Apple opts for profit over market share with not-so-cheap iPhone 5c

“The higher-than-expected price of Apple Inc’s new cheaper iPhone eased worries about gross margins, while arousing concerns the company was not being aggressive enough in its fight against Google Inc’s market-dominating Android operating system,” Eileen Anupa Soreng, Neha Alawadhi and Saqib Ahmed report for Reuters. “‘We worry that Apple’s inability/unwillingness to come out with a low-priced offering for emerging markets nearly ensures that the company will continue to be an overall share loser in the smartphone market until it choses to address the low end,’ Sanford C. Bernstein analysts said in a note. Still, Bernstein maintained its “outperform” rating on Apple’s stock, saying that it expected the new iPhones to have little impact on gross margins.”

Soreng, Alawadhi and Ahmed report, “‘Rather than offer attractive pricing for consumers, and move the iPhone 5c into a new and growing price segment, Apple retained a premium pricing strategy in targeting the $400-800 smartphone segment,’ Credit Suisse analyst Kulbinder Garcha said in a note. Garcha said that Apple’s share of the smartphone market, where it faces intense competition from Samsung Electronics Co Ltd, would likely fall to 15.5 percent this year and 13.1 next year from 18.1 percent last year.”

Apple's new iPhone 5c
Apple’s new iPhone 5c

 
“Saying the 5C was “nobody’s low-margin phone”, Cowen and Company analyst Timothy Arcuri said Apple’s new relationships with Japan’s NTT DoCoMo Inc and China Mobile Ltd supported the view that 2014 Street estimates for Apple earnings looked too low. Arcuri said gross margins for the 5C appeared to be as high as the mid 50 percent area,” Soreng, Alawadhi and Ahmed report. “Lazard Capital Markets raised its share price target to $570 from $500, noting a ‘best in class user experience… With escalating investor focus on Apple’s diminishing product differentiation, slowing growth and margin compression, we think it’s time to revisit what makes Apple unique,’ Lazard analyst Edward Parker wrote in a note. ‘We propose that Apple is a ‘storage’ company, not only levered to data creation but instrumental in driving data creation in ways its competitors are not,’ he said.”

Read more in the full article here.

MacDailyNews Take: By SteveJack

Many analysts also called for Apple to invest their resources in creating a cheap netbook.

Those “analysts” didn’t understand Apple then and they don’t understand Apple now.

Apple does not exist in order to pile up meaningless market share. Apple exists to delight customers.

When you do that, you end up with the best customers – the cream of the crop – the type of discerning customer who will pay for apps and content, not constantly expect coupons, BOGOF deals, and other assorted freebies.

The also-rans of the world can have as many of those type of “customers” as they can amass and they can swim in their meaningless, bottom-of-the-barrel “market share” until they drown.

SteveJack is a long-time Macintosh user, former web designer, multimedia producer and a regular contributor to the MacDailyNews Opinion section.

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The true objective of Apple’s new iPhone 5c – September 10, 2013
Why would anyone buy an iPhone 5c instead of an iPhone 5s? – September 10, 2013Apple reveals flagship iPhone 5s with Touch ID, the world’s first and only 64-bit smartphone – September 10, 2013
Apple unveils iPhone 5C; pre-order September 13th, on sale September 20th – September 10, 2013
Apple to release iOS 7 with completely redesigned user interface on September 18 – September 10, 2013

50 Comments

  1. well, ….. i dunno….

    there is certainly no argument that mr. apple has been very successful in producing premium products at a premium price and margin, and in the process building a sterling reputation.

    but i am thinking that the earth is shifting under their feet and that they are being none too nimble in responding to the changes.

    they innovated, built and enjoyed a great lead in iphones and ipads, but their competitors (sorry for the mis-spelling of the word copiers) are nipping at their heels now, albeit with generally inferior, but demonstrably less expensive, products.

    i think mr. apple is missing the boat, in it’s pricing of the 5c. in this cut throat world a superior product is not necessarily destined to win, when most of the world can’t afford it.

    better to build upon apples reputation as an aspirational brand, build a readily affordable phone for the third world, get them excited about the apple ecosystem and as their income rises they will continue to buy apple products, just further up the price-line.

    so margins on those products are thinner? so what? look at amazon. wall streets valuations on their basically non-profit operation are sky high. works for them can work for apple, besides there are plenty of us around the world who can afford the premium prices and margins apple is famous for and keep the company plenty profitable, but there are way more people who can’t = and they are your addressable market.

      1. well, that wasn’t my point, nor did i even inadvertently intend to imply that.

        but now that you raise the notion, my response is, no, they didn’t.

        not directly anyway.

        but after the spectacular tumble our apple stock portfolios took since last september, and the yielding to walls streets importuning for an increased dividend i think it is reasonable to imagine that mr. apple ( in the post jobs incarnation – as steve pretty much held wall street in contempt) keeps a very, very close eye on margins and is not at all interested in losing more market cap because w.s. says margins are shrinking. (one of their favorite arguments)

        you know, once burned twice shy.

        so in an indirect way wall street sentiment may well have contributed to influencing the pricing

      1. Ha ha. I hear ya. Well, look. Apple just released what looks to be a $550 plastic iPhone. And they can. The alternatives are just not there. That is more a negative comment about everything Android, as well as all the other players who have screwed the pooch so royally. Looking directly at you, Blackberry.
        It really is just Apple and …. clowns.

  2. I would guess the Analyst also advised Apple to follow Microsoft’s software only model or any other model that Apple was not conforming to. Apple to this day is not the market share leader in desktop operating systems. Yet, they changed the rules and flush with sales followed by a whopping cash hoard. Apple is doing fine, let the ignorant and armchair CEO’s play their theory’s. when the real game is afoot, the competent will always emerge.

  3. The iPhone 5C is a new cheaper model, not cheaper in components or build quality, but cheaper to produce. I think the high precision of iPhone 5/5S manufacturing proved to be too cost prohibitive.

    It’s an extremely smart move on Apple’s part. Not only are they able to increase overall margins, but they also now have a second tier model iPhone that will appeal to a younger audience.

    Yeah, those that wanted a cheaper model will complain. But so what? Apple’s not in business to make analysts happy. Their in business to make THEIR customers happy.

  4. What do these people expect a lower cost iPhone to consist of? A lower quality screen? Slower processor? Less storage? The only way to do lower cost, other than improvements in manufacturing efficiency (which Apple tends to be good at from the start) is to make them poor quality, low profit, or of lower spec. Poor quality would damage their brand, low profit isn’t worth it, and lower spec would be covered by selling older models. Apple sell older models, but only to the level that it’s worth supporting them. They want people to be using current software so that developers can cater to them and sell them apps and they and Apple can make money off them.

    A low cost iPhone would be cheap crap not worth selling.

    1. Less storage–exactly right.

      Since each step up (16-32-64 GB) is $100, if they’d offered the 5C in 8 and 16 GB the unsubsidized cost could’ve been $499 and $599.

      (Yes this is a semi-sarcastic criticism against Apple’s decision to start the 5S at 16 instead of 32 GB, and for charging an outrageous amount to jump to 32 GB)

  5. This comment is NOT mine. It’s an imposter who has some beef with my ideas, and decided to log in with MY name, to make me look bad. I would never disparage someone who lives in a different environment than me.

  6. Amazing. By now, everybody must know it: Apple doesn’t make crap. Most Apple products ARE expensive. Some other Apple products ARE affordable. No Apple product IS cheap and there will never be. Do you want something cheap? You’re then with the wrong brand.

  7. I don’t think it’s comparable to netbook. This is equivalent to Apple making MacBooks in 10 different color and say people are going to buy that over netbooks. For the netbook, Apple actually had an unique answer for it, which was the iPad.

    Unless Apple has something unique or completely different to offer, I don’t think iPhone in different colors is going to sway people from getting free Android devices.

  8. One thing about the MDN take – I own an iPhone, and I am happy with my iPhone. But I do not pay money for apps the way they imply the typical iPhone user does. I have many apps on my phone, and almost all of them are free. When I find an app I really want, I will pay for it, but those are so very few and far between. I still value my dollars. 😉

    If anything, I’ll pay extra to get the iBooks version of a book instead of the Kindle version, but apps, I stick to the free stuff.

  9. In a world where the middle to upper class is stagnant due to reduced wages, salaries, unemployment and distrust for their future, how can we expect year to year growth on a company dedicated to that sector?
    We should be celebrating, all, including bloggers, analysts, and the public at large, that Apple is still making more more money than all other companies within their business sector. That they are still growing, even though at a slower pace, that their margins are in the upper range of all estimates, even though all others in the business are struggling, including Samsung. Whom even though sells lots of phones, mostly cheap ones in the third world, cannot match apple margins or profits.

    I laugh every time I heard google talk about one billion activations. It means nothing. Google can only count on a quarter of those android activations for revenue. Why? Because feature phones, and cheap smartphones do not bring any revenue to anyone, except that particular hardware vendor. When Samsung count as a sale, google as another activation, a tablet being giving away with a television or some other gadget, neither gain a loyal customer. Most of those giving away items end up in a drawer. That’s why the metrics on usage are so askew against them.
    And all those phones sold in China by no brand manufacturers come only with 2G data, used mostly to watch pirated movies and TV. Yes, most of those Chinese phones can pick up off the air channels. Just like our old rabbit ears.
    But the 25% of Chinese that are earning enough to buy higher priced items don’t buy the cheap stuff that analysts and bloggers count as android dominance in that market. Apple is very happy to just sell to that 25% of that market. Which by the way it’s a larger segment than the whole US population.

    So again, market share will be use to say how Apple is losing here and there. Really, it’s one company against the world! But the profits will be again in line with what’s been in the past. Only with Apple profits have become a non issue, market share is king. Basically for these guys nothing is good enough. It reflects their personal bias due to the fact that Apple has made them look like fools so many times.

    My comments are not directed to those wanting to trade for quick profits, 10% here, 8% there. Yes it is more difficult to do that with any high priced stock. But that’s not specific to Apple. But when the market makers have so much control to how equities are priced, there is no way to value any corporation like it was done in the past. Fundamentals…out! Even technicals can’t be used today for trading any of the Wall Street influenced darlings or dogs.
    I hope that Apple stock price drops so low one day that the board decides to take the company private. Yeah, let’s Apple just make great products that everyone wants, without having to listen to kooks like Icahn. Borrow 150 billion so he can make a killing when he dumps his shares. Typical parasite.

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