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The True Cost of the iPhone

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Mar 15, 2019

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The True Cost of the iPhone
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  • This video is sponsored by Brilliant!
  • The first 200 to use the link in the description get 20% off the annual subscription.
  • 2018 was a rollercoaster year for Apple.
  • In August, its stock hit two-hundred and seven dollars, making it the first trillion dollar
  • company in history.
  • Then, in a dramatic few months, it lost $450 billion as Microsoft, Amazon, and Alphabet
  • passed it by.
  • And for the first time in fifteen years, the company announced it would make less money
  • than expected.
  • The problem?
  • Fewer people buying iPhones.
  • The reasons are many: China’s slowing economy, sticker shock, market saturation.
  • But there’s also another big factor: Apple has a new competitor.
  • Not Samsung.
  • Not Google.
  • Not Huawei.
  • …Apple!
  • The iPhone is increasingly competing with itself.
  • One, because we’re all holding on to them longer.
  • But also because it doesn’t cost what you think it does.
  • As the price of an iPhone goes up, something new is happening to its value, and it’s
  • shaking up Apple’s entire business model.
  • To understand what’s really going on, we need to calculate the actual, hidden price
  • of the iPhone.
  • Generally speaking, there are two ways you can get rich selling things to people:
  • One, you can play the numbers game - Sell a gazillion small things for a few cents profit
  • each.
  • Think: Gas stations, grocery stores, and, on a good day, Amazon.
  • Sure, you’ll probably lose money at first, but sell a few more and now you have the power
  • of scale.
  • Lower costs, higher margins.
  • Look at you!
  • Or, you can sell a few really expensive things.
  • Ever wondered why your town has like three mattress stores for every one person?
  • They’re always empty and yet somehow still keep the lights on.
  • Well, that’s because a few feet of foam doesn’t cost thousands, or even hundreds,
  • of dollars.
  • 50, 60, 90 percent of a mattress is pure, king-sized profit.
  • It only takes a few sales a month to stay in business.
  • And, therefore, disruption.
  • But a few companies, the really, really successful ones, manage to do both.
  • If you can make hundreds of dollars on each item, sell it thousands of times an hour,
  • and convince those same people to buy again in 12 months, AND make us want to line up
  • with a smile on our face for the privilege of doing it, well, now you have a $265 billion
  • a year business.
  • The iPhone is, arguably, the most successful subscription service in history.
  • You can bet Apple will announce a new model, or three, every September, like clockwork,
  • just as surely as you know they’ll name it something weird.
  • The problem is, technology is getting really good.
  • So good that a lot of people are thinking “Why do I need a new one?”
  • Some of us care about Portrait Mode and dual optical image stabilization, but, for most
  • people, checking Twitter and using WeChat is the same on the Phone XS as the X, and
  • 8, and 7.
  • You’re invited to the blue bubble club regardless.
  • According to analysts, the average person waited three years to upgrade their smartphone
  • in twenty eighteen.
  • This year: four.
  • Of course, phones are a little bit weird in this respect because so are humans.
  • The iPhone isn’t just a tool, it’s a status symbol.
  • According to researchers at the University of Chicago, the best predictors of wealth
  • in 1992 were: owning an automatic dishwasher, a fireplace, and oooh, a garage door opener.
  • Hi-tech!
  • Today, it’s owning a passport, an iPhone, and iPad, which have a 70% chance of correctly
  • guessing whether you have a high income.
  • Owning the newest model signals you have a grand of disposable income to spend every
  • year.
  • Add some AirPods and you won’t even hear the sound of the money leaving your bank account.
  • But that only works if this year’s iPhone looks different from last, and Apple only
  • really changes its design every other year.
  • So, here we are.
  • People are losing their appetite for frequent upgrades, but Apple certainly hasn’t lost
  • its appetite for money.
  • Which means, of course, higher prices!
  • Selling half as many phones isn’t such a problem if they’re all twice as expensive.
  • The cheaper iPhone has slowly crept from $649, to 699, to 749, today.
  • The more expensive XS now starts at nine ninety-nine and goes all the way up to $1,449.
  • Of course, that’s only if you’re lucky enough to live in the U.S.
  • And yet, revenue is still down.
  • Something’s missing.
  • To make sense of this, we need to answer the question: How expensive is the iPhone, really?
  • There’s plenty of back-and-forth on whether the iPhone is, quote, worth it, but what isn’t
  • really debated is that, in general, it’s higher-priced than most other smartphones
  • from most other brands.
  • Being selective about which price segments it sells to is pretty much written in Apple’s
  • DNA.
  • There’s no $300 MacBook not because it’s impossible but because that’s just not what
  • it’s about.
  • And with prices going up even higher, it would seem that’s never been more true.
  • But sticker price isn’t the best way to measure actual cost.
  • In fact, it’s pretty misleading.
  • Phones aren’t consumable.
  • Unless you pull a Black Mirror, they’re still worth something in a year or two.
  • The price of something like a house accounts for how much it’s expected to gain or lose
  • in value.
  • Usually, the structure itself depreciates - styles change and wood rots, but the land
  • underneath it appreciates.
  • Which, side note, is why tiny houses aren’t investments.
  • The land they sit on is often leased, not owned, and therefore, it only loses value.
  • Basically, you’ve just bought a house-shaped RV!
  • Anyway, unless your phone was signed by the ghost of Steve Jobs himself, it’s more like
  • a car - its value goes down.
  • And fast.
  • But not all phones are the same.
  • On average, iPhones lose 45% of their value in the first 12 months.
  • Samsung phones, 62%.
  • and Google, 81.
  • That may sound a little unfair - Apple only makes premium devices, while Samsung’s average
  • might be skewed by a few low-end outliers.
  • So, let’s look at specific models.
  • A year later, the Samsung S8 lost 58% of its value.
  • The Google Pixel XL, 82, and the OnePlus One 94%.
  • Meanwhile, the iPhone 8 still lost only 45.
  • That’s a difference of hundreds of dollars.
  • And that’s before the record-setting iPhone X.
  • In September 2018, only a week before the XS was set to be announced, the X was still
  • worth $679.
  • It lost only 32% of its value.
  • Taking this into account, we can calculate a rough Total Cost of Ownership.
  • A thousand dollars upfront, minus 679 for selling it a year later, gives us a real cost
  • of $320.
  • That’s $26 a month to always have the latest and greatest.
  • Now, to be fair, sticker price does matter.
  • If next year’s iPhone cost $20,000, and sells 12 months later for $19,900, it would
  • be a bit disingenuous to call it a $100 phone.
  • But, of course, resale value is still very important.
  • And here’s why: Because used iPhones are now worth more, more people are selling them.
  • Higher supply.
  • Meanwhile, more people want the new design but don’t necessarily want to spend a whole
  • month’s rent.
  • Higher demand.
  • The result: a huge, thriving, secondary market.
  • Amazon and eBay are flooded with iPhone X’s.
  • Which means the new phone has to compete with its still-pretty-good last generation.
  • In other words, Apple is, increasingly, competing with itself.
  • And the better today’s iPhone, the harder it’ll be to compete against, used, next
  • year.
  • Now, if you’re an investor, this all sounds pretty bad.
  • Like, sound-the-alarms bad.
  • Remember, the iPhone alone accounts for 60% its revenue.
  • Any other company would fight this tooth and nail.
  • So, what’s Apple doing?
  • Not only are they not fighting it, they’re actually embracing it, making the iPhone last
  • even longer.
  • Instead of buying a whole new phone because you can’t get 3 hours on a charge, they’ve
  • made it easier than ever to just replace the battery.
  • And while Android phones often receive only two years of software updates, iOS 12 runs
  • on all these devices, going all the way back to the 2013 iPhone 5s and the first iPad Air.
  • Even better, it actually speeds up your phone, it’s no longer a tradeoff of slow-as-molasses
  • for new features.
  • Or, let’s be real, pressing “Update” so it’ll stop bothering you.
  • All of this is awesome for you and I, but isn’t it a terrible business idea?
  • Not necessarily.
  • Unless you buy from Apple.com, second-hand phones don’t directly put any money in its
  • pockets, but Apple has other ways of making a profit.
  • New or used, you still buy apps, You still subscribe to Apple Music, Apple Video, iCloud,
  • and so on.
  • The iPhone is a gateway to things like the iPad, Apple Watch, and AirPods.
  • Even if you buy none of these things, you’re still useful to Apple.
  • Google, for example, pays an estimated $9 billion a year just to be your default search
  • engine.
  • Nine BILLION.
  • That’s the GDP of Haiti for one switch to be flipped.
  • User base means control and control, ultimately, means money.
  • In other words, things like services can make up for lost sales.
  • It’s sort-of the in-app purchase model applied to the iPhone as a whole.
  • In the long term, Apple needs to move its focus away from the iPhone and towards new
  • platforms entirely.
  • Augmented reality glasses are the future.
  • As we saw in 2018, this transition won’t be easy.
  • But it’s the best, and really only path forward.
  • Because, the truth is, what’s happening now is normal.
  • Everything before was an anomaly.
  • A very profitable one.
  • An easy one for companies to get used to.
  • But, still, an anomaly.
  • From 2007 until fairly recently, the stars were perfectly aligned - technology was moving
  • incredibly quickly but still always left enough to be desired for next year.
  • The smartphone was in its growth period.
  • But the average people buying a new phone every year or two just isn’t sustainable.
  • Not economically.
  • And not environmentally.
  • Phones should last years and years, go through two or even three owners, and then, gracefully,
  • be recycled.
  • The future is one where a few of us buy the latest phone, take good care of it, and then
  • give it back to Apple, or sell it second-hand.
  • The problem is, selling your phone is, kinda the worst.
  • How do you know when to sell?
  • And for how much?
  • So it ends up just sitting in a drawer somewhere.
  • Dave, over on Here’s the Bad Version has an idea for a solution: An app.
  • You’d scan your phone when you buy it, tell it how often you wanna upgrade, and then it
  • sends you a notification when it’s the best time to sell.
  • I’m 100% serious when I say I think this could be a multi-million dollar startup, someone
  • just needs to program it.
  • You could design the app to make predictions about how the value of your phone might change
  • in the future, for example, with the machine learning course on Brilliant, which teaches
  • you, step by step, intuitively, with its computer science and math courses.
  • Their Computer Science Algorithms course will teach you the concepts behind how you might
  • design the app to scan the iPhone’s barcode and then generate an eBay listing when the
  • user is ready.
  • In my programming classes, I noticed that I learned a lot faster when I was actually
  • making something versus when I was just studying arbitrarily.
  • Plus, it’s just more fun to make something.
  • Brilliant thinks the same way - instead of “Here’s this new concept, now just store
  • it in the back of your head”, its Daily Problems give you a real, interesting problem
  • to solve using your new skills.
  • Use the link in the description to sign up for free and get started today.
  • The first 200 people to do so will also get 20% off the annual premium subscription so
  • you can view all the Daily Problems and take all their problem-solving courses.
  • And after you sign up, don’t forget to go watch Dave’s video.

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First 200 get 20% annual premium membership of Brilliant: https://brilliant.org/Polymatter

Thanks to Dave for the video idea! Go watch his excellent startup pitch: /watch?v=pVsXf9wH7Q0

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