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The Smartphone War: Apple Inc. (AAPL) vs Samsung

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By now, most of the world knows what an iPhone is — and they know it typically doesn’t come cheap.

That is the problem Apple Inc. (NASDAQ:AAPL) faces. It must decide whether to keep catering to the high end of the phone market, reaping fat profits from relatively fewer sales, or offer something cheaper to compete with lower-cost alternatives like Samsung’s phones.

Worries about low-cost competition weighed on Apple’s shares after reports that the company had reduced orders of screens for the iPhone 5, suggesting that demand for the phone could be weaker than expected. Apple shares have been performing so poorly since August that Nokia Corporation (ADR) (NYSE:NOK) shares have actually beaten them by 157 percent. Within the past six months, we have seen shares of Apple Inc. (NASDAQ:AAPL) peak around $700 per share in September and then fall steadily, losing about $200 per share in about four months.  Apple had expected to order 19 million displays for the iPhone 5 but cut the order to 11 million to 14 million. These numbers came from sources in the supply chain, the companies that make components for Apple products. The reduction in orders for screens could be related to excess inventory, or because consumer demand for the iPhone5 just was not as strong as Apple had predicted.

Apple Inc. (AAPL), iPhone 5

Courtesy: Apple Inc. (NASDAQ:AAPL) Press Info

However, I believe there is plenty of room left for Apple to grow and China is a particularly important market. The iPhone is available there for China Unicom, a major wireless network. But Apple has yet to strike a deal with China’s bigger cellphone carrier, China Mobile, which has a whopping 600 million subscribers — about six times as many as AT&T. That is Apple’s opportunity for huge growth.

Apple’s strategy for growth  might be to go after more price-conscious consumers, because once they become customers, they are likely to keep buying other Apple products. Perhaps the key to that strategy might as well be a cheaper iPhone.

But even if Apple Inc. (NASDAQ:AAPL) were to offer a less pricey iPhone, it is unlikely it would be dirt cheap. If it chose to play more aggressively in foreign markets, Apple would more likely introduce a midprice model that is cheaper than the newest iPhone but more expensive than the cheapest phones on the market. That would be similar to its approach with the iPad Mini, which is more expensive than the smaller tablets sold by Google (NASDAQ:GOOG) and Amazon, but much cheaper than the full-size iPad.

The news of Apple’s cut in component orders came around the same time as rival Samsung Electronics announced that it sold more than 100 million of its Galaxy S smartphones. Samsung is by far the most important partner of Google’s Android operating system. Not only does it dominate from a market share perspective, it’s really the only Android OEM that is actually making lots of money.

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