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In 2007, Apple Inc. released another revolutionary product into the mobile market known as the iPhone. In this report the discussion presented will focus on the Company marketing and pricing strategy with a view to identification of possible unfair competitive practices used by the Company.
iPhone: Pricing and Marketing Strategy
In 2007 the product was released in 4GB and 8GB versions retailing at $ 499 and 599 respectively and was the most publicized mobile device (West and Mace 3).
Despite this rather high price consumers reportedly stood in long queues to acquire the device. After only two months the company discontinued production of the cheaper version and reduced the price of the premium version to $ 399 (Sliwinska, Ranasinghe and Kardava 5).
The decision to reduce the price of a product so soon after its launch n the market saw many of the early buyers express their dissatisfaction with the decision. As a result the company allowed the early buyers $100 store credit in compensation (Sliwinska, Ranasinghe and Kardava 7).
In addition to the pricing issues that saw the beginning of conflict between Apple and its consumers the company is also restricting access to the product both in the US and Europe by selecting only specific carriers to retail the product (West and Mace 11). This plan has seen the device sold at considerably high prices via the selected outlets (West and Mace 2).
The device is even sold at a higher price when the buyer opts not to use the retailer’s subscription plan (Sliwinska, Ranasinghe and Kardava 11). This move has seen the sales of the device in Europe produce much lower results than expected. This and the fact that products such as the Apps used to access resources are sold to the consumer in the form of a bundle which may be argued as giving Apple inc. an unfair advantage over its competitors.
Discussion on Marketing
The iPhone is sold exclusively through AT&T outlets following a much publicized bidding war between the two main US mobile subscribers Cingular (now AT&T) and Verizon (West and Mace 11). This agreement saw the purchase limited to Apple and AT&T outlets excluding third party AT&T outlets such as Radio shack and Best Buy (West and Mace 11).
It would appear that in so doing Apple Inc. could maximize its profits through profit sharing agreements. This approach was also favored by operators who realized the value of possessing the high end communication device with exclusive distribution rights for extended periods of time.
It has been suggested that owing to the market power of the cellular operators regions without coverage were excluded from the arrangement (Esbin and Szoka 2). This includes countries in which these major operators are not operational.
Within the European mobile market Apple Inc. signed exclusive deals for sale of the iPhone with Britain’s O2, Germany’s T Mobile and France’s Orange (Sliwinska, Ranasinghe and Kardava 9). In all these agreements the iPhone was retailing at significantly increased prices as compared to the US retail price for the premium version of $399.
For example in Britain if the payment plan is used the device will cost $568while in Germany the plan translates to a cost of $439 and in France the cost was $592 (Sliwinska, Ranasinghe and Kardava 9). These prices subject customers in these regions to increased purchase cost and restrict their usage to specific networks for the period of the plan which is deemed unfair.
Taking the example of the French mobile communication market Apple inc. signed an exclusive deal with Orange. This agreement was to give Orange exclusive rights to the sale of the product from November 2007 to April 2009 (Moreno 2). This agreement was particularly favorable for Orange due to the fact that the iPhone users were very lucrative for the company reportedly spending twice as much as the average user.
In addition to this more than half the customers were new to the company by virtue of the exclusivity arrangement and customer desire to own the product. Many customers offered to wait in line for the product to access services that were unavailable through other operators.
These exclusive deals are particularly favorable to mobile carriers as the introduction of new devices is an easy means of accessing huge numbers to the carrier (Esbin and Szoka 2). The mobile industry is characterized by high fixed costs and relatively low marginal costs which allows for collection of huge profits for those with an attractive new device.
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Following this numerous companies have began to from exclusive partnerships for marketing the devices e.g. LG’s Voyager, Samsung Ace, etc (Esbin and Szoka 3). This move has continued to allow for an unfair practice in the eyes of smaller carriers who are unable to compete with the limited handsets they are now able to provide the subscribers.
In Europe it could be said that the carriers with exclusive rights have decided to use this to deviate from the norm of discounting even high end products through subsidies (Sliwinska, Ranasinghe and Kardava 9).
This fact is observed in the manner in which the agreements for iPhone use have been designed. Some of the plans run as long as 18 months with relatively high payments in comparison to other devices being offered. It would appear that these companies are taking advantage of having exclusive rights to very attractive product.
Whereas the business approach is novel based the results some key questions are does the consumer right to select a preferred carrier appear to be violated and is it legal for the selected carriers do restrict the use of the device from individuals in regions without this service (Esbin and Szoka 4). The right to select or use alternative applications on the device also raises questions as to whether this practice is legal.
These questions are the basis behind a petition by the RCA (Rural Cellular Association) that argues the restriction of individuals from possessing a device of their choice is unconstitutional (Esbin and Szoka 4). It has been observed that Apple inc. went a step further to incorporate software to lock the phones allowing their use on only specific networks (West and Mace 14).
It has been observed that these exclusive arrangements were especially attractive to carriers owing to the increased profits attributable to the iPhone. The carriers were willing to enter profit sharing arrangements due to the increased revenues.
For example in the UK the increase in subscription by customers switching from other networks was 75% due to the demand for the iPhone (West and Mace 13). This attests to the fact that the carriers enjoyed being in a position to possess an exclusive product as a means of improving their competitive position.
Discussion on Competition and Law
The above issues have resulted in many claims of unfair business practices by competitors. However, according to the United States copyright Act of 1976, owners of copyrights have exclusive rights to authorize reproduction and distribution of their copy righted works (Schroeder 477).
This law has a limitation in that despite offering exclusive rights to the author (Apple Inc.) such rights do not extend to any idea, process, procedure system, method of operation, etc., regardless of its form (Schroeder 478). This law appears to favor Apple’s position with regard to exclusive distribution. However, it does not appear to provide adequate support for the bundling with Apple oriented applications such as the apps store.
Also in relation to the above point it has been observed under intellectual property rights there is a set of laws known as Digital Millennium Copyright Act or DCMA. These laws came in light of the fact that with the advent of the digital age it was felt necessary to provide legislation to protect property rights with reference to digital material.
These rights include restrictions such as those that prevent the production of a copy of a DVD on a personal computer. Based on this legislation it is legal to unlock a cellular phone if the purpose of doing this is to use an alternative network (Schroeder 481). From this it is clear to see that there is a conflict and the loser is the consumer.
For the above reasons Antitrust laws were established with a view to protect consumers from the possible effects of monopolies and abuse of market power (Schroeder 482). From the above facts it may be assumed that Apple Inc. was taking advantage of a monopoly through their new innovation to force customers to select Apple products.
The copyright held by the Company protects the boot loader and operating system software and as such do not warrant locking the devices. Despite the fact that competition is a major driving factor in capitalist economies it can also be a source of unfairness if left unchallenged.
Whereas copyright law seeks to protect innovation and creativity antitrust law seeks to protect from unfair use of market power. These laws sometimes conflict leading to possible trampling on consumer rights.
Esbin, Barbara and Berin Szoka. “Exclusive Handset prohibitions: Should the FCC kill the Goose that laid the Golden Egg?” Progress on Point 15(8), 2008: 1-10. Print.
Moreno, C. “Creating Value: The case of iPhones Launch on the French Market.” Manuscript published in The Naples Forum on Service: Service-Dominant Logic, Service Science and Network Theory, Capri: Italy 2009. 1-13. Print.
Schroeder, Jacob Adam. “Anti Circumvention of Competition: Avoiding Conflict between the DCMA and Antitrust.” The Intellectual Property Law Review 50(3), 2010: 465-500. Print.
Sliwinska, Dorota, Jani Ranasinghe, and Inga Kardava. “Apple’s Pricing Strategy.” Affaires Internationales Et Negociation Interculturelle: Paris-X Nanterre 2008: 2-12. Print.
West, Joel and, Michael Mace. “Value Creation in the Mobile Internet: The Impact of Apple’s iPhone.” Proceedings from Los Angeles Global Mobility Roundtable and DRUID Conferences 2008: 1-25. Print.