According to several recent news reports, Apple Inc. (NASDAQ:AAPL) has finally decided to launch a cheaper iPhone model. The Cupertino giant may announce both its high-end iPhone 5S and the lower-priced iPhone 5C at an event scheduled for Sept. 10.
Wall Street analysts are concerned about falling profit margins over the last quarters, and a cheaper iPhone won’t help at all in that department. However, Apple Inc. (NASDAQ:AAPL) is making the right move by putting long-term growth prospects ahead of short-term profit margins, so investors should welcome the iPhone 5C as smart strategic decision.
The changing smartphone market
Apple Inc. (NASDAQ:AAPL) is still the market leader in the U.S. smartphone market, with a market share near 40%, versus less than 24% for Samsung according to data from COMSCORE, Inc. (NASDAQ:SCOR). The carrier subsidy model means that consumers get to buy the iPhone for a relatively low price, and the company has a remarkably loyal customer base.
But in other countries, especially in emerging markets where carriers don’t usually subsidize the purchase price, the iPhone is just too expensive for many customers. Gartner Inc (NYSE:IT) estimates that Apple Inc. (NASDAQ:AAPL)’s market share on a global scale has fallen to 14.2% in the second quarter of 2013 versus 31.7% for Samsung.
As the smartphone revolution expands to emerging markets, pricing is a big issue to consider. Apple Inc. (NASDAQ:AAPL)’s faced with a tough decision: If it’s going to maintain its prices, it will almost undoubtedly continue losing market share to Samsung and other lower-cost manufacturers.
During the last quarter, the average selling price of iPhones was down to $580 from $613 in the previous quarter as more consumers chose cheaper versions like the iPhone 4 and 4S over the more expensive iPhone 5.
The company sold 31.2 million units during the quarter, a 20% increase versus 26 million iPhones sold in the same quarter of 2012, so the iPhone is still in demand, but the sequential decrease in prices shows that consumers are more price conscious.
The pricing issue is not only related to international expansion; smartphones are moving beyond the early adopter phase, and quality exigencies are usually reduced when a product is adopted by the masses. Many users simply want a smartphone providing basic functionalities like access to email and social networks, and they feel no need to pay for an iPhone when they can find cheaper alternatives which are good enough for them.
Regardless of the reasons for this change, the fact remains that the smartphone market is changing, and pricing is a much more important competitive element that it was a few years ago. Apple Inc. (NASDAQ:AAPL) will need to choose between market share and price, it can’t have them both in the current environment.
Margins and growth
Consumers are already choosing previous iPhone models due to their lower prices, and this is taking its toll on margins. The iPhone 5C will reportedly be made of plastic, which means lower raw material expenses and probably an easier manufacturing process, too.