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.