So apple today announced that they were fazing out the 4GB iPhone and dropping the price of the 8GB iPhone by 200 dollars. Now a fair bit of people are pretty pissed off at having paid substantially more for buying an early version. Now obviously I would like it if apple gave me some money or store credits as a result of their price drop but I’m not pissed off.

I would feel a bit different if I thought apple had planned this move. I wouldn’t mind apple charging a scarcity fee during initial distribution or even merely setting a price floor and letting the actual price float according to demand but given the way they did the sales there was the strong implication that the price was not an early adopter surcharge. However, I don’t think apple had any such intention for several reasons.

• The iphone product launch was a huge risk for apple. If it hadn’t generated enough buzz they would eat a very large cost. I’m not sure the extra margins would be enough to make up for the risk. Though on the other some things are more desirable when more expensive (Rolex).
• Dropping the price like this is very risky for future product launches. Next time Steve Jobs announces a fancy new product many people may choose to wait to see if the price drops and that could mean the whole thing flops.

Still on it’s own these aren’t that compelling. Certainly a plausible story one can tell is that apple initially planned to release the iPhone at the start of the summer and a pre-christmass price drop was always planned but the late release forced a compacted schedule. Now the party about the delay is likely true as apple pulled developers off Leopard to work on the iPhone but I don’t think (though I could be wrong) that the rest of the story is true. After all why wouldn’t they push back the price reduction back closer to the Christmas shopping season? However, what really convinces me this wasn’t planned is the following.

• Apple eliminated the 4GB iPhone from their lineup. If this was planned from the beginning why would they pay all the fixed costs to set up a separate manufacturing line and distribution channels?

I think a much more plausible story goes like this. Apple had no idea how successful the iPhone was going to be. Sure they had some bullish predictions but it was quite possible that the iPhone would undersell other smart phones or that people wouldn’t think it was worth even $400. Apple priced the iPhone so that they wouldn’t be losing money even if it turned out to be only a minor success but retail electronics is all about economies of scale so once they realized they had a hit on their hands they had to decide whether to keep raking in massive profit margins on the iPhone or try to and increase sales with a lower price and introduce the iPod touch. After all if they undercut the iPhone with the iPod touch that wouldn’t be any good (and might not be allowed by they AT&T contract). Still my confidence in this conclusion isn’t super high. I wouldn’t put $200 on it :-)

Now I think it is very much in apple’s interest to give people who bought the iPhone at $600 some kind of rebate. They could give them something like credits on iTunes or more nefariously credits for apple software, e.g., a free copy of iLife or a dotmac account. It wouldn’t be too hard for them to give customers something that cost apple virtually zero but would deter the perception that buying an apple product right after launch is a bad move. A perception that Steve Jobs particularly needs to avoid. But while I think failing to do that would be a bad move on their part I still think my phone is worth the money I spent so it seems silly to get all worked up about it.