Apple iPhone 5C Attacks Mid-Market, iPhone 5S Delivers Security, Performance And Seeds For Wearable Technology

Apple stock traded down 1% ahead of its media event today, traded up during the event and ended back at $501 as the presentation concluded.   However, Apple’s announcements regarding the new iPhone 5C and the iPhone 5S are truly game changers.  Here’s why:

(Disclosure:  I have a long position in Apple.)

The iPhone 5C offers an A6 chip, retina display, 8 megapixel camera and the new iOS 7 all housed within an attractive color form factor.  The iPhone 5C will be available in blue, green, yellow, white and red.   Apple will offer the new devices at $99 for 16GB and $199 for 32GB, a very attractively priced mid-range phone.  Alongside the new phones, Apple is recapturing margins and sales that went to the ecosystem of accessory makers.  Apple will offer (“adorable” according to my 14-year old) coordinating cases for $29 (read, higher margins).   The iPhone 5C effectively hits the mid-range market with all of the product allure for which Apple has made its brand, at prices more affordable, and seemingly at prices and with cases that preserve margins.

The iPhone 5S offers a 64-bit A7 processing chip with an accompanying M7 motion-sensoring chip.  Make no mistake:  these are technology game changers.  The A7 offers 40 times the CPU and 56 times the graphics performance of the original iPhone potentially making it the next “must-have” device for gamers.  The A7 coupled with the M7 enable an entirely new generation of fitness and health apps on the iPhone 5S because the iPhone 5S will be able to track users’ movements and work with the new Nike Move app.   Health/fitness has been the killer app to date on wearable technology and Samsung's new Smart Gear watch relies on a bluetooth connection to a Samsung Galaxy device.   As Apple tackles the heavy lifting of this wearable technology killer app in the guts of its iPhone 5S, it opens the door for a sleeker companion than Samsung's first Smart Gear and a smarter, more accurate competitor to the Nike Fuel Band, Jawbone UP, etc.

The iPhone 5S also offers improved photo-taking features including color filtering, image stabilization and slow motion photography.  Apple did not mention anything about megapixels in the camera leading one to believe that Apple is offering greater software enhancements to the existing 8 megapixel camera.   Clearly, this is less than the new 13 megapixel camera of the Galaxy Note 3.  On the other hand, the larger the photo, the greater the bandwidth required to send it.

The iPhone 5S includes a fingerprint sensor for greater iPhone security and will enable “One Touch” purchasing from the iTunes store. Apple will set the standard in terms of fingerprint sensor security, and this has enormous implications over time for possibilities in mobile commerce.   The security value proposition offered by this fingerprint sensor technology for vendors and consumers is not offered by any other company.  The A7 + M7 chips and the fingerprint touch sensor technology raise the standards for smartphone features sets, and create a clear stake in the ground for Apple in the nascent emerging mobile commerce and wearable technology industries.  (Correct, the iPhone 5S is not wearable technology but with the new capabilities packed inside the phone, one can see how an accompanying “band/watch” can be deployed.)

The iPhone 5S will sell at the standard price points:  $199 for 16GB, $299 for 32GB and $399 for 64GB.  The iPhone 5 will be retired, the iPhone 5C will be sold at $99 for 16GB and $199 for 32GB.  And the iPhone 4S will still be available at 8GB.  (All prices with two-year contracts.)

Apple also announced its distribution through NTTDoCoMo and that iPhones will be launched in China on the first launch date September 20.  The new iPhones will be available in 100 countries by December 2013.  What Apple did not announce was an agreement with China Mobile , which was widely anticipated.  The China Mobile deal did cut both ways with analysts, some citing that such a deal with reduce margins and others citing that such a deal would increase revenues.  (If one extrapolated last year’s revenues and earnings, a 4% overall decline in gross margins would be offset by a 10% increase in sales, meaning that such a deal could end up being neutral with long-term benefits of a bigger addressable market.)  That said, “China” was highlighted on the country slide and a media event is to occur in China tomorrow (later today, US time).

Apple’s new iOS 7 will be available on September 18 for download on all iPhone 4+, iPad 2+, iPad Mini and fifth generation iPods.  Investors may have expected limited backward compatibility to force an upgrade cycle, but consumers are very happy given Apple’s recent “missteps” with shortening product cycles for the iPad.  Instead, Apple announced that their iWorks suite of productivity tools would be made available for free on new iOS devices, creating a "pull" for an upgrade cycle to the new iPhones, without upsetting older model owners.

As of this writing, Apple stock has sold off further to $495.

I suggest that investors are missing the opportunity here.  The iPhone 5S offers something for many constituencies.  It offers the security for enterprise users and personal users who are concerned about the information stored on their iPhones.  It also offers a security feature that can provide Apple an entry into mobile commerce with a unique value proposition to users and vendors.  The iPhone 5S offers gamers greater processing speed and graphics than have been available previously on an iOS device.  The iPhone 5S offers fitness junkies a potentially better alternative to less-accurate Nike Fuel bands or the bulky Samsung Smart Gear watch.  The iPhone 5C is an attractive mid-range phone with functionality and style.

The television media attributes the poor stock performance to “the lack of a wow factor.”  Criticisms are that the phones are the same and, because they look the same, they lack innovation.  The iPhones may be in the same size casing (read:  maintaining form factor maintains gross margins) but under the hood is remarkable.  Consumers want data quickly on their phones and they want it to look great.  Apple gave us performance, security, and greater motion and photography features.  And these features have the potential to define the nascent emerging industries of wearable technology and mobile commerce.

I believe the "wow factor" comes September 23 when Apple announces how many iPhone 5Ss and iPhone 5Cs are sold on their weekend debut.  Investors stay tuned.