The iPhone SE and Apple’s Art of War

I’m going to come right out and say it. In the last few years, Apple has been enticing its competition onto battlefields where they can’t compete, and their competition keeps taking the bait.

What has to be appreciated about this strategy at a high-level is only Samsung has the development and manufacturing capital to zig and zag with Apple. Huawei, while seemingly competent, does not sell many premium phones. Therefore, I don’t put them on the same level as Apple or Samsung capability wise despite Huawei being the second-largest smartphone maker by volume.

While Samsung makes great premium phones, they sell magnitudes fewer premium smartphones compared to Apple. Bearing all that in mind, every smartphone OEM has had to be extremely tactical vs. Apple. The Android market is enormous but also divided up into many pockets of a market, and each OEM has the slice in mind they are targeting. However, at a high-level, a key part of their strategy and specifically the strategy for Huawei, Xiaomi, and Oppo and Vivo has been to gradually go upmarket into the premium tier. Knowing quite a bit about how the Chinese think strategically, should they achieve success in the higher-end, they would put more resources into those models and spend less time and attention in their entry-level products. This makes sense considering they make zero margins on their low-end phones. Little did they know they this is a tactical error, and more importantly, they don’t understand why. I know they see the data, that large groups of buyers still choose Apple products over theirs even though Apple products cost more. I have had countless debates with executives of Chinese companies who compete with Apple, and they simply can not understand why people would choose Apple’s product over theirs at a few hundred dollars more when theirs is less expensive and competitive “on paper.” I emphasize “on paper.”

This mindset is exactly why they can move upstream onto the premium battlefield and still not succeed with the volume they want or hope anywhere near Apple’s premium volume. Nonetheless, Apple’s competition ventures out and puts enormous resources and focus on their premium devices for a hope to compete and, from data we see, it just doesn’t work. Part of their hope is that by simply having a premium device, something aspirational, it will help the rest of their portfolio, where they have always believed Apple would not go, until now.

This is what fascinates me strategically about the updated iPhone SE, Apple now has what anyone would consider an affordable premium SKU that may actually be better, “on paper,” and without a doubt experientially due to Apple’s vertical integration, that strikes right at the heart of where the competition was becoming vulnerable as they were prioritizing the premium segment.

Apple’s competition is about to see what happens when Apple starts playing the affordable premium game and starts picking off their competitions more mainstream consumers.

The iPhone SE Land and Expand
While it is certainly true, to Carolina Milanesi’s point today in her analysis, the iPhone is perfectly and purposefully targeted at the portion of Apple’s existing customer base who does not buy flagship phones and often buys last years, or the year before model, at a lower price and holds onto it for 3+ years.

There is also a massive second hand, or hand-me-down, market for iPhones that this device will play an interesting role against. I’ve seen estimates that anywhere between 350-450 million of Apple’s ~ 1 billion iPhone installed base is second hand or hand-me-down devices. At $399 the new iPhone SE makes for an interesting proposition to get someone on the latest and greatest technology.

For Apple’s existing base, the iPhone SE now offers a much more interesting option than going to last years or the year before model, with the added benefit of longevity, security, better experience, etc. That being said, I’m more interested in the land and expand strategy of the iPhone SE.

We are at a point in time where on the best years, smartphone sales have neared 1.5b annually around the world. Apple sells ~200m a year on average, which means there is certainly room to grow. But, we all know the market for premium flagships is capped, and that has played a role in Apple’s volume ceiling.

Expanding beyond premium will almost guarantee Apple attracts new customers in every market of the world, and particularly those where the price is more of a concern. In every market, there is a tier of smartphone prices and customers who fit those tiers. Apple asking every potential customer to spend well north of $500 for modern technology, was always going to limit their potential customer base. The iPhone SE is perfectly positioned for the middle tier of the market and the customers who look more at price and value for the price than anything else. This market is extremely large around the world.

There are markets outside of tier 1-3 in China where this device could be attractive, although import tariffs may still make it too expensive. However, in India, where Apple has begun local manufacturing of certain SKUs in order to keep prices low, the iPhone SE is perfectly positioned. I strongly suspect the iPhone SE can be made locally in India and have a regional SKU just for India to keep the costs competitive. Again, this is not designed to go against the flagships of Xiaomi or the premium market in India, but it is designed to go after the largest segment of the Indian market, which is the mid-tier, and there I think it will appeal to many Indian buyers.

The iPhone SE is likely to be the entry point to the Apple ecosystem for many first time buyers, and that has a significant impact on Apple’s long-term prospects.

The last point I want to make is this strategy could also benefit their wearables and services strategy. For wearables, the more potential customers, the better the sales prospects are. Having said that, combined, AirPods and Apple Watch have still not penetrated 20% of Apple’s customer base. This segment has massive headroom to grow within Apple’s existing base, let alone new customers they may acquire. But more new customers means more potential to sell more Apple Watches and AirPods. Services could also benefit. Every data point I’ve seen from research suggests that when customers get onto the newest devices, they tend to subscribe and pay for more services. Knowing this is a price-sensitive target segment could mean that trend doesn’t follow, but there is a chance newer devices do offer better experiences with services and become more attractive. It is noteworthy Apple is offering the Apple TV+ free year subscription with the purchase of an SE.

Apple keeps zigging, while others keep zagging, and whether Apple is strategically this savvy or not, I don’t know. Still, the reality is the iPhone SE will put tremendous pressure on Apple’s competition in the smartphone space, and I’m certain will end up expanding Apple’s customer base.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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