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Has Apple Inc. (AAPL) Just Made a Huge Mistake?

iPhone 5C. Source: Apple.

Two and a half years after unveiling the original iPod in 2001, Apple Inc. (NASDAQ:AAPL) would aggressively move downmarket and launch the iPod Mini in order to target lower price points, opening up an entire new addressable market segment. Nearly the same timeframe played out with the iPad; the Mac maker launched the iPad Mini approximately two and a half years after the first version debuted in 2010.

Yet, here we are over six years after the original iPhone was launched in 2007 and up until now the company has kept the iPhone product strategy limited to one new model per year. The only way that Apple Inc. (NASDAQ:AAPL) has addressed lower price points has been to progressively move models down the pricing spectrum as new ones are released. Relative to how long Apple took to move downmarket in its other major product categories, this expansion seems long overdue.

At long last, Apple Inc. (NASDAQ:AAPL) has made the iPhone into a bona fide family affair. Say hello to the iPhone 5C and iPhone 5S.

A tale of two iPhones
Apple’s rumor mill is as active as ever, and there weren’t any major surprises for investors paying close attention. All of the leaks heading into today’s event regarding both the iPhone 5C and iPhone 5S have proven spot on. The iPhone 5C will sport a plastic unibody in five different colors, while the iPhone 5S design remains largely unchanged save for the addition of a new gold color option.

Marketing chief Phil Schiller spent a lot of time discussing the iPhone 5S camera improvements. The iPhone is one of the most commonly used cameras in the world, and Apple knows it. Instead of furthering the megapixel war, Apple has decided to take cues from one of its rivals: HTC. The Taiwanese OEM took a dramatic strategic departure earlier this year with the HTC One by using a 4-megapixel sensor while emphasizing the better low-light performance and other benefits. Apple Inc. (NASDAQ:AAPL) is now sending the same message and has likewise increased the pixel size in its sensor. HTC’s strategy just got an implicit vote of confidence from one of its biggest rivals.

iPhone 5S. Source: Apple.

The integrated fingerprint sensor was also a shoe-in heading into today’s event. As if it wasn’t immediately obvious that this is what Apple had in mind when it acquired AuthenTec last year for $356 million, the company just made it official. The home button on the flagship model will now come with a “Touch ID” fingerprint sensor for a layer of biometric security, which can then be used to unlock the device, authenticate for purchase, and more. Apple is sharing any of this fingerprint data with anyone, even itself.

According to Tim Cook, Apple Inc. (NASDAQ:AAPL) is now “replacing” the iPhone 5, since the iPhone 5C is built out of the same internals and will now occupy the $99 subsidized price point. The new iPhone 5S will naturally take the $199 subsidized price point common for flagship smartphones, with the expected $100 incremental bumps for additional storage. The iPhone 4S is sticking around to occupy the $0 subsidized price point. Here is Apple’s new iPhone lineup on contract.

Model Subsidized Price Points Storage Configurations
iPhone 4S $0 8 GB
iPhone 5C $99 / $199 16 GB / 32 GB
iPhone 5S $199 / $299 / $399 16 GB / 32 GB / 64 GB

Source: Apple.

However, it’s when we get to unsubsidized pricing that the story gets interesting… and potentially disappointing.

A tale of two choices
Investors were initially quite excited about the iPhone 5C’s prospects — the stock jumped immediately after Apple made the mid-range device official.

The iPhone 5C has been heralded as Apple Inc. (NASDAQ:AAPL)’s key to tapping emerging markets, particularly those where the subsidy model is not utilized. Most investors were hoping for the 5C to price between $350 and $450, which would give it better odds of succeeding in China and India, among other key geographies. In order to meet those expectations though, Apple would face a dilemma.

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