Apple Gets A 'Wake-Up Call' On Product Pricing

While disclosing a plunge in demand for the iPhone during Apple's recently completed quarter, CEO Tim Cook avoided any mention of whether increased iPhone prices might have played a role.

But Wall Street analysts such as Toni Sacconaghi of Bernstein Research call this an obvious omission on Cook's part.

"Surprisingly, the company did not acknowledge the possibility that iPhone prices have simply become too expensive, and that the company may have misjudged elasticity of demand," Sacconaghi wrote in a note to investors on Thursday.

[Related: 5 Takeaways From Apple CEO Tim Cook's Bombshell iPhone Letter]

Apple had issued previous guidance suggesting that revenue for its fiscal first-quarter 2019, ended Dec. 29, would come in at between $89 billion and $93 billion. Cook's update on Wednesday revealed that guidance has now plummeted to $84 billion in revenue for the quarter. Cook said the iPhone "accounts for all of our revenue shortfall." Apple's stock price was down 9.45 percent, to $143 a share, as of 2:50 p.m. Eastern time.

Prices for the iPhone have risen significantly in recent years, and particularly so in the fall 2018 iPhone lineup. The flagship of the 2018 lineup, the iPhone XS Max, starts at $1,099--compared to the $769 starting price of the 2016 flagship, the iPhone 7 Plus.

Even the "budget" iPhone in the new lineup, the iPhone XR, has a starting price of $749—meaning that the iPhone's entry-level pricing is now equal to what its high-end pricing had been just two years ago.

Jerry Zigmont, owner of MacWorks, a New Haven, Conn.-based Apple consultancy, told CRN on Thursday that he hopes the troubles in Apple's business will be a "wake-up call for them."

"I'm kind of glad they're feeling the pinch. I hope they correct course" on pricing, Zigmont said. "Apple is just outpricing itself—not only in the iPhone market, but also in the MacBook Pro market."

Starting with the refresh in late 2016, the MacBook Pro has "really crept up in price" compared to what it used to cost, Zigmont noted. The current 13-inch MacBook Pro with Touch Bar has a starting price of $1,799, whereas the version of the MacBook Pro prior to the refresh had started at $1,299.

For the iPhone, Cook wrote a letter to shareholders emphasizing a drop in iPhone demand from China as the key factor in the guidance shortfall. But Cook acknowledged that there's sluggish iPhone demand in plenty of other places, too.

"While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be," Cook wrote.

Factors impacting iPhone sales include "consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements," Cook wrote.

Sacconaghi noted that while Apple "squarely attributed its shortfall to China," revenue for iPhone outside of China "still appeared to fall $3B+ short of Apple's expectations."

And Apple has "failed to acknowledge the possibility that current iPhone prices are simply too high," he wrote.

"Our analysis suggests that iPhone ASPs (now around $800) are nearly 5x higher than the average non-Apple smartphone globally and that price elasticity is very real," Sacconaghi wrote. "The fact that Apple didn't raise the issue of price in its pre-announcement letter maybe a reflection of the fact that there is no easy solution to the problem. Drop prices, and margins will be pressured and could cannibalize higher end offerings. Maintain prices, and customers could increasingly look to less expensive alternatives."

Apple did not immediately respond to a request for comment on Thursday. The company reports its fiscal Q1 2019 results on Jan. 29.