Why Apple Should Not Create a Low-End iPhone

For a while now Wall Street backers of Apple have wanted them to create a low priced iPhone and use it to gain more marketshare. They seem to think that market share will drive up profits and expand their reach. A Tech.pinions colleague has done a great jobs dealing with the issue of marketshare vs profits so I won’t go into that here and suggest you read his series on this since it lays out a very good argument that profits are much more important than marketshare.

But if Wall Streeter’s really want to understand why this is a bad idea, all they have to do is look back at Apple’s history and see that Apple tried that once before and it nearly destroyed them. Not long after John Sculley was pushed out of Apple, Michael Spindler was brought in as CEO to try and make Apple more competitive. At the time the Mac had become a niche product, mostly used for desktop publishing, graphics, and engineering. On the other hand, the PC was outselling Macs at least 20 to 1 and pressure from Wall Street pushed Spindler to try and do things to help the Mac gain market share.

So what did he do? First, he made the Mac Look like a PC in design. Second, breaking major tradition, he licensed the OS to a special group with the idea that if there were more companies offering the Mac, it would sell more. And, Apple and the licensee lowered the prices and tried to compete with the PC head on. There was only one problem. The PC clones had access to tens of thousands more apps then was available for the Mac and IT and consumers took the safe route and stayed with PCs. Even the lower prices could not help Apple gain any ground in the PC market.

During this side trip to try and be all things to all people, Apple lost a lot of money and was in the red to the tune of almost a billion dollars when Spindler was forced out. They then brought in Gil Amelio who tried to stem the losses but by that time, it was too late to save Apple. That is when Jobs came back and took it back to its roots of selling the best product they could to their core customers. As he told me in a meeting with him the second day he had come back to Apple, he would lean on industrial design and innovation to try and grow the company again.

If you look at the low-end of the smartphone market, it is becoming a wasteland. First, as long as a smartphone has an OS, some memory and access to apps it is called a smartphone. However, low-end smartphones are now around $99 in China and well over 50% of the smartphones selling in China are white box phones that are sold off the street, in cell phone flea markets and through channels we as market researchers can’t even track. But nobody in that price range is making any money.

The same goes for other markets where these phones cost $99-$139. BOM costs alone make it very difficult for them to have any margins when they sell these products and at these price ranges, profits are slim or next to none. For Apple to try and do a low-end phone for the emerging market might help market share but at the cost of any serious profit. I trust they have learned the lessons from the last time they low balled products for the market and never go after this side of the business.

On the other hand, there is precedence from the past for mid-range priced smartphones. While the Mac for the graphics, DTO and engineering worlds became premium products in their line, Steve Jobs introduced the innovative, candy colored iMacs at prices well below their upper-end Macs. To this day Apple still sells a lot of premium priced Macs but the bulk of their sales comes from mid range priced iMacs and MacBook’s selling well under their premium lines. But what they have not done is chase the low-end of the PC market and with the is strategy they still have solid profits in their Mac Line.

There are rumors that Apple will soon introduce lower priced iPhones, but don’t expect them to priced to compete at the really low-end of the market or be aggressive with pricing in emerging markets. From History, Apple knows that they can still make some good profits with mid ranged priced products and if these rumors are true, Apple new iPhones would be following a proven formula that has continued to help them stay one of the most profitable companies in the world today.

Published by

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

9 thoughts on “Why Apple Should Not Create a Low-End iPhone”

  1. I have always been skeptical of a low-price iPhone. However, it occurs to me that Apple could introduce a lower cost phone to replace the iPhone 4S (which would, presumably, drop to an unsubsidized price of around $400 once the new iPhone came out.)

    The advantage would be that Apple could upgrade the power input, screen size and perhaps tweek to internal memory in order to more rapidly standardize both the newest and the oldest sold models.


  2. I like those story nuggets and analogies from the industry history. It is nice being related to an industry historian and eye witness to so many defining moments 🙂

  3. Obligatory Steve Jobs quote on Market Share:

    “What ruined Apple was not growth … They got very greedy … Instead of following the
    original trajectory of the original vision, which was to make the thing
    an appliance and get this out there to as many people as possible … they
    went for profits. They made outlandish profits for about four years.
    What this cost them was their future. What they should have been doing
    is making rational profits and going for market share.”

    Apple doesn’t need a low cost iPhone for wealthy western countries. It needs a low cost iPhone for India/Africa and other places where it has essentially no market share, lest it simply be shut out of those markets. It is better to accept lower margins in those markets than sell no product and have no margins to worry about.

    1. This is a very interesting question and the research I did most of last year on China and toward the end of the year on India yielded interesting results. We certainly believe an affordable iPhone is in the works but the question is whether Apple should make the true low-cost phone for emerging markets. A mid-tier phone, which we think is in the works is likely in the $349-399 unsubsidized range. Even that is still expensive for those markets, especially when competing against sub $99 Android phones and knock offs.

      There are nearly zero margins to be made at the low-end by a global company. The upstarts in China, which there are many, and to a degree India who are competing only for that region can actually make some money in the super low-end. A global company can not. So the real question is how big the market is for the mid to high end in markets like China and India today and how big will it be in the future. Our data indicates it is large enough in China to take seriously and will grow significantly over the next five years. India is a little behind but growing quickly.

      Whether Apple is locked out is an interesting question. I tend to think they still have time given the immaturity of those regions. However, it is becoming very clear that emerging markets favor much more regionally specific strategies than global brands / companies are used to doing. This has changed my thinking on how Apple should attack these markets with regionally specific strategies. I did not think they needed to do this before but now I do.

      1. I agree there is a point where the price is too low to actually make a profit. They will never build a $99 unsubsidized phone.

        But I do think $300-$400 unsubsidized phone may be a reasonable attempt to gather some position at the upper end of lower tier countries.

      2. “A mid-tier phone, which we think is in the works is likely in the $349-399 unsubsidized range…”

        That sounds about right to me. It could well replace the 4S on the bottom of the iPhone rung.

    2. I disagree a bit with this. There are use patterns that could benefit from a lower priced phone. I use my iPad for basically everything but phone calls. However I could still benefit from the iCloud syncing etc so going back to a dumb phone doesn’t really work.

      I don’t think that Apple should make a cheap phone designed merely to be cheap for any market but if they were to make a limited feature phone for folks like me or the kid’s first phone etc that because of the limits had lower specs and a lower cost, nothing wrong with that.

      As for the current rumors I think that folks are mixing up things some. I think that the game plan is to get everything on the new lighting connector so the iPad 2/3 and iPhone 4 series will all be nixed in favor of a new scaled down lower iPhone model which will basically be the iPhone 5 with limited storage (8 and maybe 16 GB models) then the iPhone “2013” might just be 32/64 GB with a level drop in price. And then on the iPads the current iPad mini and iPad 4 will stay 16 GB and the new ones will be 32-128 with a similar price drop.

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