Why Apple Didn't Announce iPhone 3G Today

It's an old adage that one should never buy the first generation of an Apple product, because it's usually packed with bugs and missing features that become standard in later versions of the same product; I can say from experience that this is usually the case, and there's no truer case than this with the iPhone. The bugs with the iPhone are rather minor things and after 14 revisions of the firmware, most of them have been fixed. Save for a newly upped storage capacity on the iPhone, nothing significant has changed since the release in June of last year.

Apple's strategy in the past has been a "same-day-announcement-release" of their products -- to a certain extent, this works well, but judging by the reception of the iPhone at MacWorld 2007 and the release in June, having a long release period doesn't seem to dull the enthusiasm much. There are design issues with the iPhone, and while I believe the external casing for the 2.0 iPhone won't change much, I think we're going see some some pretty substantial improvements for the hardware inside. There's two things ways that Apple can approach iPhone 2.0: all new hardware, or old hardware which is faster, smaller and more efficient. Since the biggest gripe about the iPhone is 3G, I suspect that once the iPhone 3G is released, the griping on the iPhone will shift from "it doesn't have 3G" to "The 3G iPhone's data plan is too expensive!"

I also think that we're going to have a good number of upgraders when version 2.0 comes out, of people who bought a version 1.0 iPhone and want to move up to the latest and greatest -- now what happens to their old iPhone? I suspect a great majority of them will be given away to other family members or be resold to fund iPhone 2.0.

While I think it's possible for Apple to sell both EDGE and 3G iPhones at the same time, I don't think this going to be the case for the iPhone, unless they can make the EDGE iPhone substantially cheaper than the 3G iPhone; I'd envision the 3G iPhones slotting in at the same price as their current EDGE products, so a 8GB iPhone with 3G would be $399, and the 16GB iPhone would be $499 -- the only reason this would be able to work is if the price of memory continues to drop, and they keep the hardware more or less the same; the cost of the chips required to make the iPhone EDGE capable were priced at around $16, the cost to include 3G is in the ballpark of $20, yielding a $4 increase in cost of manufacture, which definitely means that it benefits Apple to continue selling EDGE as long as they can (or to increase the price of the 3G iPhone by $50, but I have a feeling that the resulting numbers of $449 and $549 are too ugly).

We all know that 3G is coming, so why not announce it today? Because this would negatively impact the sales of their current iPhones; keep in mind that for the first iPhone, the waiting period for the iPhone was 6 months -- people neglected cellphone upgrades during that period in order to line up and be one of the first to own these devices. In that case, having an early announcement benefited Apple; competitors didn't get potential iPhone users when they knew the iPhone was coming. With only 3 months to go before the announcement/release of the 3G iPhone, Apple is likely benefiting more by continuing to keep sales brisk through this quarter. When the 3G iPhone appears, it will be available that same day -- make no mistake, Apple wants to make that 10 million iPhone goal, and having people hold off purchases for any period of time runs counter to their purposes. 3G is not as widely available as GSM coverage, but it's getting better -- the last thing Apple wants is a bunch of returns after launching iPhone 3G with customers complaining about 3G coverage.

The iPhone started with a per-unit profit margin of about 50% -- in three months, the price was cut, and the profit margin amounted to only 35%, and the 4GB was discontinued, yielding a 17% profit margin on their remaining inventory. This $200 price drop had a huge effect on sales of the iPhone, and refurb iPhones sell out quickly (I suspect the majority of these iPhones are bought by the gray market and resold internationally, I know very few people who have purchased a refurb). My guess is that the current product lineup maintains a 35 - 40% profit margin, and that this is the price that Apple wishes to maintain -- too much of a shift in either direction would not be good for sales. When 3G is released, I expect Apple to drop the price of EDGE handsets to quickly move them out, and I suspect the biggest push is going to happen at the end of the year, around October. What's currently hurting Apple's sales of the iPhone right now is their rollout internationally; once they secure more deals with carriers, they should be able to make their 10 million sales easy; what's stopping them is that a fair chunk of them use CDMA and 3G as the network technology, not GSM.

For Apple, it's the 10 million mark that matters, and 3G is the way they're going to do it.