Rumour: Apple’s Next Big Thing — A Cheaper iPhone

In the second half of 2013, Apple Inc. may release a cheaper iPhone, with a larger screen, for emerging markets such as China, India, Indonesia and maybe even Malaysia. If this turns out to be true, Apple could very well bring the fight back to Google in a market territory the iPhone is unfamiliar with — entry level smartphones.

Analysis: but WHYY??

Why would Apple want to disrupt the iPhone’s premium branding, in a shift to address less wealthy consumers? The summary answer: iPhone sales have saturated the top-end of the market, and the only way for Apple to continue to grow profits is by making iPhones affordable to less-wealthy consumers.

This is nothing new for the Cupertino company. Apple has no qualms about cannibalising its own products and it has been doing it aggressively. Just look at the range of iPods – which expanded from a single iPod, to iPods both with touchscreens and without screens, in smaller sizes and, with lower price-points. We’ve also seen this pattern with the iPad — hello iPad Mini. It seems that now the time is “ripe” for Apple to pursue this marketing strategy with the iPhone.

How would that work?

With competitors dishing out phones with up to 6.1-inch touchscreens, Apple seems motivated to offer something slightly bigger than its current largest screen of 4-inch on the iPhone 5. If a larger screen is to come at a lower price, it’s likely that the pixel resolution on a new, larger, cheaper iPhone would be nothing to shout about. Or Apple might choose to ignore screen size altogether and offer a slightly smaller bargain iPhone while maintaining the 4-inch iPhone 5 as a premium product. It’s too early to tell and Apple could go either way.

Further cost-cutting might come from the use of cheaper manufacturing materials, like polycarbonate, instead of the posh, but delicate, glass and aluminium casings currently featured on the iPhones 4, 4S, and 5. Apple could also use previous generation internals — like an A4 or A5 processor instead of the current A6.

To increase the number of consumer options without hiking up costs, typical moves among mobile phone manufacturers have been to offer each model of phone in a variety of colours, Apple may go down this route as well.

iEmpire

For five years, the iPhone brand has been at the forefront of smartphone news. At launch, it was years ahead of competitors’ touchscreen technology, and its iOS software ecosystem has become one of the most successful software platforms on earth.

In recent years, competitors have both innovated against and imitated the iPhone, giving Apple a run for its money. Despite the market’s less-than-stellar perception of the latest iPhone, the iPhone has continued to take a majority of profits in the smartphone industry:

However, if we look at the iPhone’s global share of shipped smartphones, it’s clear that iPhone users remain in the minority:

In September 2012, the latest iPhone was first officially launched in just nine regions: Japan, Hong Kong, Singapore, UK, Canada, Australia, France, Germany, and the USA, where it sold at least five million units on its first weekend in those markets, combined.

Three months later, when Apple launched the iPhone 5 in China, it announced that it had sold at least two million iPhone 5s over the launch weekend, in China alone. This is despite the fact that the iPhone 5 had already been available for months, via neighbouring Hong Kong and Japan, and on the Chinese grey market.

Here’s a simple comparison of the raw number of sales, in China, versus the first nine regions.

This is how many iPhone 5s were sold per 1,000 people, in China, and in the first nine regions combined.

Now this is how many iPhone 5s were sold, for every dollar of GDP (economic activity) that China produced last year. If you look at it from this perspective, for every dollar that it earned, China spent 83% more on buying iPhone 5s than the combined markets of Japan, Hong Kong, Singapore, UK, Canada, Australia, France, Germany, and the USA:

While an iPhone 5 might be out of reach from a vast number of poorer Chinese citizens, China as a whole still likes its iPhones. A lot.

There were horror stories of an apparent lack of Chinese interest in the iPhone 5, but it turns out that no one was lining up outside Apple stores to buy an unlocked iPhone 5, simply because these were only available via Internet pre-registration.

At the end of the day…

iPhones remain in demand.

Upon launch, the iPhone 5’s supply could not match its demand. This took months to resolve. Five years after the brand’s launch, older iPhones remain priced at a premium to competitors. The current entry-level iPhone, the iPhone 4, is priced at USD 450 (RM 1,366) for 8GB of non-upgradable storage, a 5-megapixel camera, and a 3.5” display. Compare that to the Samsung Galaxy SII or Sony Xperia S. Apple is only able to demand such a high price for such lowly hardware, on the iPhone’s superior brand value.

Demand for the iPhone is strong, even among buyers at lower price-points. To address demand for the iPhone at the lower end of the market, mobile carriers and retailers have resorted to slashing prices for the iPhone, even to zero. These conventional sales strategies sell call plans, products with lower brand value, on the marketing success of the much desired iPhone. As usual, carriers and retailers then make up the losses incurred from “giving away” the iPhone, over the life of the consumer’s call plan payments.

When Apple launched the iPad Mini last year, it debuted at two-thirds the price of the cheapest full-sized iPad. Looking at the trend, it’s a safe assumption that in 2013, Apple may launch a 4.5-inch iPhone, with a meagre display resolution, priced at about USD 300 (RM 900) — or at the very least, consider the possibility.

Apple is late in addressing market demand at the low-end of the smartphone market. While its too early to tell if the rumours are true, Apple’s next big thing could very well be a cheaper iPhone.