Hardly a day goes by without some analyst
clamoring for a low-cost iPhone as a strategic necessity for Apple. Apple is
largely silent, but occasionally they try to deflate those expectations such as
Phil Schiller’s interview on January 10, 2013: "Despite the popularity of
cheap smartphones, this will never be the future of Apple's products….In fact,
although Apple's market share of smartphones is just about 20 percent, we own
75 percent of the profit."
Clearly, there would be demand for a cheaper
iPhone, particularly in countries such as India and China where there is an
enormous population that has limited incomes coupled with business models in those
countries where carriers do not subsidize phones. But there would also be
significant cannibalization from a low-cost iPhone, and Apple would likely earn
less than its current 70% share of total phone industry profits. Further,
industry profits would likely decline as such a move would shift volume from
high margin products to low-margin models and hence transfer profit from the
industry to the consumer’s pocket.
The problem Apple faces is not high cost to
manufacture, it is the upfront price to the consumer; shaving $50 off the
manufactured cost of an iPhone does not make a $650 phone affordable. Apple is not building in too much functionality
into its iPhone and not utilizing
too expensive materials thus driving up the cost beyond reach. In markets such
as the US, a consumer can purchase a subsidized iPhone 5 for $199 - $399 (with
a contract) or $649 - $849 (without a contract); this range extends down to $0
for an iPhone 4 and $99 for an iPhone 4S. But the contract option does not exist in some
huge markets such as India and China.
Apple is pursuing a much more intelligent and
appropriate strategy to accomplish the same goal of reducing the upfront cost
of buying an iPhone:
·
Every year Apple has dropped the
price of the older iPhone model to $99 or less in “contract markets”; currently
an iPhone 4 can be had for $0 in the US. This has allowed Apple to appeal to
price sensitive consumers without introducing new low-cost models and
complicating their product line.
·
In the US, T-Mobile is now
experimenting with payment plans that allow the customer to pay for the phone
over 2 years without having a “contract.” Some view this as just semantics, but
the economics are actually different if you don’t upgrade your phone after 2
years (you start paying less each month).
·
More importantly, Apple has
introduced similar plans in India with very positive results -- Apple last
quarter took the #2 spot in Smartphones with 15.4%, compared to #3 Sony at 9.4%.
·
Recently, Apple has experimented
with a trade-in program in India where consumers get a large discount by
trading in their old phone. The retailer recoups most of the discount by
selling the old phones, and the customers reduce the upfront outlay of cash.
This has been wildly successful, and Apple’s competitors have quickly followed
suit by introducing clones of this Apple innovation.
Apple means it when they say they are willing
to forego market share and only make premium products. They’ve done this for
years in computers by resisting pressure from analysts to drop the price of
MacBooks to compete with netbooks. Apple was right, and Apple now makes 45% of
all PC industry profit from only 5% market share (see http://tech.fortune.cnn.com/tag/horace-dediu/)
. Netbooks have nearly vanished as a segment. Apple actually knows better.
Focusing on the premium segment (where the
profits lie) works for Apple, just as it works for BMW. Chasing the low-end of
the market is a distraction and Apple should leave that to others. However,
capturing some of these customers through innovative payment plans helps Apple
by expanding the reach of its IOS ecosystem without cannibalization. That makes
sense.
The answer is business model innovation, not
cheaper products. Apple understands
that, and hopefully Apple will stick to that strategy.
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