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Sept. 11, 2019, 7:27 a.m. EDT

Apple iPhone event reveals a dramatic change in strategy

Apple is now competing on price, after years of focusing on high margins

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By Therese Poletti, MarketWatch


Bloomberg News/Landov
Apple Inc. dropped the lowest price on its newest iPhones by $50 this year, and continues to offer older phones for less as well as trade-in options.

The most surprising new features Apple Inc. debuted at its iPhone launch event Tuesday were the price tags, in a much different way than we have seen previously from Apple.

Apple /zigman2/quotes/202934861/composite AAPL +0.50% surprised consumers and investors alike with the pricing of its new Apple TV+ streaming service at $4.99 a month, as well as lower prices on its cheapest new iPhone and a lower-priced Apple smartwatch. Apple usually positions itself as offering the most high-end, highly designed products, but its streaming service especially appears headed a different way, including an offer of one free year of Apple TV+ to buyers of new iPhones, iPads, Macs and Apple TVs.

Full story: Apple drops price on new iPhone 11, undercuts Netflix and Disney on streaming

The news immediately hit the stocks of streaming rivals such as Netflix Inc. /zigman2/quotes/202353025/composite NFLX +2.56% , Roku Inc. /zigman2/quotes/205087179/composite ROKU +1.79%  and Walt Disney Co. /zigman2/quotes/203410047/composite DIS +2.06% . Netflix’s entry-level streaming costs $8.99 a month, and Disney plans to charge $6.99 a month for its Disney+ streaming service that launches later this year. Roku has a free Roku Channel and lots of free content, but charges separately for premium channel subscriptions. Apple’s TV+ will debut Nov. 1 on the Mac and some Samsung smart TVs, and on Amazon.com’s /zigman2/quotes/210331248/composite AMZN +0.75%   Fire TV, Roku, LG, Sony and Vizio platforms at some point in the future, it said.

/zigman2/quotes/202934861/composite AAPL 267.10, +1.34, +0.50%

The lower price is likely both an admission from Apple that it can’t compete with the libraries of content that Netflix and Disney have built, and a play to amass users while it adds that needed content to the service.

“The Street was anticipating a $7.99-$9.99 price point, as clearly Cupertino is looking for market share coming out of the gates with these surprising price points that we loudly applaud,” said Dan Ives, a Wedbush Securities analyst, in a note. He added that he believes Apple has the opportunity to gain 100 million consumers on the streaming front in the next three to four years.

On top of the low cost for its streaming services, Apple also offered a low price for its entry-level iPhone at $699, $50 below what many analysts were expecting, clearly an effort to boost its sagging iPhone growth. Last quarter Apple saw iPhone sales fall nearly 12%, but attributed a better-than-expected performance in China to pricing and trade-in deals that showed it can succeed through lower prices.

“We think the lower iPhone 11 price point and trade-in program will help promote upgrades, specifically in China, while the Apple Arcade and TV+ offerings will help accelerate services growth,” said Angelo Zino, a CFRA analyst, in a note to clients.

Patrick Moorhead of Moor Insights & Strategy, however, believes that the lack of a 5G modem option in the iPhone 11 will hurt sales in China.

Don’t miss: Apple’s iPhone 11 design is getting people worked up in all the wrong ways

Apple is taking a risk with its lower prices: The costs for producing top-tier content are very high, as Netflix investors have seen for years. Netflix has been warning investors about new rivals in the streaming business for the past few quarters, and spends billions each year on content licensing, as well as developing its own content. In its most recent quarter, Netflix said its streaming content obligations were $18.5 billion, which it funds with debt.

If Apple is willing to lose money on its streaming ambitions, it will need to make that up through iPhone sales, but the lower price on the iPhone 11 could hurt the margins on its biggest moneymaker, especially if tariffs take effect on smartphones. Combined, the two decisions bring up many questions about Apple’s margin profile in the future, which Cook will undoubtedly face questions about from investors and analysts.

Apple clearly needs some big hits on Apple TV+ in order to increase its price, as Netflix has done repeatedly after attracting millions of users. Until it does, the new normal could see Apple adding more customers to its iEcosystem, but subtracting from its healthy profit margins.

Apple’s stock has run up 37% year to date through Tuesday, while the tech-friendly Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +0.11%  has climbed 22% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.11%  , of which Apple is a components, has advanced 15%.

/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 267.10
+1.34 +0.50%
Volume: 21.70M
Nov. 18, 2019 4:00p
P/E Ratio
22.54
Dividend Yield
1.15%
Market Cap
$1180.84 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/202353025/composite
US : U.S.: Nasdaq
$ 302.57
+7.54 +2.56%
Volume: 8.62M
Nov. 18, 2019 4:00p
P/E Ratio
96.57
Dividend Yield
N/A
Market Cap
$129.30 billion
Rev. per Employee
$2.22M
loading...
/zigman2/quotes/205087179/composite
US : U.S.: Nasdaq
$ 160.12
+2.82 +1.79%
Volume: 27.65M
Nov. 18, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$19.35 billion
Rev. per Employee
$668,322
loading...
/zigman2/quotes/203410047/composite
US : U.S.: NYSE
$ 147.65
+2.98 +2.06%
Volume: 15.36M
Nov. 18, 2019 6:30p
P/E Ratio
21.22
Dividend Yield
1.19%
Market Cap
$260.61 billion
Rev. per Employee
$295,532
loading...
/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 1,752.53
+13.04 +0.75%
Volume: 2.84M
Nov. 18, 2019 4:00p
P/E Ratio
77.59
Dividend Yield
N/A
Market Cap
$862.43 billion
Rev. per Employee
$359,671
loading...
/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
8,549.94
+9.11 +0.11%
Volume: 1.85M
Nov. 18, 2019 5:16p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
28,036.22
+31.33 +0.11%
Volume: 252.32M
Nov. 18, 2019 4:56p
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Therese Poletti is a senior columnist for MarketWatch in San Francisco. Follow her on Twitter @tpoletti.

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