilute its brand and will find out firsthand that it needs more and more tech support personnel to serve its customers.

There is always a challenge in finding an equilibrium where Apple can maintain a premium product pricing (and margins), yet still keep bringing up millions of more new conversion buyers each year.  Going solely for market share at lower and lower prices is not what Apple has been successful at doing.  But hard times in the economy calls for more aggressive pricing.  We won’t bother telling Apple the risks of pricing things too low in too many words.  It has  shown over and over how they know what they are doing.

Apple shares are down about 3% at $140.40 in midday trading.

Jon C. Ogg
June 8, 2009