As I have reflected on Apple’s earnings the past few days I kept coming back to what I am observing with the premium smartphone market. What I think is interesting about what we learned with the 5c is that Apple customers prefer them to be in the premium segment. Brian Hall wrote a column last November that Apple couldn’t go downstream and he anticipated the 5c struggling in the market.
I was skeptical of his remarks but now I am wondering how much truth there is to it. There is absolutely nothing wrong with a premium strategy. It is an excellent business that is healthy and can stand the test of time. However, I’ve never been convinced Apple only wants to focus on the top 20% of any market they enter with personal computing products. In Walter Isaacson’s biography of Steve Jobs, he writes about an interview where Steve was talking about why the Mac lost to Windows. In summary Steve Jobs admitted the Mac was priced too high. In fact, at the 30th anniversary of the Mac John Markoff mentioned that Jef Raskin, the original creator of the Mac wanted to make the Mac a very approachable $500 highly portable computer. All the Mac team wanted to do ended costing a bit more than that. But then in September, in Tim Cook’s interview with Businessweek, something he said stood out to me.
We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience, and we figured out a way to do it at a lower cost. – Tim Cook
The last line, “we figured out a way to do it at a lower cost” is the one that intrigues me. I believe Apple is committed to this line. Creating the best, not the most, but figuring out a way to make the best and offer it at a lower cost.
This brings us back to the 5c. The statement above from Tim Cook is referring to the iPhone 5c. The 5c was ultimately challenged in the market because it was too close in price to the iPhone 5s in subsidy markets. More consumers seemed to spring for the extra $100 to get the iPhone 5s than did for the 5c perhaps hinting that if Apple is to have two different current generation and differently priced iPhones in the market that they need to be priced further apart.
Perhaps an option is to focus on making the best product they make at lower cost. If Apple’s manufacturing can support them offering their flagship premium phone but doing so at lower costs, and maintaining margins, they could in theory bring the premium fight to the middle tiers of the market. Which would open up their total addressable market pretty quickly in markets like China and India. It could also bring the cost of the subsidized flagship product as well which could increase quickly the number of iPhone users to switch from Android in key western markets.
Ultimately, the current carrier subsidy model is a challenge to Apple in lower price tiers. If they release a phone that is in the most popular price tiers in China and India ($115-246 USD), it would be practically free in subsidy markets. Apple could of course release phones that are only available in certain markets as well to deal with this but one has to question what Apple could release in one market that would not be desired in others as well.
Apple’s dependence on the iPhone is growing. In 2013 the iPhone made up 53.4% of their total fiscal year revenue which was an increase from 2012 where the iPhone was 50.3% of fiscal year revenue. Of course, new revenue streams (categories) are ways to increase revenue growth in new ways and perhaps lesson the dependence of Apple on iPhone revenue. But it needs to remain firmly planted in everyone’s heads that as much as new categories or new revenue streams are good additional sources of revenue there is no market in annual units sold as large as the smartphone market. We estimate that in 2018 we will sell 1.9 billion smartphones every year.
The key thing to understand about the smartphone segment is that growth has slowed across the board. We added approximately 450-500 million new smartphone owners in 2013 and that number will drop to around 300-350 million in 2013 and stay somewhat flat. The vast majority of those new owners will be in the sub $200 (wholesale) price category. Likely not customers for Apple. So who is Apple competing for? They are competing for owners whose interests are maturing and who may value their ecosystem. Interestingly, among current smartphone owners worldwide we are seeing 25% begin to move upstream from the low-end to the mid-market. The question, should Apple continue to focus on the high-end price tiers, is if/when will more mature consumers move from the mid to the higher end of the market. This may be only a matter of time, but it will require time to manifest.
We do anticipate some growth still to be had in the higher tiers as markets mature and more importantly as the rapid development happens in developing countries. I firmly believe Apple is employing the correct strategy by focusing on making the best products not the most. But if we read between the lines from Apple’s executives speaking, making the best does not necessarily mean charging the most.
“More consumers seemed to spring for the extra $100 to get the iPhone 5S than did for the 5C”
Or, consumers decided to save $100-200 and go for an Android or Nokia device. Apple’s problem with it’s 5C strategy is that the market for $550 phones (or $100 after subsidy) appears to be small relative to the above $650 market and $450 and below market
“The question, should Apple continue to focus on the high-end price tiers, is if/when will more mature consumers move from the mid to the higher end of the market.”
The other question is whether entry level consumers are developing loyalty to other brands or getting locked in to other ecosystems. Also, if 25% of consumers are moving up-market, that means 75% are not and Apple has nothing to offer them.
Apple also has the problem, and I do not see it discussed much, is that a lower priced iPhone impacts it other products. A $300 iPhone would likely decimate sales of $300 iPod touches. At some point Apple needs to decide what to do with the iPod touch and whether it should be the entry level iOS device.
” A $300 iPhone would likely decimate sales of $300 iPod touches.”
This is a non-issue since Apple has never cared about cannibalizing its own products. History has proven that to be true.
“The other question is whether entry level consumers are developing loyalty to other brands or getting locked in to other ecosystems.”
That’s a very good question, which is why I think Apple should have a mid-tier iPhone (around $399). Even though over time, more people will move up-market, it doesn’t necessarily mean they will move to iPhone. It could very well mean they move up-market to the ecosystem that they’re used to. It does mean foregoing short-term profits for long-term profits.
I don’t think Apple would care if someone bought an iPhone instead of an iPod Touch. It’s an open question how many Touches Apple is selling anyway. After all, isn’t a two year old iPhone with no data connection pretty much equivalent to an iPod Touch?
I don’t expect a $300 iPhone though.
There are many ways to interpret the slow sales of the 5C relative to the 5S. One way of looking at it, that I haven’t seen discussed, is that selling a lower cost does not seem to cannibalize sales of the flagship product, presumably due to the Apple brand.
This might mean that Apple could introduce a more aggressively priced model without fear of cannibalizing the flagship model at all.
In subsidized markets, the flagship model would sell well and the cheaper model, not so much.
In non-subsidized markets, the cheaper model would sell.
As a result, Apple would not have to worry about restricting availability of the cheaper model for fear of cannibalization. The failure of the 5C has shown that the Apple brand alone is enough to ensure that subsidized markets will buy the flagship, despite a cheaper model being available.
Nice thought.
Well said. Which is why I don’t think Apple will kill the 5c (or a variant of it) like some bloggers / journalists have speculated. It’s definitely a product designed to find more success in non-subsidized markets.
I am sure buyers would be all over an actual low tier iPhone, but the 5C is not that.
It is still Premium priced, but for last years tech. I am no sure why anyone goes that route.
Likely because there are some (many? most?) buyers, like my daughter, who don’t think in terms of last year’s tech. No matter how much I tried to convince her that it was only a little more for a new 5s (she had the upgrade pricing advantage) and that I WOULD EVEN PAY IT FOR HER! She would not be steered from the 5c. We are kind of now at the point with phone hardware that we are with PC hardware—last year’s tech is still pretty good.
[edit: I can’t even convince my wife to upgrade from her 4s. She loves that phone.]
Joe
“So who is Apple competing for? They are competing for owners whose interests are maturing and who may value their ecosystem. Interestingly, among current smartphone owners worldwide we are seeing 25% begin to move upstream from the low-end to the mid-market. The question, should Apple continue to focus on the high-end price tiers, is if/when will more mature consumers move from the mid to the higher end of the market. This may be only a matter of time, but it will require time to manifest.”
Well, look there. Thanks for writing what I’ve been thinking, and so much more precise and clearly, too. What I’m wondering about now is Apple gets a hard time from some analysts who say unsubsidized iPhones are unapproachable for most markets that don’t use a subsidized model. Supposedly Samsung (and theoretically other handset makers, too) address this by offering low-end “less expensive” smartphones in that sub-$400 category. But there is not or extremely limited profit there. Some say it is Samsung’s high-end that subsidizes their low-end.
Except in a short term attempt to grab some of that “high-end” market no one that I see sells high-end phones at low-end prices. In other words, even in unsubsidized markets premium is still premium. If Apple struggles there, so does everyone else. But the low-end does not subsidize the high-end, from what I can tell.
I’m not making my point well. I guess I am still thinking it through. I guess what I mean is I don’t see any upside for Apple going “down stream” and I am less convinced that 5c was fully an attempt to do so. I think there were a number of things the 5c provided Apple. If going downstream was one of them, it was such a minor motivation that there was no reason to make it even less than what it was, in function or price.
No one who buys at Pay-less thinks they are getting high-end or high quality shoes. They either don’t care or can’t afford better but want better. For those who don’t care, they aren’t potential customers anyway, at least until they change their mind (like I did).
Joe
Nice post. I learn something new and challenging on blogs I stumbleupon on a daily basis.