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Why Apple Kept the 16 GB iPhone in Favor of 32 GB

Perhaps the biggest surprise of the iPhone 6 and iPhone 6 Plus introduction was not the larger screen sizes, but the storage levels among the models. The most expensive configurations now include a roomy 128 GB, but the low-end models ship with only 16 GB. The sole option in the middle is 64 GB.

Unfortunately, 16 GB of free space disappears quickly, as many people have discovered when upgrading to iOS; they need to clear nearly 6 GB off their phones just to download and apply the update. (Connecting the iPhone to iTunes and updating from there bypasses the restriction.)

In the past, Apple has offered evenly doubled capacities. The original iPhone in 2007 was available in 4 GB and 8 GB capacities. And last year’s iPhone 5s and iPhone 5c came in 16 GB, 32 GB, and 64 GB models; they’re still available for purchase, but in only 16 GB and 32 GB sizes for the iPhone 5s and a laughable 8 GB for the iPhone 5c.

So why didn’t Apple stick to its pattern and release the iPhone 6 in 32/64/128 GB tiers?

The answer, of course, is profit — but profit mixed with a little marketing psychology.

It’s All About the Benjamins — Apple has offered 16 GB configurations of the iPhone, iPad, and iPod touch since a revision of the original iPhone in 2008. Even taking into account that the speed of those memory chips has no doubt improved over the years (and would presumably be more expensive than in 2008), Apple’s volume purchasing power — it’s equipping millions of devices — means the company is surely paying very little for each one.

IHS estimates the 16 GB memory in the iPhone 6 costs $15, based on their teardown of the device. That also includes 1 GB of LPDDR3 active memory, but in an article for Re/code, Andrew Rassweiler, the IHS analyst who supervised the teardown, is quoted as estimating that Apple is paying about $0.42 per gigabyte for flash storage. That implies that 16 GB costs Apple $6.72. The IHS figures don’t break out a price for the 64 GB RAM module, but using the same cost-per-gigabyte estimate, 64 GB would cost
Apple $26.88.

Apple claims that the 16 GB model enables the company to maintain a low $199 (carrier subsidized) introductory price for the iPhone 6. Being the least expensive option, the 16 GB no doubt sells well to those who don’t store much media, which means Apple makes a decent profit on each 16 GB iPhone sold.

If Apple were to offer the $199 model at 32 GB, however, the company would make a slightly lower profit at that tier, since that amount of storage would cost $13.44 instead of $6.72. At the scale of iPhone sales — 10 million in the first weekend — the loss of $6.72 per sale would add up fast (if we assume 4 million of those sales were the low-end model, Apple would have left $26.9 million on the table). Apple would still be happy. But there’s opportunity for even greater reward.

Psychology — I suspect the more compelling reason for bypassing the 32 GB tier is related to an Apple briefing I (and other TidBITS editors) had when the company released the iPod nano back in 2005 (see “New iPod nano Replaces iPod mini,” 12 September 2005).

In an unexpected move, Apple discontinued its best-selling iPod mini in favor of the smaller iPod nano, which used solid state memory for storage instead of a tiny hard disk. The iPod nano was available in three configurations: 1 GB for $149, 2 GB for $199, and 4 GB for $249. However, Apple also sold its full-sized fifth-generation iPod, which still had a hard disk inside, alongside the iPod nano in a 30 GB configuration for $299 (and a 60 GB model for $399).

In our briefing with Phil Schiller, Apple’s senior vice president of worldwide marketing, we brought up the question a lot of people were asking: Why offer a 4 GB iPod nano for $249 when a customer could get 30 GB of storage for just $50 more?

Schiller’s eyes lit up as he answered (I’m paraphrasing) that Apple was more than happy to sell the higher-priced product. (Ever the consummate marketer, he then went back on message to praise the benefits of the iPod nano’s smaller size and cutting-edge design.)

I’ve watched this same marketing psychology at work since the iPhone 6 was announced. The general advice given by folks like me who tend to care about electronics is to avoid the 16 GB model because it’s just not enough storage for many people to run iOS 8 and to store apps, music, photos, and videos without constant management.

But I suspect the more influential factor at work is this thought: “For only $100 more, I can get four times as much storage!”

“Only $100 more” is an enormously powerful marketing strategy that Apple has used successfully for years.

It also plays into what’s called “price bracketing,” by which a company offers products at three different price points. In this case, consumers may see (or listen to us pundits say!) that the 16 GB model is too small, the 128 GB model is too big, and therefore the 64 GB model is just right. Goldilocks would be right at home in an Apple Store, and anecdotal data from a local AT&T store suggests that the 128 GB model is the least desirable of the three.

But Apple’s happy no matter what you buy. The 16 GB model costs them less than a 32 GB model would have at the low end. More important, working from the $200.10 cost of materials and manufacturing for the 16 GB model estimated by IHS and the cost-per-gigabyte estimated above, we can see that when you pay $100 more for the 64 GB model, Apple earns roughly $80 more in profit on each sale. And while the 128 GB model may not sell as well, Apple still pockets nearly $75 more than it would if you bought a 64 GB model.

Everybody wins. The customer is happy to get more storage than they likely had before, at what seems like an entirely reasonable cost, and Apple racks up still more profit.

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