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After months of rumor and speculation, Apple is launching a colorful plastic iPhone 5c. It’s the first time the company has offered color variants beyond black and white for any of its iPhones, and it marks a return to plastic that was first introduced with the 3G over five years ago. It’s also the first time Apple has launched two iPhones simultaneously, with a new high-end iPhone 5s set to replace the iPhone 5. Many had expected Apple to alter its iPhone pricing and aim to compete with low-cost Android devices in China, but it hasn’t. So why introduce a whole new model now?
Cost has always been an issue for the iPhone. Apple introduced the first iPhone in 2007 at a price of $599 exclusively on AT&T. It was a pricey offering for a smartphone market that was just starting to take shape, and some competitors even laughed at its introduction. Just over two months after its release, Apple slashed the price to $399. While there weren't a variety of price points available initially, more recently Apple has stuck to three tiers of pricing: $199, $99, and free on contract.
The three price points remain the same
These price points have helped the company sell a large number of iPhones. Apple sold 31.2 million of them in the most recent quarter, 20 percent more than the same quarter last year. While the iPhone 5 is undoubtedly a popular device, it's clear that the low-cost iPhone 4 and 4S have been propping up the sales numbers: Verizon, the nation's biggest wireless carrier by subscriber numbers, revealed earlier this year that half of its iPhone activations in one particular quarter were iPhone 4 and 4S. Consumers want a cheaper iPhone, but until now they’ve had to settle for last year's model.
It's a cheaper iPhone, but not a cheap one
With the 5c, consumers do indeed get a cheaper iPhone — but not revolutionarily so. In reality, Apple is positioning it firmly in the middle. The specs include a 4-inch display, an improved forward-facing camera, a bigger battery, and a polycarbonate colored shell. Essentially, it's an iPhone 5 with a plastic body that Apple is willing to sell as a new midrange device. It’s keeping an 8GB 4s model, which will be available free on contract, or $450 less. Instead of pushing iPhone price points down, as many had expected, Apple’s new 5c model is primarily designed to look and feel new to consumers.
This midrange iPhone will undoubtedly boost sales, but importantly it may help with the product line’s average selling price (ASP). A high ASP acts as a barrier to penetrating more price-sensitive markets — like China, for instance, widely seen as an enormous target for Apple’s continued success. Since 2009, the ASP of the iPhone has been well above $600, but in its latest quarter that dropped significantly to $581 from $613 in the previous quarter. If Apple wants to improve on that trend, it needs to increase market share in the face of low-priced Android devices worldwide. To increase profits, it needs to sell more iPhones as the smartphone market starts to saturate at the high end.
What about a cheap iPhone for China?
The timing for focusing on lower-cost hardware couldn't be better for Apple. Google just revealed it has activated 1 billion Android handsets, Samsung's devices continue to attack Apple's smartphone profits, and ultra-cheap Android handsets eat away at the all-important Chinese market. A China Mobile deal, widely expected to be announced tomorrow for the iPhone 5c, will provide Apple with access to over 700 million subscribers. This is a key area of growth for smartphones, and an opportunity for Apple to capture some of the profits in a region where Android devices currently dominate with over 90 percent of the installed base. However, without a wildly different pricing model, or perhaps an 8GB model of the 5c, it’s hard to see how Apple’s colorful machine, that's priced at $549 off contract, is primed to crack the most populous wireless market on the planet. Analysts had expected a price between $400 and $500, a sweet spot for Chinese smartphone buyers. Strangely, Apple appears to still be selling the iPhone 4 in China for around $422 off contract, despite not listing it on the main comparison site. This may well change tomorrow, too.
The iPhone 5c is Apple's answer to the Android threat in the midrange, but it’s merely a cheaper iPhone, not a cheap one. Given Apple’s old strategy, the iPhone 5 would have dropped to $99 on contract today anyway. The iPhone 5c could be a big deal in established markets like the US, where value carriers like T-Mobile stand to benefit from a new iPhone that isn’t coming to market with premium pricing on day one. China, though, remains a huge question mark.
A colorful marketing trick that might just work
If Apple can manage to convince consumers to buy the iPhone 5c in favor of the free 4S, then it will maintain and possibly even improve its lucrative margins. Given the choice, consumers may be more inclined to spend $99 on what amounts to a marketing trick: a "new" colorful iPhone with the internals of the old, instead of a free model that features the last-generation iPhone design. Apple has always been good at pushing its customers to spend a little more — and in established markets, that could be the case once again with the iPhone 5c. But for now, all eyes turn eastward.
