Apple shifts strategy on pricing to undercut rivals

11/1/2011

Something unexpected has happened at Apple Inc., once known as the tech industry's high-price leader. Over the last several years it began beating rivals on price.

People who wanted the latest Apple smart phone, the iPhone 4S, were able to get one the day it went on sale if they were willing to wait in a line, spend at least $199, and commit to a two-year wireless service contract with a carrier.

Or they could have skipped the lines and bought one of the latest iPhone rivals from an Apple competitor, as long as they were willing to pay more. For $300 and a two-year contract, gadget lovers could have picked up Motorola Corp.'s Droid Bionic from Verizon Wireless, or they could have bought Samsung Group's $230 Galaxy SII or $260 HTC Amaze 4G, both from T-Mobile, under the same terms.

Apple's new pricing strategy is a big change from the 1990s, when consumers regarded Apple as a producer of the high-priced Macintosh family of computers unable to compete effectively against the far cheaper Windows PCs.

But more recently, it began using its growing manufacturing scale and logistics prowess to deliver Apple products at far more aggressive prices, which in turn gave it more power to influence pricing industrywide.

Apple's innovations -- including the iPhone, iPad, and the ultrathin MacBook Air notebook -- are justifiably credited for their role in the company's resurgence.

But analysts and industry executives say Apple's pricing is an overlooked part of its ability to find a large audience for its products. It sold more than 4 million iPhone 4S smart phones over its debut weekend.

Shoppers can still easily find less expensive alternatives, with less distinctive designs. Within the premium-product categories where Apple is most at home, though, comparable devices often do no better than match or slightly undercut Apple's prices. "They're not cheap, but I don't think they're viewed as high-priced anymore," said Stewart Alsop, a longtime venture capitalist in San Francisco.

Apple declined to comment.

The aggressive pricing, analysts say, reflects Apple's ability to use its growing manufacturing scale to push down costs for the crucial parts that make up its devices.

Apple has also shown a willingness to tap into its huge war chest -- $82 billion in cash and marketable securities last quarter -- to take big gambles by locking up parts supplies for years, as it did in 2005 in a five-year, $1.25 billion deal with manufacturers to secure flash memory chips for its iPods and other devices.