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One big choice Apple faces is whether to maintain its extraordinarily high profit margin by staying in the “premium” segment of the smartphone market……or to combat its loss of market share to Android-based phones by offering lower-priced iPhones.
It can’t do both.
On its current trajectory, with only high-priced phones, Apple is getting its clock cleaned in emerging markets like China and India, where incomes are lower, there are fewer carrier subsidies, and cost is a major issue for consumers.
If smartphones were only about gadget sales, market share wouldn’t be so important: Apple could just relax and enjoy its humongous profits and keep making high-end phones for its richer customers.
But smartphones are a platform market, meaning that third-party companies built products and services that run on top of them. (In smartphones’ case, apps.) Platform markets tend to standardize around the platform with the most market share–at the expense of smaller platforms, which are often forced to become niche players.
This is what happened to Apple in the PC market in the 1990s: Despite its extraordinarily innovative Mac, it tried to maintain its “premium” positioning, lost the market-share war to Microsoft and nearly went bankrupt.
In the smartphone market, Apple was once again first and best. But competitors like Samsung have caught up on the product front, and they are now selling high-quality phones for much less than Apple sells the iPhone (~$600).* As a result, Apple is losing market share rapidly. So much so that, globally, Apple has now been rendered a niche player, with only ~15% share to Android’s 75%. (See: “This Trend Is Very Worrisome For Apple.”)
But it doesn’t have to be this way.
Apple could easily opt for selling a lower-end phone at a much lower price.
To do so, it would merely have to be willing to sacrifice some of the massive profit it now makes on every phone that it sells.
Doing so would likely reduce the company’s overall profit margin, but it would arguably strengthen its overall competitive position, by increasing its platform market share.
The right decision here, I think, is for Apple to sacrifice some profit margin for market share.
And one analyst, Gene Munster of Piper Jaffray, thinks that that’s exactly what Apple is going do.
In 2014, Munster thinks, Apple will roll out a $200 iPhone (unsubsidized).
This iPhone, he thinks, will have a much lower profit margin than Apple’s current iPhone, a margin that is more similar to the profit margin Apple makes on its iPads and Macs.
If Apple were to sell a lot of these phones, the average price point of its iPhone unit sales would drop, and its overall profit margin would fall. If it were to sell enough of the phones, however, it’s overall profit might increase. And, importantly for its competitive positioning, its global market share would stop dropping and start growing.
So, Apple fans should hope Gene Munster is right about Apple releasing a $200 iPhone.
SEE ALSO: The Future Of Apple
* In the US market, and other markets in which wireless carriers subsidise handsets, Apple already offers a phone that is free for consumers. But this is only because of the carrier subsidy (the carrier buys the phone from Apple for full price, which, on average, across all iPhones, is about $600). In emerging markets like China and India, there are few carrier subsidies. So phone buyers have to pay the full price.
Watch Gene Munster’s presentation at IGNITION below:
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