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Apple’s diseconomies of scale and the next iPhone

posted by Jason Kottke   Jul 19, 2017

Apple is the biggest company in the world and they sell one of history’s most successful consumer products. As the total human population of Earth becomes a limiting factor in the iPhone’s continued sales growth (see also Facebook), they are perhaps running into problems designing a desirable product that they need to produce 200 million times over the course of a year.

This is one of those areas where Apple may be the victim of its own success. The iPhone is so popular a product that Apple can’t include any technology or source any part if it can’t be made more than 200 million times a year. If the supplier of a cutting-edge part Apple wants can only provide the company with 50 million per year, it simply can’t be used in the iPhone. Apple sells too many, too fast.

A Daring Fireball reader put it this way:

People commonly think that scale is an unambiguously good thing in production, but the tremendous scale at which Apple operates shows this not to be the case. Annual iPhone production is so large that Apple is likely experiencing diseconomies of scale, a phenomenon one doesn’t often hear about. What significant, break-through technology can a company practically introduce to 300 million new devices in a year?

Diseconomies of scale is a real thing, btw. John Gruber has been arguing that Apple’s way around this is to produce a more expensive iPhone ($1000-1200) with exceptional components and features that the company simply can’t produce at a scale of 200 million/year. Rene Ritchie describes this iPhone++ strategy as “bringing tomorrow’s iPhone to market today”. Gruber compares it to the Honda Prelude, quoting from the Edmunds description of the car:

Honda established itself in America with the Civic and Accord — both good, solid but basic cars. But big profits in the automotive world don’t come from basic cars that sell for commodity prices. Those profits come from cars that get consumers so excited that they’ll pay a premium price just to have one. The Prelude was Honda’s first attempt at an exciting car.

The Prelude was Honda’s technological leading edge. Features that are now expected from Honda, like the double-wishbone suspension under the Accord, fuel injection, and VTEC electronic variable valve timing system showed up first on the Prelude before migrating across the Honda line (though VTEC first showed up on the 1990 Acura NSX).

Keen observations all around and it will be interesting to see if Apple can benefit from this strategy.