The travesty of the iPhone X
How the $1,000 iPhone X reveals just how broken America's free market is
On Tuesday, the news world momentarily stopped, as it occasionally does, to pay homage to the latest offerings from Apple. The tech behemoth's new releases included the new iPhone 8 and 8 Plus, as well as an update to the Apple Watch and other new software.
But the big revelation was the new iPhone X, which will sell for a staggering $999.
There are other super-expensive smartphones on the market, a few of which already run north of $900, so bumping right up to that four-figure threshold is as much a psychological shock as anything. And you can argue that the iPhone X's price tag makes sense. This is how new technology gets introduced: at the high end of the market first, before trickling down to the masses.
But anyone concerned with the capitalist ideal of a well-functioning market should be perturbed about a world where a smartphone sells for a cool grand.
In Apple's defense, the iPhone X's price likely reflects real input costs: It boasts an advanced screen, wireless charging through magnetic induction, new facial recognition abilities for unlocking the device, and a fancy camera. As The Verge observed, this makes the iPhone X a "proving ground" of sorts for envelope-pushing technologies.
Or, as Wired put it: "That bonkers price tag gives Apple access to technology too rare and too expensive to put into 100 million $650 handsets. And that means Cupertino can innovate again — and once Apple does something, others follow. Before long, all the stuff coming to a phone you can't afford will come to a phone you can."
This is a tried-and-true business model. New technological innovations start out in the high-end luxury market. Then businesses work out the kinks, develop efficiencies, and figure out mass production. The price comes down, and the technology becomes a common consumer item. We've seen this with Tesla, which started out making six-figure electric cars and is now working on a $35,000 Model 3. We've seen it with other Apple technology like the Retina display, which started out as an expensive addition to the MacBook Pro. In fact, the iPhone itself defines this "trickle-down" mechanism: When it was first introduced, it swept away the Nokia and BlackBerry phones everyone was still using and set the framework for smartphones from that day forward.
But how well is the trickle-down mechanism really functioning?
There are perfectly serviceable smartphones out there in the $100 to $300 range. They have cameras, internet access, app capabilities, and even 4G coverage in some instances. The question is whether that is enough in the age of stagnating wages, jobless recoveries, and rocketing inequality. There's still a serious class gap in smartphone ownership: Ninety-three percent of people who make over $75,000 annually own a smartphone, but only 64 percent of those who make less than $30,000 do. The divide is similar for college graduates versus Americans with only a high school diploma.
If owning a smartphone is becoming like owning a car — a kind of basic necessity for navigating society — this smartphone gap is worrisome, as is the iPhone's new price tag. For the trickle-down mechanism to work, you still need a large population of working- and middle-class consumers who can afford to buy the cheaper tech in mass quantities.
Instead, the bulk of consumption in the U.S. economy has actually been rising up the income ladder in recent decades: In 1992, the top 20 percent of earners accounted for just over 53 percent of consumption, but by 2012, they accounted for 61 percent. The large base of consumers who snatch up technology once the price drops seems to be slowly eroding.
More striking is Apple's own business model. Even Apple's cheaper iPhone offerings run around $400, which places them at the higher end of the smartphone market. The iPhone X will be the high end of the high end. That's long been Apple's strategy: It may not increase its profit margins with the iPhone X, but Apple's profit margins are already pretty substantial precisely because it is the market's luxury provider.
Yet instead of serving as a niche or boutique producer in the smartphone market, which is what you'd expect from a luxury-focused brand, Apple dominates the field. Despite a steep starting price of $649, the iPhone 7 was the best-selling smartphone in the first quarter of 2017. Apple also sets the price for the rest of the market: As other smartphone producers explained to Wired, they actually breathed a sigh of relief at the iPhone X's new price because it will allow them to sell their own smartphones for comparable mark-ups. "Today, nearly everyone buys either dirt-cheap or frightfully expensive devices," Wired explained. "There's virtually no money to be made on the low end, so the high end becomes ever more competitive."
This is not how it's supposed to work. In a functional market with real competitive pressure, other smartphone makers would jump at the chance to undercut Apple with similar technology for lower prices, forcing Apple to bring its prices down. Apple would be coerced into becoming a mass consumer-focused business if it wanted to hold onto its dominant market position, and everyone would be left scrambling to compete over the diminishing returns of selling dirt-cheap devices, whether they liked it or not.
Focusing on the conspicuous consumers at the luxury end ought to force Apple to give up market share. That the company is chugging along largely undisturbed suggests the larger economy has been broken, whether by rampaging inequality, permanent semi-slumps, or overwrought monopoly power by players just like Apple. The competitive pressure that ostensibly makes capitalism work for the good of all is dissipating.
Of course, none of that is Apple's fault. It's just a profit-seeking company reacting as any profit-seeking company would to the economic landscape it finds itself in. But the landscape could change; the international market, especially India and China, could provide the low-end mass buyers America no longer can. Apple's determination to hold onto the profits that come with purveying luxury smartphones means it is losing market share in both countries, even if its share in the U.S. is stable.
Still, China has its own inequality problem. And as the iPhone 7's sales show, the day the international market forces Apple to rethink its business model is still a ways off — and it may never come at all.
For the moment, Apple appears quite comfortable in its throne, ruling over its smartphone kingdom. That should unnerve anyone who understands how capitalism is supposed to work.