(Bloomberg) -- Apple Inc.’s biggest surprise at its keynote address on Tuesday was not a new feature, device, or service, but an aggressive pricing strategy that’s a departure for the premium electronics maker.
The iPhone 11 starts at $699, down from the iPhone XR’s $749 price last year. The XR stays in the lineup for $599, a $150 decrease for a phone that’s only a year old. That’s one of the biggest year-over-year reductions in iPhone history.
“The biggest news from the Apple launch was the price cut for iPhone 11,” Chris Caso, an analyst at Raymond James & Associates, wrote in a note to investors. “We view this as an admission that Apple stretched too far with the price points at last year’s launch.”
The iPhone 8 from 2017 now costs $449, also down $150, while the Apple Watch Series 3 from the same year saw its price drop to $199 from $279. That should help Apple better compete with Fitbit Inc.
Apple became one of the world’s most valuable companies by designing innovative consumer hardware and charging a lot for the gadgets. However, it has struggled to maintain once-frenzied demand for the iPhone. Most Western and Chinese consumers already own a smartphone and are reluctant to upgrade due to a lack of breakthrough features and cheaper alternatives. Researcher IDC expects industry shipments to slip 2.2% in 2019, the third year of declines. It sees iPhone shipments down 15% this year.
Lowering prices may encourage more people to upgrade iPhones sooner, while luring new users for a growing digital subscriptions business. Apple shares rose 1.2% to $216.70 in New York on Tuesday, the highest close since early November.
“Many of the users who purchase lower priced devices will eventually become customers of Apple services,” said Jitesh Ubrani, a research manager at IDC. “They’ve shown they can do this in the past with hardware: If you bought an iPhone you were likely to buy an iPad or AirPods.”
It will likely be harder for Apple to make this type of connection between its devices and new services. That’s partly because there are so many existing digital service providers and their offerings already work well on iPhones and other Apple devices, Ubrani said.
Apple is tackling this challenge with aggressive pricing, too. The Apple Arcade gaming service is $4.99 a month, roughly half the cost of Apple Music and Apple News+.
The $4.99 monthly cost of Apple’s upcoming TV+ video streaming service surprised many analysts and undercuts Netflix Inc., Amazon.com Inc.’s Prime Video, and the Disney+ offering. And when people buy an iPhone and iPad, a Mac or an Apple TV, they get a free year of TV+, Chief Executive Officer Tim Cook said.
Dan Ives, an analyst at Wedbush Securities, called the TV+ price a “show stopper” and said the move should help Apple gain more subscribers.
“With an installed base of 900 million active iPhones worldwide we believe Cook & Co. have an opportunity to gain 100 million consumers on the streaming front in the next 3-4 years,” Ives wrote in a note to investors.
--With assistance from Ian King.
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