Apple aims for the low end

John Gruber writes:

Another new pattern: the expansion of the iPhone product line down to free-with-a-contract pricing. Apple did this not by creating a new “low-end” model, but by keeping the 3GS around for another year. This move seems so obvious that I’m disappointed in myself for not having predicted it. Operations wise, the 3GS doesn’t just use cheaper components, but because Apple has been making it for two and a half years, they’ve surely streamlined the manufacturing process.

The most important cost savings is the value of simply keeping the factory doors open. For technology components manufacturers, costs break down into two categories: fixed and operational. The fixed costs can be huge. A new chip fab (factory) costs over a billion dollars. Companies like Intel spend the first several years just paying for the R&D and the factory. An Intel processor doesn’t actually start making them any money until they have a newer high-end chip, and the “obsolete” chip gets sold at discount prices. Without the fixed costs, the discount prices have a healthy profit margin.

Video game consoles are built around this model. They keep roughly the same price and the same specs over their lifetime. For the first few years, consoles are a huge bargain: the manufacturers actually loose money on them. Near the end of their lifetime, the components are laughably obsolete, but the price is justified by the huge library of video games they run. This drives their design. Hard disks were added only reluctantly, since their platters don’t get cheaper. Chips are good. And custom anything (processors, controllers, cases) is the best, as R&D is a pure front-end cost which keeps the console distinctive in later years.

Apple knows streamlined manufacturing, and it shows in the iPhone 4’s design. Using an antenna and two panes of glass for the case minimizes materials costs. As does a small battery. Small and thin, few buttons: it’s not just for looks, it’s to maximize the factory’s lifetime. The iPhone 4 was designed to be a third-world discount product. But for now, it’s cheaper to keep making the 3GS in an old factory than to put old components in an iPhone 4.