The World Need Cheap iPhones, Will Apple Listen?
On July 22, Apple Inc. (NASDAQ: AAPL) released its quarterly earnings report displaying a strong performance. With iPad, Apple’s second most important product, sales dwindling, much of this strong performance was down to the iPhone.
In the quarter the company shipped close to 35 million iPhones, which is 12.7% increase compared to a year earlier. Nevertheless, the iPhone revenue growth was slightly lower, standing at 9%. In the quarter, the iPhone had a mix of cheap lower-end (iPhone 5C and 4C) and premium handsets. So while the increased sales was driven by the high-end 5S, the blend of lower-end models played a great deal in helping the company gain traction in the emerging markets.
When I say cheap lower-end handsets, you might be tempted to think that they are indeed cheap. But how cheap is $500 for a low-end iPhone?
China Market: Samsung Loses its Market Leadership
Chinese smartphone maker Xiomi is now the leading vendor in China with over 12.5% stake tightly followed by Lenovo with also over 12%. The two Chinese companies have both overtaken Samsung, which is currently ranked 5th in the market with 9.8 % stake down from 18.5%.
In emerging markets, price is far much important than the brand reputation or its technology. Lower-priced handset models continue to dominate the market at the expense of pricy ones. This explains why Samsung is no longer the market leader in China.
While in the last quarter iPhone sales were tremendous in China, Apple brand is specifically for the affluent. Since the local smartphone vendors give their customers a perfect blend of price and tech knowledge to win the home market, Apple has been reduced to a niche mobile phone dealer. But China is a booming Smartphone market Apple cannot afford to ignore.
Why Apple needs cheap iPhones
The late Steve Jobs, Apple co-founder and Tim Cook’s predecessor, instilled “obsession with quality” into the DNA of this company. To Apple, there is nothing like average product but the best one. For a long time now, the company has been creating premium products and getting the best out of its customers’ wallets. But how long can it keep doing this?
During the reign of Jobs, Google Inc. (NASDAQ: GOOG) had hardly set foot in the Smartphone market. Nobody knew Android would become world’s leading mobile platform. To remind myself how the situation was then, I watched a December 2009 CNBC documentary dubbed “Inside the Mind of Google”. The narrator Maria Bartiromo says:
“…but it will still be a struggle for Google Android to challenge the “800-lb gorilla of mobile phones, Apple!”
But isn’t this statement quite similar to Bill Gates’ alleged comment “640-K ought to be enough for anybody”?
Now Google Android has dominated the Smartphone market, thanks to price differentiation offered by Android phone makers. With a gross margin of between 49% and 58%, iPhone could still be sold at cheaper price without causing any harm to the company’s profitability. What’s more cheaper iPhones would attract more buyers fending off competition.
It is obvious that price is a critical driver in the shift of balance in the battle to control the smartphone market. But since even Apple’s lower-end handset is not all that cheap, price does not favour Apple. And this is why it needs to work on cutting down the prices of its mid-tier iPhones.