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Apple Inc. (AAPL): Riding the Highs and Lows of the Smartphone Market

Smartphones notched a whopping $239.9 billion in worldwide sales last year. That’s pretty hefty number, but what’s really interesting is that only 31% of the world’s population is currently using smartphones — leaving a huge amount of potential future growth.

For tech investors trying to figure out the smartphone market, there are two things you should keep in mind: smartphone prices are falling, but high-end devices can’t be counted out.

It’s not just about low-end smartphones
At the beginning of 2012, the average cost of a smartphone was $450, and now it’s just $375, according to IDC. ABI Research expects shipments of smartphones under $250 will increase from 259 million this year to 788 million in 2018. In places like the U.S., the drop in prices comes as a result of smartphone saturation. Right now, the U.S. smartphone penetration has reached 51% to 55% saturation, and will hit 80% by 2017, according to eMarketer.

iPhone 5 with iOS 7. Source: Apple Inc. (NASDAQ:AAPL).

But mid-range and high-end smartphones aren’t even close to being out of the game — and Apple Inc. (NASDAQ:AAPL) CEO Tim Cook definitely doesn’t believe so. In a conference call last week he said, “I don’t subscribe to the common view that the higher-end, if you will, of the smartphone market is at its peak.”

Depending on what analysts and research you read, Cook is either being overconfident or right on target. ABI Research seems to suggest the latter: “Mid- and high-cost smartphones will continue to play an important role for operators looking to seed their customer base with the most advanced smartphones.” Apple Inc. (NASDAQ:AAPL) has its own research to back up its confidence, considering it just sold 31.2 million iPhones in the fiscal third quarter of this year — a record for the company.

It appears that Google Inc (NASDAQ:GOOG) is siding with Apple Inc. (NASDAQ:AAPL)’s strategy. The company will spend $500 million to market its forthcoming mid-range to high-end Moto X phone — more than Apple or Samsung’s entire mobile marketing budget. Some think Google’s launching the phone to set a high standard for phones using Android mobile operating system, but with a budget like that, it’s more likely the company is getting serious about its role in the smartphone device segment.

Motorola Mobility’s new logo. Source: Motorola.

One thing the majority of the research and analysts agree on is that smartphone prices will continue to drop, and that as prices trend down it will eat into revenue and profits.

A recent report by Citigroup Inc. (NYSE:C)‘s Glen Yeung stated, “In order to achieve the steep rate of adoption associated with such expansion, we assert that smartphone ASPs will need to fall, further moderating industry revenue growth.” Gartner Inc (NYSE:IT) Research echoed a similar sentiment recently: “The challenge in the smartphone market is also that, as penetration moves more and more to the mass market, price points are lowering and in most cases so do margins.”

As smartphone prices are dropping, it’s harder for larger companies to keep up with smaller vendors in emerging markets, which can put out phones with decent specifications for lower prices. That may be why Apple Inc. (NASDAQ:AAPL) is reportedly going to launch a cheaper iPhone in the fall, and why Nokia Corporation (ADR) (NYSE:NOK) is releasing the new Lumia 625 in Asia, Africa and Latin America.

Nokia Lumia 625. Source: Nokia.

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