Like other Apple shareholders, I was disappointed and nervous to hear that Apple’s new cheap iPhone–the iPhone 5C–would not, in fact, be cheap, but would instead cost just a hundred dollars or so less than the top-of-the-line one.
iPhones are a platform, and in the platform business, market share is important. Third-party developers want to build applications and services that can be sold to the largest possible number of users. So a platform with dominant market share has an inherent competitive advantage over niche platforms. And by clinging to its massive profit margins and “premium” positioning, Apple has been sacrificing gobs of market share.
Apple’s cheap iPhone was supposed to change all that.
The cheap iPhone was supposed to allow Apple to compete aggressively in price-conscious emerging markets and other places in which the top-of-the-line iPhone is just too expensive. The cheap iPhone might reduce Apple’s profit margin, the theory went, but it would also increase the company’s market share. And the increased market share of the iPhone platform would strengthen Apple’s value as a platform and, therefore, increase its competitive strength over the long haul.
But then Apple announced the price of the new cheap iPhone. And it wasn’t, in fact, cheap.
So I and other Apple shareholders feared that the company had blown it and that it would cling to its huge profit margins while its market share collapsed.
But I have heard some things in recent days that make me less worried.
Most of what I have heard is second- or even third-hand. But it is still encouraging. Because it makes sense. And the folks at Apple are nothing if not sensible and smart.
First, the new iPhones have gotten excellent reviews. And the new fingerprint sensor could unlock a huge new opportunity in which Apple is the “authenticator” for billions of mobile payments and other applications.
Second, I have heard that, despite announcing a price for its new “cheap” iPhone that was too expensive ($500+), Apple actually isn’t that serious about maintaining this price.
For example, Apple is already allowing Walmart and others to discount the price. And it’s allowing AT&T, Verizon, and other carriers to provide the cheap iPhone for “free” by letting consumers pay for it in 24 monthly installments, as part of their regular phone bills.
More importantly, I have heard that Apple views the price of the cheap iPhone as just a starting price and will cut it rapidly. This is one of the benefits of forking the product line and offering a top-of-the-line iPhone (the 5S) and a cheap iPhone (the 5C). Apple can cut the heck out of the price of the cheap phone to drive sales while also protecting its brand and margin by holding the line on the expensive one.
Lastly, and most importantly, I have heard that Apple may sell the cheap iPhone for different prices in different countries. This is very good news. If Apple can get millions of Americans to pay $US500+ for the new phone (through their carrier subsidies) and sell the same phone for, say, $US250 in China, then Apple can have its cake and eat it, too. It can preserve its massive profit margin in rich countries but still drive market share gains in poorer countries.
And then there is Apple’s brilliant iPhone marketing plan, which I heard about this morning. Apple is apparently making it necessary for you to stand in line for at least 24 hours if you want to buy the new iPhone 5S on the first day (tomorrow). This will create massive lines at Apple Stores, which will create an impression of insane demand. Yes, this scarcity is an old ploy, and, yes, it is probably less a ploy than the result of Apple not being able to make enough iPhone 5Ss to meet initial demand, but it will have the same effect.
So, as an Apple shareholder, I am more encouraged about the prospects for the new iPhones than I was a couple of weeks back.
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