Here’s how Apple works: It creates a new, innovative product from thin air, then spends years refining it, adding features, and making it best in class.
Eventually, many years later, it makes that original product obsolete with something new.
Yesterday was an excellent example of this model.
Apple hasn’t discovered anything that’s better for mobile experiences than the iPhone. So, it didn’t reveal some new iPhone-killing product.
For the seventh iteration of the iPhone, the iPhone 5S, Apple refined its camera system, and added a fingerprint scanner which will make the phone simpler to unlock and make secure.
The iPhone 5S appears to be an excellent phone. Probably the best on the market.
The innovative, iterative spirit for its products, however, does not carry over to its business model. Yesterday delivered no deviation from Apple’s established pricing scheme for the iPhone.
The entry level high-end iPhone 5S costs $US199 with a two-year wireless contract. The entry-level iPhone 5C costs $US99 on contract. The 5C the exact same phone as the iPhone 5, but with a plastic casing in six bright colour options. Apple kept the iPhone 4S, which will be free on contract.
Just about everyone expected Apple to deviate from its established pricing pattern, making the iPhone 5C a lower-priced phone. When we say everyone, we mean everyone.
Apple blogger John Gruber was looking for a lower-priced iPhone. Apple analyst Gene Munster expected a lower-priced iPhone. The Wall Street Journal expected it. Even our Apple uber-bull commenter Sammy The Walrus IV thought it would be cheaper.
Apple didn’t deliver a cheaper phone, and today the stock is down 5%.
Investors and analysts believe Apple needs a cheaper iPhone to expand its smartphone market share. Globally, Apple is getting trounced by Android. The latest numbers show Android with 80% of the smartphone market. Apple has only 13.2% of the market.
Apple doesn’t believe it needs to go chasing market share. While the stock market may not agree, it’s not hard to understand why Apple thinks it is right.
The iPhone business is still growing, it’s still a premium brand, and people are still in love with the phone.
A lot of people, ourselves included, have been harping on the fact that quarterly iPhone unit growth measured on a year-over-year basis decelerated from a high of triple digits to a low of single digits.
However, the reason Apple’s growth shrank to 7% earlier this year was that it was going against a difficult comparison. In the first quarter of 2012, Apple launched the iPhone 4S in China. It launched the iPhone 5 in China in the fourth quarter of 2012.
In the second quarter of the year, when Apple didn’t have a stilted comparison, sales were up 20% on a year-over-year basis. That’s rather astounding when you think about it. There was nothing new from Apple in the quarter. Its main rival, Samsung had released its flagship phone, the S4 a few months prior and was marketing it like crazy. And yet, Apple still grew iPhone units by 20%.
Overall, if you look at iPhone sales, it’s still growing.
The reason iPhone units continue to grow is that Apple’s iOS is the best smartphone operating system on the market for a normal person to use. It’s clean, simple and it gets the best applications. Apple is also going to start bundling iWork, its productivity apps with iOS, an offensive move against Microsoft Office and Google Docs.
In Apple’s opinion, that’s worth paying a premium.
Unlike Android phone makers which have no way to differentiate beyond price, Apple believes it has a complete package from software to hardware to services to retail that is worth more.
Will Apple lose market share? Probably. But does that even matter? Probably not.
The risk of losing market share is that Apple becomes relegated to a second-tier citizen in the platform wars. Well, Apple is about to sell its 700 millionth iOS device. It has hundreds of millions of active iOS users. Apple is not RIM. It is not Nokia. It will not collapse suddenly and lose those customers.
If you need an illustration of the power that Apple still has over the mobile market despite its minority share, look no further than NFC, which is a close-proximity wireless transmission system. Google with all its Android might tried to make NFC a widespread technology used by most consumers. As analyst Benedict Evans noted, NFC has been left for dead, largely because Apple chose to ignore it.
In the U.S., the market that matters most for developers, iOS is leading Android, when measured by web traffic, which is the best indicator of active, engaged consumers.
If Apple gives up some more share in countries where people aren’t downloading apps, then so what? That’s not going to make developers skip iOS for Android, which is the big risk of losing out on a platform battle.
When you get down to it: the only argument in favour of a cheaper phone is market share.
Apple has been totally clear that it does not care about market share. Most people chose not to believe Apple. Starting today, that should change.