Three Guys and a Podcast

Three Guys and a Podcast: Apple News & Analysis

January 11, 2013 at 9:43am Pacific Time
by: Mark Reschke
Categories: iPhone, News, Predictions, Products, Review, Rumors

Cheap_or_costly_iphone

The mobile industry is abuzz with the thought of Apple turning to a cheap, low-end iPhone for the Asian markets. Unfortunately there seems to be minimal analysis to such a move by Apple, nor do analysts seem to be paying any mind to Phil Schiller's interview in China, as he suggested that Apple would never go the way of cheap smartphones. What could Apple do to address the lower-end market? Or should Apple simply let Android and Microsoft battle it out for the lowest common denominator, leaving a wake of continual garbage for cheap-is-as-cheap-does consumers to haggle over?

To answer these questions, the mind of Apple must first be understood. No one has been able to figure out Apple's next play to any great capacity since Steve Jobs returned to the company in 1997, and I am certainly no exception to that rule. Howevr, in 2006 when I was working with Intel, and employee close to Apple told me: "When Apple enters a market, they don't enter it to become a player, or join in the party -- they enter a market to utterly dominate it." Looking back, one can hardly argue that domination isn't an Apple core value.

In the case of phones, Apple has cleaned house of the industries profits (smartphones or otherwise). Apple is dominating mobile phone profits. Maintain iPhone margins moving forward, Apple must eliminate the threat of the "good enough" smartphone, the traditional Microsoftian-like products, that pose a threat to overtake the iPhone with just a few Apple missteps.

The tipping point in the smartphone industry is 2013, but lets get the analyst nonsense out of the way right now. Anyone stating Apple will build a cheap iPhone is off their rocker. That isn't how Apple works, thinks or executes it's plans. When you hear talk of a cheap iPhone hitting the streets with low-end anything, question that analysts sanity or motives (I typically lean towards the latter). Low-end is not how Apple has built its dominating fortress.

Evidently Wall Street has failed to understand that Apple has low-end iPhones already, via the iPhone 4 and 4S. The only major issue with current and older generation iPhones, is they do not address China Mobiles particular bandwidth. Thus, the path for Apple is fairy straightforward:

  • Continue to produce a high-end iPhone. Future generations will either include China Mobile frequency capability, or Apple will -- for the first time -- produce a specific China Mobile frequency version.
  • Apple continues to move iPhones downstream as per normal.
  • Apple simplifies the iPhone lineup for China Mobile:

                  1. iPhone 5S or 6 at regular prices or subsidized plans.

                  2. The iPhone 5 is given China Mobile's frequency chip set, and a 4GB version.

                  3. No iPhone 4S will be offered with China Mobile.

Launching in this fashion with China mobile does a few things. It never alienates the rest of the world from having something Apple is offering from one region to another, and for at least a while (assume a year), Apple will achieve strong sales from China Mobile's high-end customer base.

Apple then has a year to maximize sales with China Mobile's affluent customer base, the 4GB iPhone 5 can slide south, into a free position (with subscription plan), or be bought outright for $299. The middle tier iPhone 5S/6 goes for roughly $100 USD and the new high-end iPhone is for those willing and able to afford it.

Apple should be able to catch 2% of China Mobile's high wage earner customers in year one. That may sound trivial, but with nearly 1 billion customers, that's an additional 20 million iPhones sold. A year later, when high-end customer sales are maximized, Apple will further expand their sales figures with the "free" iPhone 5 rounding out the bottom of the line.

Apple ads tens of millions of iPhone customers in China, expands their economies of scale, keeps their lineup amazingly simplified, while maintaining margin. This simple approach, evidently, is far too difficult for analysts to understand.

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