FIRST TAKE: The New IPhone 5C Is Too Pricey To Boost Apple's Global Efforts

Apple made some big mobile announcements this afternoon during a media event at its Cupertino, Calif. campus. Here are the highlights:

  • The iPhone 5S is Apple’s first new handset in over a year. It is an update to the 2012 iPhone 5. It retains the same hardware features as the iPhone 5 but is updated with a new home button that utilizes “Touch ID,” a fingerprint-scan technology for security in unlocking the phone. There’s one additional fingerprint feature — users can now make iTunes purchases by scanning their finger on the home button. The 5S is the first smartphone to come equipped with a 64-bit processor. It will also be available in gold.
  • The iPhone 5C is Apple’s first ever low-cost model. The smaller 16-gigabyte model will go for a subsidized price of $US99 on a 2-year contract, and $US199 on a 2-year contract for the 32-gig model. The unsubsidized price in the U.S. has been set at $US549 for the 16-gigabyte version. It could be even more expensive in international markets.
    • We believe that price is too high to really power iPhone sales in emerging markets.
  • iPhone 5C will have similar internal hardware to the iPhone 5 but its exterior will mimic the iPod or iPhone 3GS with a plastic outer shell, available in different colours.
  • iPhone 5S and iPhone 5C will be available Sept. 20 in the U.S., China, Canada, France, Germany, Japan, the U.K., Singapore, and Australia.
  • Both new devices will come stock with Apple’s newest mobile operating system, iOS 7. It is the most significant aesthetic redesign in the history of Apple’s iOS software and offers new functionality and unique features.
    • Control Center is the one-swipe widget-like hub to toggle Wi-Fi, aeroplane mode, brightness, and other system preferences.
    • AirDrop is a Bluetooth-based peer-to-peer file swap system where users can share content directly to each other’s iPhones with one click.
    • iTunes Radio is Apple’s attempt at a mobile Internet radio service that will be free to all iOS users.
  • Finally, Apple CEO Tim Cook claims the 700 millionth iOS device will be shipped this month. Android recently surpassed 1 billion active devices.

The Price Is Wrong

The iPhone 5C and its $US550 price tag constitute Apple’s attempt to join the “race to the bottom” in the quickly maturing global smartphone market.

At $US550, we feel the 5C still cannot compete for a large share of the market in countries like China, where Apple’s smartphone business is in need of some reinvention. A few things about China’s smartphone market:

  • In China, the estimated unsubsidized price for the 5C of over $US500 would pit it against the high-end devices of domestic manufacturers like ZTE, Huawei, Lenovo, and Xiaomi, not their middle-range devices that Apple could easily beat.
  • Most phones in China are sold without carrier subsidies, and although some carriers have stepped up hardware subsidies, the consumer still bears the brunt of the cost.
  • Jay Yarow of Business Insider has pointed out that a $US500 5C model might have been Apple’s strategy all along rather than trying to target low-usage users on the bottom-rung. Nevertheless, Apple’s brand legacy is nowhere near as strong in China as it is in more developed markets. Local brands have one strong advantage in that they bring higher commissions for Chinese retail channels.

Globally, the iPhone is increasingly facing an Android-first market.

The global smartphone shipments share of handset makers, especially Chinese manufacturers, has been growing rapidly at the expense of Apple, and they’ve done so by undercutting the iPhone’s premium pricing with a barrage of low-cost handsets.

Most of these cheaper handsets run Android, and because of that, Google’s platform has been increasingly asserting its will over Apple. It now controls 80% of the global smartphone market. Meanwhile, Apple’s platform share keeps falling and is currently around 13%.

Apple CEO Tim Cook famously quipped that Apple was never in the business of making the “most” phones, rather they are in the business of making the “best” phones. In fact, Apple is the only manufacturer that is almost wholly dependent on high-end devices.

But competition in this overly crowded smartphone market is at an all-time high. And so, in order to stay relevant, Apple will have to conform eventually. We just don’t see the 5C as a strong attempt to do so.

Pricing for the 5C was heavily speculated upon and analyst estimates ranged anywhere from as high as $US500 to as low as $US100.

Consumers Are Already Buying Low

A potential silver lining is that consumers have been responding favourably to the current iPhone product mix.

Last quarter, the iPhone’s average selling price (ASP) dropped to a historically-low $US581 as consumers snatched up the glut of aggressively-priced, legacy 4S and 4 models.

Even with a $US450 price tag, iPhone 4 and 4S made up almost half of all iPhone sales in June 2013.

That alone is a clear enough signal that Apple can find success catering to the lower end of the market with the 5C, and may grab customers away from Android.

We also feel there’s a huge opportunity for Apple to expand its U.S. presence with the low-cost 5C.

Despite being a more developed mobile market that has been a bastion of high-end devices, the U.S. mobile market is moving in a new direction.

Three trends are currently dictating the domestic smartphone market:

  • Carriers are shifting away from subsidized hardware and looking to earn more upfront fees from consumers.
  • U.S. consumers are holding on to their smartphones longer. Given the lack of hardware innovation, handset users prefer waiting for a software or platform update rather than scrapping their handset entirely.
  • U.S. smartphone penetration is moving at a glacial pace now, and the last pocket of feature phone users is concentrated among the older age groups and lower income brackets.

We commented on the 5C’s domestic potential, and what it means to Apple, in a recent news note: “The United States is Apple’s key market. As a manufacturer, Apple currently holds a 40% market share, according to comScore’s latest numbers, for July 2013. Samsung, Apple’s closest competitor domestically, is at 24%. To protect that dominance and have a shot at increasing it, Apple can’t afford to find itself outflanked here by companies with more flexible hardware pricing.”

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