Category Archives: pricing

Refocusing the Apple Watch

September 9, 2016 Jan Dawson 2 Comments

As part of my media comment on the Apple event, I talked a little about how Apple has rethought the Watch since its initial introduction two years ago. That thought deserves a deeper dive, and although we did discuss it a little on the Beyond Devices Podcast this week, I wanted to elaborate here. The word that I keep using in talking about what has changed is that Apple has refocused the Apple Watch, and it’s done that in two ways:

It’s refocused the feature set of the Watch
It’s refocused the Watch portfolio.

Refocusing the feature set

When it comes to the feature set, Apple famously introduced the Watch with an echo of the original iPhone announcement, with a tripartite identity:

the most advanced timepiece ever created
a revolutionary new way to connect with others
a comprehensive health and fitness companion.

Though the health and fitness companion came last on that list of three, it’s rapidly risen to the top in terms of how Apple talks about the device today. Tim Cook referred to it this week as “the ultimate device for a healthy life.” Meanwhile, the communication aspects (represented in that second bullet point above) have faded into the background, barely mentioned in this week’s keynote.

But the other thing that’s been de-emphasized in the refocusing of the Apple Watch is apps, and that’s because apps just haven’t worked on the Watch. In September 2015, Tim Cook described what I refer to as Apple’s playbook for hardware devices in the iPhone era, with a set of bullet points:

Powerful Hardware
Modern OS
New User Experience
Developer Tools
App Store.

It’s clear that, both at its initial unveiling and a year later, Apple saw the Apple Watch as another product that fit this model, under which developer tools and the App Store would be critical to its success. I argued at the time that it would have been impossible for Apple to introduce a new piece of hardware in 2015 which didn’t tap into the App Store model, and yet I’m no longer sure of that view. Apps have largely flopped on the Watch. The reasons are simple – the hardware has been underpowered, and under watchOS 1 in particular apps were too dependent on the phone. But even in watchOS 2, Watch apps were too slow to load, because they didn’t maintain state and didn’t update in the background.

WatchOS 3 is intended to fix at least some of these issues, and the CPU and GPU upgrades in Series 2 of the Watch are aimed to improve app performance too. But Apple still didn’t make apps much of a focus at this week’s event. In other words, even with these potential enhancements to app performance, Apple is still focusing most of its messaging around the Watch on fitness features. I suspect that, instead of saying “this time we really got it right” after versions 1 and 2 fell short, Apple is going to quietly give developers time to figure this out, and then perhaps next time around we’ll see a renewed emphasis on how apps are adding value to the Watch. Pokemon Go and other high-profile apps may well help with this effort, but Apple is trying very hard not to oversell it this time around, and I think that’s smart. This particular form of crying “Wolf!” is running dangerously close to falling on deaf ears at this point.

The Apple Watch Hourglass

What I think we may see as a result is a sort of hourglass on its side, as in the diagram below:

The Apple Watch started out trying to be another micro computer. But Apple has now narrowed the focus to mostly being a great timepiece and an increasingly capable fitness device. In time, though, as the apps enhancements kick in and Apple works on other areas like Health in more depth, we may well see the purpose and positioning of the Watch become more expansive again.

The near-term implications of that are important to note: this means the addressable market for the Watch for the time being is mostly about a combination high-end fitness tracker and digital watch, rather than the broader “small computer” market which the iPhone and iPad arguably inhabit, and which is enormously larger. This, in turn, means that the Watch is likely destined for modest, incremental growth over time, rather than the sort of explosive growth that characterized both the iPhone and iPad in their early years. But as Apple begins to think about the Watch more expansively again, so the addressable market will begin to expand, and the sales potential of the Watch will grow with it.

Refocusing the portfolio

The original Apple Watch portfolio had three distinct tiers, with the Watch the core tier, the Sport the less expensive aluminum version, and the Edition the high-end luxury version, with prices to match. The price ranges for this original portfolio are shown in the chart below:

Two important things to note: the enormous separation between the Sport and Watch versions on the one hand and the Edition on the other, and the sheer height of the Edition portfolio’s pricing, topping out at $17,000. That’s a 48:1 ratio between the most expensive and least expensive Watches.

Fast forward a little over a year and you have the new portfolio announced this week, with a slimmed-down Apple portfolio and two partner versions of the Watch as well. For comparability with the chart above, here’s a view of the new pricing to the same scale:

And here’s a version with a scale that makes more sense for today’s Watch pricing (note that the axis tops out at exactly a tenth the price of the axes above):

First things first: Apple has basically eliminated its ultra-luxury Watch Edition models. The only model that has this designation now is the white ceramic Watch, but that’s priced at roughly a tenth of the original Editions. The new price ratio, including the Hermès Watches which actually top out slightly higher than the new Edition watch, is roughly 5.5:1 from most to least expensive. It’s also worth noting that the three Apple ranges are still mutually exclusive but now more or less touch each other — there are no more big gaps in the portfolio, even at the high end. The Series 2 aluminum Watches, starting at $369, pick up just above where the Series 1 Watches leave off at $299, while the Edition hits at $1,249, again just a little above where the Watches peak, at $1,099. The Edition branding still connotes exclusivity and premium materials and therefore satisfy the conspicuous consumption angle, but Apple is now targeting the low end of high-end watches rather than true luxury watches.

Apple now also has its two key Watch partners, Hermès and Nike, to fill in gaps in the portfolio. It’s interesting that we’re seeing these partnerships so early, but I suspect this is another sign that Apple recognizes the nature of this market and its growth prospects. What Apple is doing here is diversifying the portfolio by feature and function early in order to better saturate the smaller addressable market.

Beyond Devices Podcast

If you enjoy these posts, you’ll probably enjoy the Beyond Devices Podcast, in which Aaron Miller and I discuss events like this week’s Apple announcements, as well as other topical issues, and also answer questions about trends in technology.

Our most recent episode is embedded below, and you can find all past episodes on our website, on iTunes, on Overcast, and in other podcasting apps.

pricing, T-Mobile, Wireless

Uncovering the Reasons for T-Mobile’s One Launch

August 18, 2016 Jan Dawson

T-Mobile today announced its latest Un-Carrier move, Un-Carrier 12. The crux of the plan is new unlimited plans under the T-Mobile One brand. The headline from T-Mobile is about simplicity and unlimited for everyone, but the upshot of this new pricing is that the base price for postpaid at T-Mobile just went up quite significantly. And the reason for the move is that Un-Carrier is losing momentum and T-Mobile needs to boost growth again.

The context – slowing growth

I’ve written about this a little bit in the past, but here is the context: T-Mobile is losing momentum with its Un-Carrier moves. Two key metrics – postpaid phone net adds and porting ratios from other carriers – have both been falling.

The chart below shows postpaid phone net adds on a quarterly basis, with one line for each year, so you can see how each quarter compares to the year-ago quarter:

As you can see, the 2016 quarters so far are below Q1 and Q2 in 2015, while Q2 was also below 2013, and Q1 was below 2014. In 2015, every quarter but Q2 was below 2014 net adds. So there’s a very clear trend now that T-Mobile is adding fewer phones each quarter than a year earlier. If you strip out the exceptional Q2 2014, when phone net adds dipped, the trend is now clear for a year and a half.

Moving to porting ratios, which T-Mobile reports on its earnings calls, the trend there is fairly clear too. It reports porting ratios against each of the other three major carriers, as well as an overall porting ratio most quarters. An average of the three individual carriers’ porting ratios tends to track fairly closely against the overall porting ratio, so I’ve included that in the second chart below to fill in some gaps:

That second chart is probably the easiest one to read, because the trend is so clear. The overall rate peaked in Q3 2014 at just under 2.5, and has fallen since to under 1.5. Against individual carriers, the biggest change in the last two years has been Sprint, whose troubles two and three years ago allowed T-Mobile to capture massive numbers of subscribers, but whose recent improvements have made that cherrypicking much harder. I’ll stop here with the context, but it should be clear by now that T-Mobile is having less and less success with adding new customers and winning subscribers from competitors as time goes on, as its various Un-Carrier moves offer diminishing returns.

T-Mobile One – simplicity at a cost

T-Mobile is selling simplicity here – that’s the headline. It will have one plan going forward, and that plan will be unlimited, with a pricing structure that’s extremely easy to understand. In the context of recent pricing moves from competitors, that’s admirable, and attractive to customers. Unlimited is the simplest message of all, and has huge appeal in the peace of mind it provides.

However, this change is coming at a significant price premium. T-Mobile’s current plans start at $50 for a single line, with 2GB of data. A second line at that price costs $30 additionally, for $80 total. A third line is only $10, so $90 in total, and the same pricing continues for additional lines. Let’s compare this to the new pricing which will be offered from September 6, which will be the only pricing available for new customers:

The headline here is that, for the plans at 2GB and 6GB per line, the new pricing is more expensive, while for the plans at 10GB and the Unlimited plans, the new pricing is the same or cheaper. That’s significant, because T-Mobile says their most popular plans are the 6GB and 10GB plans, so a good chunk of their customers would be paying more on this plan, while many others would be paying roughly the same or slightly less. This helps to explain why T-Mobile says it doesn’t expect a meaningful change to its ARPU.

But of course for new customers, the starting point is now $70 rather than $50, meaning that the entry point for new customers has gone up by $20 for a single line. Put another way, competitors who previously matched T-Mobile’s entry pricing now undercut it by $20 (and Sprint has just launched new pricing today). So, even though the headline is all about simplicity and the gift of unlimited, the reality is that customers coming in at the low end will end up paying more than they would have before, and potentially more than they would at competitors.

The reason for the shift to unlimited

Here’s the rub, though, with this whole thing: T-Mobile introduced BingeOn, its video throttling strategy, a year ago. That did two things: it made it much more economical for T-Mobile to offer bigger and unlimited data plans, because it cut bandwidth usage dramatically; but it also meant that many customers who would otherwise have been on the standard trajectory of ever increasing usage pushing them into ever bigger data buckets instead went backwards. The same consumption of video suddenly drove far lower usage. The result is that T-Mobile doesn’t have the same driver of ARPU that almost every other carrier does, because it kneecapped data growth.

There’s an analog here with what happened with all the carriers a few years back when it became clear that voice and text usage were no longer going to grow as they had in the past, while data was going to continue to grow rapidly. At that point, the best move from a financial perspective was to move away from metered voice and text, because there was no longer upside for charging for every bit of usage, and instead only downside as usage dropped. On the other hand, it made sense to begin metering data and move away from unlimited plans, because that’s where the usage growth was, and where the future revenue opportunity would be too.

What T-Mobile is doing here is finding an alternative way to move people to higher tiered data plans even though they no longer need to. The appeal of unlimited is such that people will move to it even if they’re not close to hitting their current data cap, just for peace of mind. It’s even more likely that a T-Mobile customer would actually need to move to a higher plan when you consider that T-Mobile has offered Data Stash, which allows customers to roll over a data allowance over many months.

The cost of unlimited

T-Mobile made much today of the fact that its network was designed for unlimited, and that competitors’ networks were not. But that’s really another way of saying two things: T-Mobile is far smaller than its two major competitors, and so has far fewer customers on an national network, using far less data in aggregate; and with BingeOn, it’s reduced the data usage associated with video consumption by about two thirds.

But it’s not really about the network per se – it’s about the cost. Unlimited customers (for the most part) don’t actually use dramatic amounts of bandwidth in the average month. It’s likely that many of them would fit fine in the 5-20GB buckets offered by the carriers. But suddenly taking the limits off all customers risks significant increases in usage because it changes behavior dramatically, and that could incur significant costs in increased data capacity. So that’s a high-risk move, and it’s why most carriers don’t do this.

But anyone can offer unlimited if they price it right, which is why you see T-Mobile pricing it at roughly the same price as 10GB plans under its previous options. It’s also why streaming video up to 4K costs an additional $25 per line per month. There’s a cost to unlimited, and if it’s truly unlimited rather than being throttled to 480p, it costs more. This is really just a question of pricing, but that’s why T-Mobile’s pricing is going up here – it’s not magic, just economics.

A sign of confidence

The other thing that’s going on here is that T-Mobile is getting more confident in the performance of its network. One of the interesting facets of pricing in the US mobile market is that pricing power largely depends on perceptions of network performance. This is why Sprint can run campaigns offering 1% worse performance than Verizon at half the price and yet doesn’t see a massive influx of customers from its competitor. Network quality, but more importantly perception of network quality, requires certain carriers to charge less for the same services in order to win customers, while other carriers can charge more on the basis of their perceived better network quality.

Both Sprint and T-Mobile (and especially T-Mobile) have been increasing the quality of their networks in recent years, and perception on the T-Mobile side is finally starting to catch up with reality. It’s absolutely a sign of the company’s increased confidence in both its actual network and perceptions of its network that it’s willing to raise prices at this point. It clearly feels like it’s more able to compete with the big guys on network, and so can move its pricing more in line with theirs. That Sprint instead focuses on that 1% difference and 50% lower pricing is a sign that it’s not there yet, by a long stretch (leaving aside the wisdom of highlighting the worse performance of your network in national advertising).

Amazon, Hardware, pricing

Amazon’s changing hardware pricing strategy

January 5, 2015 Jan Dawson 3 Comments

I’ve referred to this in passing in several different posts, but I wanted to really devote some time to both researching and writing up a particular trend: Amazon’s changing approach to hardware, and especially the pricing of its hardware.

Kindle: Amazon’s successful hardware product

The Kindle e-reader was Amazon’s first hardware product, and is arguably its only truly successful hardware product too. It has three key characteristics that make it successful:

It offers exclusive functionality: it’s the only dedicated e-reader that is designed from the ground up to work with Amazon’s Kindle ebooks.
It’s tied exclusively to content sold through Amazon: Kindles are designed for one thing, and one thing only: reading books purchased from the Kindle store. Yes, it’s technically possible to read some free content and content from other sources, but for all intents and purposes Kindles are storefronts for Kindle books and aren’t really useful unless its users are buying those books.
It’s competitively priced: although Amazon’s first Kindles cost several hundred dollars, prices quickly dropped, especially as Amazon began selling the devices at, near, or even below cost.

When Amazon debuted the Kindle Fire category, it took in some ways a similar approach, pricing the devices very competitively, at well below what comparable tablets were going for, and the devices were heavily focused on content purchased through Amazon. The exclusive element wasn’t so much in the functionality, however, as in getting that functionality for the price Amazon was charging. But since then, the strategy has diverged further and further from the original strategy that made the Kindle so successful, and Amazon’s other recent devices – the Fire Phone and Fire TV – have arguably continued the pattern.

We never did see those free Kindles promised in 2011

It’s worth looking at the history of pricing for the Kindle and Kindle Fire lines to see how Amazon has handled pricing since the early versions. The chart below shows baseline pricing (WiFi only, no ads) for Kindles since their inception:

Kindle prices over time It’s no wonder that there was a slew of articles in late 2011 asking when Kindles would be free, or predicting that they certainly would be shortly (see here, here and here). That was partly just extrapolation from the obvious trend line, but it also seemed to fit with Amazon’s razors-and-razor-blades model for the Kindle. However, what happened in 2012 and beyond was not at all what so many predicted. The baseline price of the Kindle stopped falling in 2012, and the next edition (launched in 2014) actually cost more. The price discount offered on the version with ads masks this a little bit, but the reality is that Kindle prices aren’t falling at all, and in fact they’re rising. If you layer in the other Kindle versions, the baseline price for the more expensive version has actually risen again as well, with the launch of the Kindle Voyage.

Kindle Fires have also been getting more expensive

Now, look at the equivalent chart for the Kindle Fire:

Kindle Fire prices over time The trend here is harder to spot, because Amazon hasn’t stuck with a single model throughout the history, rather introducing a series of new models over time. But you can see two distinct trends: individual models have come down in price over time (in the case of the original Fire and the HD 7), while new versions are being introduced at higher prices, actually raising the upper price over time. Amazon has lowered the entry-level price (and you very much get what you pay for at that level) but it’s also moving up the stack into the premium space. The highest base-level price has moved from $200 to $300 to just under $400 over this time.

Let’s go back to the original Kindle model for a second and see how the new line of Kindle Fires stacks up:

Exclusive functionality – a key problem for the Kindle Fire line all along has been that they offered no exclusive functionality, only exclusive access to widely-available functionality at a low price
Exclusive ties to Amazon content – one of the key problems for the Kindle Fire line is that they could be used for plenty of things that didn’t require another purchase from Amazon. As such, the razor blades and razors model fundamentally didn’t work
Competitive pricing – as a result of both of these, Amazon hasn’t been able to keep the prices low, and instead has had to raise prices over time for the most capable tablets in order to truly cover costs.

That last point is the key here: Amazon can’t sell other products on the same basis as it originally sold Kindles because those other products don’t have the same positive effect on other sales as Kindles do. Even Kindles can only be discounted so far before they become loss-making, presumably, even taking into account e-book sales. As a result, both the Kindle itself and Amazon’s other products have been priced increasingly like competing products, at modest to decent gross margins, rather than being sold at cost, because there simply is no significant indirect revenue opportunity from selling these devices. As such, these devices have to be revenue and margin generators in their own right, rather than driving content revenue for Amazon (especially since Amazon has turned video consumption into a Prime perk, rather than a revenue source of its own).

For all these reasons, neither the Fire Phone nor the Fire TV could be priced the way the early Kindles were, because they have to cover their own costs when it comes to revenues. But because many people haven’t understood this shift that’s happened in Amazon’s hardware pricing strategy, they’ve been surprised by the pricing of both devices, which was higher than many expected. Interestingly, the Fire TV stick is the one exception to all this, as the equivalent of those cheap Fire tablets, with more limited functionality at rock-bottom prices. As a result, it’s also sold very well (it’s Amazon’s top-selling electronics device as I write this).

But the implication of all this is that Amazon has lost the two things that made its hardware so compelling in earlier versions, and it’s also lost much of the benefit of selling the devices from the perspective of its other businesses. As such, it should at this point scale back its hardware activities (which are apparently troubled in other ways) and focus on those hardware products which exhibit the same characteristics as its earlier, successful products. That means dramatically paring back its hardware activities, which I’m not convinced the company is ready to do yet. But it’s essential.

Postscript: compare all this to the iPad

It’s interesting to compare all this to the iPad, and what’s happened to its price over the last few years. This is a slightly different chart, in that it shows both the highest and lowest price as well as the average selling price, but it’s comparable:

What you can see is that Apple has slowly lowered the lowest price of the iPad, partly by keeping older models on sale, and partly by introducing the iPad Mini, such that the entry-level price is now half what it was in 2010, when the device first launched. Notably, though, in contrast to Amazon, it hasn’t done this by creating ever cheaper, crappier tablets, but by keeping very good older tablets in market. It’s also kept the high end of the spectrum remarkably constant, with only a brief blip in 2013 when it introduced a new storage tier. Meanwhile, the average selling price fell for a while and has now stabilized somewhat.

Apple has pursued in some ways the opposite strategy to Amazon, as it often does. It comes in at a relatively high price, giving it the healthy margins it expects while also leaving room for future price discounts. What was so amazing with the iPad, of course, was that it cost far less than people expected even in its original version.