As the whole world seems to know by now, Apple recently placed the new iPhone 5 on sale for $199 with a new 2-year contract. Without a contract, you can expect to pay far more for the phone. Nokia, Motorola, and Samsung–makers of Windows and Android phones–have also been anticipating the release of the new iPhone. As Apple is very secretive about the makeup of their phones, other manufacturers can only speculate on what the new phones will include before the actual release. However, there are many features that non-Apple phones include that make them attractive in comparison. Could these other manufacturers actually reap some benefit from the release of the new iPhone? Think about integrating your answers into the supply-and-demand framework used in our class.
You would have to think that all these manufacturers and platforms are basically selling their top of the line phones for an identical price, but I ask you to dig a little deeper. Much of the real money in the smartphone market is actually paid to the wireless carries like Verizon Wireless, AT&T, Sprint, and a number of other smaller carriers in the form of monthly subscriptions to data and wireless plans. These carriers pay large subsidies to the phone manufacturers in order to secure units and a place in line with the manufacturers. There are arguments to be made that doing away with the subsidies entirely might help lower phone and plan prices, while helping to accelerate innovation in the smartphone market. Comparing the prices paid for phones and wireless plans in other countries is one way to look at this. While competition could bring the overall price down, maybe people are willing to settle paying a little less up front, with higher costs on the back end.
Finally, I’d like you to think about the markets for the suppliers for the iPhone and other smartphones. Hundreds of different components go into each smartphone, and when suppliers have trouble manufacturing enough parts, Apple often has to delay production of the entire phone. Each iPhone that has been released has faced the same problems. Why don’t manufacturers like Sharp and LG simply increase overall production to meet demand? Should Apple wait until they have enough product on hand that they don’t have to create long lines to get their product? Or do you think Apple likes to play on the hype of the new phone to increase the buzz around their product. Are there raw resource constraints that prevent Apple from producing as many phones as they expect to sell at a given price?
Questions you might answer
Might you expect to see an overall increase in sales of other brands of smartphones in the overall market due to the release of the new iPhone? Could Samsung (the leading Android retailer) and Nokia (the leading Windows phone retailer) reap some benefits? By ‘market’ you should be referring to Supply/Demand/Price/Quantity and you can differentiate between different types of phones. Try to think deeper than just “This will lead to a decline in Samsung’s demand” which doesn’t really say much. Do you expect other firms to change their prices, and if they do, what should be the impact on their firm? What has happened to the sales of other phones in the U.S. and abroad around the time of the last iPhone releases?
In the market for the inputs for the iPhone and other smartphones, why do these shortages occur? Chip, screen, and other part manufacturers struggle to meet the demand for their goods. Explain why they cannot simply raise prices.
Why do manufacturers try to create hype or buzz for their products? Do you believe long lines for products leads to the feeling of exclusivity, or do others feel left out and simply turn to a competitor? Are there examples of where this strategy have not been played so successfully?
The smartphone market is highly differentiated, with Windows, Android, and iOS devices ruling the market. Only a few short years ago, a little company called Research in Motion was cruising along selling millions of phones with similar buzz. Try to find old articles on their products to see if you can find the point at which their products no longer had the cache they used to. What can the current market leaders do to maintain their grip on the market–if they can?
Do you think that innovation has been stifled because of the way your purchase of a new iPhone or other smartphone is subsidized by the wireless carriers? Should carriers or the government get involved to try and improve this market and possibly increase innovation?