Paul Deneve is leaving his job as head of high-end fashion house Saint Laurent to return home to
Targeting a lower price
While Apple has spent the last several product cycles demoting the last two iPhones into lower-priced categories, what it hasn't done yet is explicitly targeted lower price points for its smartphone. This is confusing in the U.S. where the iPhone 4 is routinely available for free on contract. How can anything be cheaper than free, right? The answer, of course, is that the carriers still pay Apple something around $400 for that iPhone 4. This presents a problem for Apple in a number of countries where an entry-level price of $400+ makes the phone simply unaffordable.
In Spain, for example, carriers have moved away from the subsidy model, and Apple's market share has fallen into the single digits overall. IDC's latest report has Apple's share of the Western Europe market falling from 25% to 20% over the past year. And in the fast-growing Indian market, Apple is not even among the top-five manufacturers.
The scary part for Apple is IDC calls the European phenomenon the "second wave," where buyers don't even believe they need a smartphone, but will buy one so long as it's cheap. In India, by contrast, it has to be cheap; incomes are simply lower there.
Apple's answer is fairly simple: Take the iPhone and reduce its cost enough to make it more competitive. The question that has yet to be answered is just how competitive. In India and China, Android phones that are less than $200 without subsidies are routinely available. An iPhone 5 supposedly costs Apple a bit more than $200 just to build, and that's without any profit margin. The low-cost model will allegedly substitute in a plastic outer shell and it's likely some component costs have come down over the past 9 months. In addition, higher volumes should allow Apple to negotiate better deals with suppliers.
But there's a difficult path to tread here between investors, value customers and premium customers. The first group has hammered Apple in the past over declining profit margins. Given that Apple's stock sits 40% off all-time highs, it's reasonable to argue they already expect the worst. The hope is Apple is ignoring their concerns here. The second challenge is more fraught. If the low-cost phone is too good and too available globally, it can and will cannibalize sales of the higher-margin iPhone 5S (or iPhone 6, whatever the September model ends up being called).
Familiar territory
Apple has been down this road before, though. When it was busy dominating the MP3-player market with the iPod, it decided to press its advantage 3 years in with the much-cheaper (and smaller) iPod Mini. The risk was that the offspring would crowd out the larger iPod and it did, becoming the most successful player in the lineup until Apple went and canceled it less than 2 years later for the iPod Nano. That kind of crazy allowed Apple to dominate the music-player market until it went and blew the whole thing up for good with iPhone.
In tablets, Apple has taken a similar tactic with iPad. The smaller Mini is now the best seller, although the larger one remains an important part of the product line and carries higher margins. It's clearly differentiated and sells to industries like healthcare and the airlines, where the larger screen is essential. There's even a school in the Netherlands that's making the big iPad its central learning tool, replacing not just books, but chalkboards in a radical experiment.
Mockups of the lower-cost phone and the rumored September iPhone refresh suggest the two will look more alike than different. The more expensive model is expected to carry some significant improvements, especially around the camera and quite possibly in a fingerprint sensor to replace the need to enter passwords, but the low-cost iPhone is rumored to be available in a series of bright colors that should have some inherent appeal.
The solution here seems obvious, even though Apple has been reluctant to take it. The company currently loses some small portion of sales to people who demand a larger-screen. Whether it's for gaming, watching videos, easier typing or just because the smaller screen is harder for them to read with aging eyes, every premium smartphone that isn't an iPhone has a larger screen. Apple can differentiate here simply by moving the premium product up in size -- perhaps not to the 5-inch screens of some Android models, but somewhere above the 4-inch size of iPhone 5 -- while keeping the low-cost model on the 4-inch screen.
In the U.S., it could offer a slightly higher memory configuration of the phone at a slightly higher price than might work in India such that entry pricing here is ends up closer to $349 while in the developing world it's more like $249. Realistically, this kind of scenario opens up the possibility of Apple selling far more phones through far more carriers than it currently does. It wouldn't be shocking for it to move an incremental 100 million units in 2014 this way. (Total iPhone sales were 125 million in fiscal 2012.) The overall profitability of iPhone wouldn't come close to doubling, but this is the start of a "long game". And that long game includes AppleTV. I'll take a look at how it all fits together over the holiday weekend.
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