I’m neither a Wall Street analyst nor a MBA-types who knows much about running successful companies. So the following arguments about Apple can be taken with a grain of salt or you can stop reading now to avoid thinking how much more stupid I can get.
Everyone was surprised (not in a good way) when Apple announced a new ‘cheaper’ version of its flagship product, the iPhone and called it the iPhone 5C. Some had hoped the ‘C’ stood for cheap but perhaps Apple meant it as color. It is priced at $99 for its base model under a two-year contract or for $549 unsubsidized. People had expected it to be much lower; some even posited that it would be as much as an iPod Touch ~$250-300. For months leading up to the keynote, rumors floated around first on the product specs starting with the existence of a plastic (actually polycarbonate) around a steel-reinforced frame. If you see the video of its manufacturing, it is pretty cool. But it is still a plastic iPhone even though Jonny Ive calls it ‘unapologetically plastic’. After the existence of the plastic iPhone were almost confirmed prior to the keynote, the rumor blogs moved on to why was Apple doing it? And this is where the wheels come off.
Tech blogs are great at reviewing technical specifications and analyzing OS features but in judging and predicting business strategy especially for Apple, it doesn’t have even a modicum of success. Not just Apple, the tech pundits have no clue why Amazon enjoys unprecedented trust from its investors in spite of zero profits. But then if everyone could tell what made a successful business, we all would’ve had successful businesses. So after the plastic iPhone was near-confirmed, people rumored that perhaps Apple was targeting China and India where most smartphones are sold unsubsidized and need to be cheap. Based on my anecdotal evidence when I was visiting India and spent 10 minutes in a cell phone shop, the first thing new customers (almost 10 people) mentioned was their budget and asked to see what phones were available in that budget.
So Apple targeting these huge growing market almost seemed obvious. Of course, known for their secrecy, Apple said nothing. This supposed foray into India and China was based on the assumption that Apple needed to expand marketshare after Samsung was handily beating them. Apple still said nothing. If it needs to expand marketshare, Apple needs to sell a cheaper iPhone because that’s what most customers in India and China will buy. Apple still said nothing. The near-confirmed iPhone 5C will be the cheaper iPhone and price points ranging from $200 to $350 were being floated in spite of having no knowledge or understanding of the manufacturing cost, supply chain management, and ability to maintain high profit margins. So now the stage was set – Apple was going to announce a plastic iPhone 5C costing somewhere between $200-$350 aimed at China and India to expand marketshare. All this time, Apple still hadn’t even hinted at anything being discussed furiously online.
The disappointment and fall in stock price was almost as unexpected as the continued high price of the iPhone 5C. Even I was disappointed.
The iPhone 5C unlocked price is totally ridiculous. It doesn’t look like Apple even wants the developing countries market.
— Patrix (@patrix) September 10, 2013
You may argue that Apple’s secrecy that had served so well in the past is now biting them in the ass and setting unrealistic expectations that they repeatedly fail to meet. But was Apple really aiming for India or China to expand their marketshare? Does it really need to?
The iPhone 5C effectively replaces the iPhone 5 as Apple’s new “mid-range” device and retains the same subsidized/unsubsidized pricing structure of $99/$549. The most obvious question to ask is why Apple felt the need to replace the iPhone 5 with the 5C when they’re practically the same device, at the same price.
I believe the answer is related to the level of cannibalization caused by the iPad Mini. Apple was spooked when it saw a “new”, “good enough” product sharply eat into sales of their flagship tablet. As a result, Apple attempted to minimize the pricing gap between the two “new” iPhones and attempted to differentiate them based on casing and color. Therefore, I don’t believe the iPhone 5C is targeted at emerging markets at all, but is an attempt to defend the iPhone’s margins & ASP in subsidized markets.
Apple furiously guards its margins that generates tremendous amount of profit to the tune of $500+ per iPhone sold. It is also its luxury and premium brand status that still makes it special. Contrary to popular opinion, it was never the most popular smartphone. It was always Nokia and Blackberry and then when those declined, Android-powered Samsung phones took over. As crass as it may sound, perhaps Apple is not interested in diminishing its brand value by flooding the market and joining the ranks of cheap smartphones. As in any product category (clothing, cars, etc.), there is a luxury segment and brands in those segments do exceedingly well.Something that 37signals argued several years ago:
If you try to please everyone, you won’t please anyone. When we built Basecamp we focused our marketing on design firms. By narrowing our market this way, we made it more likely to attract passionate customers who, in turn, would evan gelize the product. Know who your app is really intended for and focus on pleasing them.
Perhaps Apple is better off with not having a large marketshare and tons of more customers for cheaper iPhones. More customers means more infrastructure in handling their needs and keeping them happy. You attract a certain segment of the market whose first criteria is not product quality but price then you’re never going to keep them happy. So why should Apple take a hit on its profit margins to attract more customers who are more likely to be unhappy? When Apple was silent on all this speculation of expanding into emerging markets, it perhaps was not. If you think about it from that sense, the iPhone 5C pricing is right where Apple’s prices usually are. The iPhone 5 is discontinued and its innards are put in a new plastic shell and sold for $100 less than its premier product, the iPhone 5S.
Now Apple may choose to do a complete about-turn and in fact, trade profits for marketshare next year. After all, this year’s iPhones 5C will be a year old and can be sold for cheap. But considering the iPhone 4 still sells for $420 in China, I’ll be surprised. Then again, as I mentioned, I’m no business guru.
From a personal perspective, why should you be worry about a company expanding its marketshare just because you bought a phone from them? As long as you can buy it for a reasonable price in your country, why should it matter to you if they sell a cheaper one in India or China? Most people making prognostications aren’t even Apple stockholders. I own shares in a mutual fund in which 3% are Apple stocks. Given the amount I’ve invested in the mutual fund, I’m sure I own less than 10%…of a single Apple share. I couldn’t care less what its stock price is as long as the iPhone I buy every two years serves me good. I care about the customer service they provide me and not how many customers they will gain in India. In fact, I don’t want them to serve more customers than they can reasonably handle. I’ll gift an iPad to my parents so we can FaceTime once a week but otherwise, even your family in India not owning an iPhone is no biggie.
Why anyone gets into serious Apple-Android debates is beyond me. I like to tweet out a few zingers on Twitter but you should know better than to take me seriously on there. You buy the phone you like the best and might better your life. At most, you can influence your immediate family because it may make things easier to share (Shared Photostream, FaceTime, etc.) but apart from that, it shouldn’t matter if a hundred million more people in a faraway country also use the same phone as you do. If your phone is discontinued or the company shuts down due to bad business decisions (like not selling for customers in India or China), you can always buy a phone from its erstwhile competitor. It’s not like your investment of less than 10% of a single share in the market capitalization of the said company will ruin your life. It will be sad to see a design-conscious company decline (and it isn’t really any time soon) but there will always be others.
- strange term now after the economies have stopped growing as rapidly [↩]