The iPhone 5c Is Not A Low Budget iPhone
At its iPhone special event, two days ago, Apple finally unveiled the iPhone 5S and the iPhone 5C confirming rumors of a plastic, cheaper iPhone, available in a rainbow of colors. This marks the first time that Apple has offered an iPhone in many color variants (not just in black and white) and it is also a return to plastic, for the first time in five years (since the iPhone 3G). Also a first, is the fact that Apple released two new iPhone models at the same time, with the iPhone 5s that will take the iPhone 5′s place as the company’s flagship smartphone. Regarding the iPhone 5C, there was speculation that it will be a low budget version iPhone aimed at emergent markets such as China, in a desire to compete against low budget Android smartphones. However, as it turned out, that was not the case so the question is why introduce the iPhone 5C?
The iPhone’s high price was always an issue. The first iPhone was released with a price tag of $599 exclusively on AT&T. For a young smartphone market, that was incredibly high (and still is) which prompted competition to laugh at the price. Two months after the first iPhone’s release, Apple dropped its smartphone’s price to $399. In recent years, Apple stuck with three pricing tiers: free on contract, $99 and $199.
These pricing tiers contributed to the large number of handsets sold by Apple. During this recent quarter, Apple sold 31.2 million iPhone units, more by 20 percent than during the same period last year. These sales numbers were driven primarily by the iPhone 4 and the iPhone 4S, even though the iPhone 5 is a very popular handset. To better illustrate this, we would like to mention that Verizon (the biggest wireless carrier in the United States by subscriber numbers) revealed in early 2012 that for a particular quarter, half of the iPhone activations were iPhone 4 and iPhone 4S. Bottom line is most consumers want affordable handsets and so far, the iPhone 4s was their smartphone of choice.
The iPhone 5C is indeed a low price iPhone, but only marginally. The truth is that Apple is establishing the iPhone 5C as a mid range smartphone. The iPhone 5C’s comes with a 4 inch display, a better front facing camera, a bigger battery and a polycarbonate shell in multiple colors. You can say that it is a plastic iPhone 5 which Apple is selling at a mid range price. So Apple is keeping the iPhone 4S around (the 8 GB model) for free on contract, or $450 less. The strategy that Apple adopted with the release of the iPhone 5C is to have this midrange iPhone (that gives the impression of a new iPhone) instead of dropping iPhone price points.
The iPhone 5S will help with sales, without a doubt, but it may help with the iPhone series’ ASP (average selling price). If your average selling price is too high, yo may not be able to establish an important presence in markets such as China (a market that Apple has been targeting for a while now). Since four years ago, iPhone’s ASP has been $613 but during the latest quarter the ASP went from $613 to $581. To continue on the same line, implies that Apple will gain market share (against low budget Android smartphones). It is simple actually: due to a full high end market, Apple’s desire to increase its profits turned the company’s attention to the mid range market.
The company’s decision to manufacture cheaper hardware comes at a crucial point, as Google recently mentioned that it has activated 1 billion smartphones, Samsung continues to shrink Apple’s market share and very low budget Android smartphones continue to dominate the Chinese smartphone market. A deal between Apple and China Mobile (the biggest carrier in the country) for the iPhone 5C will offer Apple access to more than 700 million subscribers. This is the perfect opportunity for growth in an area where Android smartphones dominate with more than 90%.
There is a problem though with the iPhone 5C’s current pricing model. With Apple’s latest iPhone having a price tag of $549 off contract and no 8 GB model, it is highly unlikely that it will manage to establish an important presence on the Chinese market. According to analysts, the sweet spot for Chinese customers, for an off contract smartphone, is between $400 and $500. However, Apple is also having the iPhone 4S available on the Chinese market; for an off contract iPhone 4S, Chinese customers will have to pat $422.
While the iPhone 5C is Apple’s effort to compete with Android smartphones on the mid range market, it is not the low budget device that all the rumors led us to believe it will be. If Apple was to use its old pricing strategy, the iPhone 5 would have now been $99 on contract. For an established market, such as the US market, the iPhone 5C could be very important given value carriers such as T-Mobile will like the prospect of a new iPhone that will be released with a lower than premium price. However, for emergent markets, such as China, the iPhone 5C might not be interesting enough and its success is, for now, unlikely.
It will depend on how well Apple will convince consumers to get the iPhone 5C in favor of the free iPhone 4S. Apple strategy of releasing the iPhone 5C in a rainbow of colors may pay off as many people might be interested in paying the $99 price for a colored iPhone with last year’s specs, than getting a two generations old iPhone. Apple has a very good track record in making its customers pay a little extra and in an established market this could be the difference between success and failure. So we predict that the iPhone 5C will do fine in the US market; but Apple’s attention is focused on the Chinese market and we are not so sure about that.
