The cheaper iPhone rumour appears to be more than a rumour, with various reports suggesting Apple is soon to launch a low-cost iPhone, apparently called the iPhone 5C. The rumour was initially based on the idea that Apple needs a low-cost iPhone to compete in the huge emerging markets of China, India, Russia and other as-yet untapped smartphone markets. In this report, originally published in January 2013, we examine whether such a device is really the right move for Apple, and what a budget iPhone might do for the companies image if it was available worldwide. UPDATED 9 September 2013.
Why is Apple hosing a Chinese event?
The best evidence yet that Apple sees China as an important market came with news that the company will be holding an event in Beijing on Wednesday 11 September. This event is scheduled for 10am local time, which is nine hours after Apple's Cupertino event takes place. The delay in hosting the event lead to suspicion that Apple's CEO Tim Cook would be attending – but Beijing is a 12 hour and 20 minutes flight away from San Francisco, so it's unlikely that Apple's CEO will be attending. It's more likely that the event is being postponed to a more suitable time as the actual event takes place at 1am Beijing time. It is likely that there will be some news that is significant to that market.
It's possible that Apple has signed a deal with the world's largest mobile phone network, China Mobile, and will be announcing that deal on 11 September (more below).
Why is Apple hosting a Japanese event?
It's not only Beijing that will play host to an Apple Event. Apple has also issued invites to Japanese journalists for an event in Tokyo.
Where Apple faces challenges in China, the company is said to have seen success already in Japan. Apple already has three times the marketshare of rival Samsung in Japan, according to Reuters. This is despite Apple not having access to the subscribers of Japan's largest carrier – until now. Reports claim that Apple has now come to an agreement with Japan's largest carrier - NTT DoCoMo – which has 53 million subscribers. Apparently no deal had been done before now because the two companies couldn't come to an agreement over branding and sales margins – for example, the network is said to have requested that it print DoCoMo logo on the iPhones it sells.
Does China matter to Apple?
It is clear that China is well and truly on the map at Apple; Apple CEO Tim Cook has paid a number of visit to the country over the past year, most recently meeting with the head of China Mobile in July.
Apple also announced that would extend its plans to build 25 Apple Stores in China. In January 2013, Apple had 11 stores in the mainland China and one in Hong Kong - six of those stores opened in 2912. Cook also revealed that Apple recorded $5.7 billion of sales in China during the quarter that ended in September 2012.
What plans does Apple have for India
We hear a lot less about Apple's plans for India, although in an unprecedented move, the company did slash the prices of the iPhone 4 and 4S one week after lowering them following the launch of the iPhone 5 back in October 2012. Apparently Apple isn't too keen on the bureaucracy involved in doing business in India, where it has to tie up with national, regional and local distributors to get its products to consumers, according to this WSJ report.
Is it really necessary for the company to produce a budget iPhone to grab market share in these territories?
As the US and other western smartphone markets are said to have matured, Apple is looking to China and other emerging markets for potential customers. It shouldn't have too much trouble finding them - China is the world's largest smartphone market with 77 million smartphones sold in the second quarter of 2013.
With the smartphone market said to have reached saturation point in the West, are these emerging markets the only chance for Apple to grow market share? Not necessarily. If the adoption of Samsung's cheaper smartphones is any indication there are certainly people who cannot afford the iPhone. Apple can address this market with a lower priced iPhone model.
No. Apple already sells the iPhone 4, and iPhone 4S at a low price
As we noted back in January, Apple's usual practice that when it debuts a new iPhone it begins selling the old iPhone models at a lower price. For example, when Apple launched the iPhone 5 it reduced the price of the iPhone 4S and iPhone 4 with the entry point for an off contract iPhone 4 being £319. Apple did the same when it announced the iPhone 4 and the same when it launched the iPhone 3GS in June 2009. As a rule, Apple carries on selling the previous year's low-end iPhone and cuts the price of that model. This same practice could work in China and India.
The only issue is the fact that these older legacy iPhones use a different sized screen and a different port, and the company will not be able to take advantage of better margins on the parts it uses in newer iPhones if it cannot order in bulk.
Also worth noting is the fact that while a cheaper iPhone may be available, consumers may be put off by the fact that it is an older phone. Given the choice between a new Android phobe and a two year old iPhone they may well opt for new.
No. Apple is already offering Chinese customers a deal where they can pay for their phone in 2-year installments
Apple has introduced installment payment plans for shoppers in China. Fees can run from zero to 8.5% and can be spread over a two-year period.
Payments can be split into three, six, 12, 18 or 24 installments. Choosing 12 or fewer installments carries no fee. A fee of 6.5% of the selling price will be charged for 18 installments, and 8.5% for 24 installments.
The issue, however, is at the network's end. Reports have claimed that the Chinese networks are having to subsidise the iPhone more than they are prepared to pay. Calls for Apple to produce a cheaper iPhone are coming from these networks rather than the customers.
No. Apple doesn't care about market share. What matters is quality.
Senior vice president of Apple marketing Phil Schiller told the Shanghai Evening News back in January that Apple would: "Not develop cheap smartphones in order to grab market share".
"Some manufacturers use cheap smartphones to replace feature phones, but this is not Apple's product development direction," he said.
It looks like Apple may have gone back on its word here, but that's assuming that this cheaper iPhone is a 'cheap phone'. It seems likely that the new iPhone 5C will hit a mid-range category of phone, rather than the low-end entry point.
No. The big priority is to sign up China Mobile
The one thing that would really make a difference to Apple in China is if it could sign up China Mobile as a network partner. As we reported in January, the company had been in talks with China Mobile about selling the iPhone, and recent reports claim Apple CEO Tim Cook was in the country in July meeting with the CEO of China Mobile.
Why does this deal matter so much? China Mobile has more than 700 million customers, and without China Mobile, Apple's growth in the country will always be constrained. RBC Capital Markets analyst Amit Daryanani expected that Apple would finalise the deal with China Mobile in early 2013, that didn't happen, but it looks like something may be on the cards.
Indeed, news of the Beijing Apple event on 11 September, fuelled speculation that Apple may announce a long-awaited deal with China Mobile at that event.
However, Gartner analyst Sandy Shen doesn't believe a partnership announcement is on the card, she told Reuters: "I think the primary purpose of the event will be for a new product launch. Though an announcement with China Mobile is possible ... I won't hold my breath."
This echoes an IDC report earlier this year that suggested that China Mobile won't offer the iPhone until 2014, after the carrier is expected to launch its commercial 4G LTE network.
In related news, a leak last week suggested that China Telecom, the third largest mobile operator in China, would stock both new iPhones.
No. It could damage Apple's brand
Apple is trusted for producing quality products that are reassuringly expensive. Apple has never sold a "cheap" anything. It is a premium company that believes in charging a premium for its products.
To produce a low-cost product is contrary to late Apple founder Steve Jobs' vision. Steve Jobs strategy was to offer a small number of products, focus on the high end, give priority to profits over market share, and create a halo effect.
The Apple brand is associated with quality. Apple products are aspirational. If the company lost that association it would find its popularity waning.
This assumes that Apple will make a cheap iPhone, we don't believe this will be the case. What looks more likely is that Apple's iPhone 5C will fit in the mid-range market. Consumers will still preceive it to be a premium product in that category.
No. It could damage Apple's margins.
This is why investors got worried when the budget iPhone rumour broke. Even Apple bull Piper Jaffray's Gene Munster cut his target for AAPL, claiming that a less expensive iPhone will reduce Apple's margins.
Apple doesn't have to sell the most iPhones in order to make the most money from the smartphone market. It's profitability that matters, to Apple at any rate.
However, this is not necessarily true. As we noted in our article: How the low-cost iPhone will make money for Apple, while the company's profits have fallen for two consecutive quarters, and one reason for the declining profits is the fact that consumers are opting for the iPad mini over the regular iPad and the older iPhone 4S rather than the iPhone 5, it's not only the hardware that adds up to profits for Apple. There is another way Apple can make money from the iPhone - namely the software and services that the company sells to the iPhone owner. Apple has hinted at the transition to software and services in its earnings statements this year, breaking out those revenues for the first time. In the second quarter, for example, the category Apple labels as "iTunes/Software/Services" made $4 billion in revenue.
If Apple can continue to grow the marketshare of the iPhone then it can continue to grow revenue from sales from iTunes and the App Store, and from everyone that makes a device for the iPhone (the company takes a cut from anything that has the Made for iPhone logo on the packaging).
If selling a cheaper iPhone means that Apple can sell more iPhones it will also be able to sell more content on the App Store and more accessories.
No. Apple should avoid becoming too mainstream
If everyone owned an iPhone Apple wouldn't be cool anymore. In the early days Apple was cool because it "Thought Different". Then because Mac users were cool while PC users were fuddy-duddy. Then just plugging iPod earbuds into your ears made you cool. Now the iPhone is becoming so popular that youths are said to be turning their nose up at it. The irony of the Apple Samsung court battle is that Samsung some how came out looking like the underdog, and that may have done wonders for its image.
Apple needs to go back to the Think Different mentality. People don't want to follow the herd.
Then again, people want to know that they have made the right choice and bought the best product. For a long time Apple's iPhone was considered the best product and consumers were happy to pay a premium for it. This confidence was shaken by the problems with Maps last year. The market of people who have yet to purchase a smartphone will probaly be swayed by the popularity of a brand like Apple, as long as it remeins popular.
Yes. The iPhone is too expensive, how much will the iPhone 5C cost?
The entry-level iPhone 5 is priced at 5,288 yuan (£532). That's equal to about six weeks’ pay for the average urban worker, according to data from the National Bureau of Statistics. The average monthly pay in China is about 3,585 yuan (£360).
Local handsets producers are luring customers with smartphones costing less than 1,000 yuan (£100) each, according to IDC.
So how much will the new iPhone 5C cost? Analysts are estimating price point at $400-$500 (that's £255-£318, or 2,448-3,061 Chinese Yuan). It is likely that if Apple announces this price point people will be critical that it is too high, but as Business Insider explains in this report it's wrong to suspect that the low-cost iPhone 5C should be cheap. That report explains that Apple should be aiming at the mid-range market and that the $300-$400 price range is considered perfect for the middle-range smartphone market. Apple is currently in the high-end market.
Indeed, according to Morgan Stanley's Katy Huberty, Chinese consumers consider $486 (or RMB 4,000) to be an acceptable price range for the lower-priced iPhone – and that's even higher than the predicted prices.
Yes, China and India don't have the subsidized model for mobile phones
When we sign up for a new phone we rarely have to pay the full price of the handset, it is usually subsidized by the carrier (we basically pay for the phone as part of our contract). That is not the case in emerging markets. Piper Jaffray analyst Gene Munster notes that China and India don't have a business model where handset prices are subsidized by the networks, hence the need for cheap iPhone handsets.
As we mention above, the networks have been calling for Apple to offer cheaper phones because they are the ones who have to swallow the cost of the iPhone if it is subsidised.
Yes, to address the massive market potential.
A report from research firm Canalys claims that China's smartphone market has the potential to be twice as large as the US market. Apple's CEO Tim Cook has said that he expects China to become the company's largest market, surpassing the US. It's a big market – there are 1.1 billion mobile users in China.
As for India, with 850 million subscribers, India has the second largest number of mobile phone users in the world. Mobile device sales in India are forecast to reach 251 million units in 2013, an increase of 13.5%over 2012 sales of 221 million units, according to Gartner.
Like China, India is a very competitive market with 150 device manufacturers many of which are focused on the low-cost phone market.
Fitch thinks a low-cost iPhone will allow Apple to gain reasonable market share in emerging markets like China and India.
Yes. Or Samsung will win
Samsung’s a formidable enemy with a wide device portfolio and an established presence in these emerging markets.
"Samsung is an extraordinarily good competitor," said former Apple CEO Sculley. "The differentiation between a Samsung Galaxy and an iPhone 5 is not as great as we used to see."
Yes, Apple needs more variety
Samsung has a wider variety of handsets in terms of both price and screen size than Apple. Apple can't have all its eggs in one basket. Variety is the spice of life.