Apple’s new iPhones continue to aim at high-margin sweet spot

  • Two variants of iPhone 5 unveiled; 5S with better hardware, 5C only slightly cheaper
  • Both expected to succeed in sales with die-hard fans' backing, but will likely struggle in emerging markets

NEWS ANALYSIS AS Apple Inc unveiled the latest iteration of its iconic iPhone, analysts and pundits once again debated whether the technology giant can stay ahead of its rivals in the battle for smartphone dominance.
Apple’s new iPhones continue to aim at high-margin sweet spotThe Cupertino, California-based smartphone maker announced the arrival of two phones – the iPhone 5S (pic left, click to enlarge) and the iPhone 5C – with the more expensive 5S to be made available in the United States and 10 other countries (including China) on Sept 20, while the cheaper 5C will go on sale online today (Sept 13).
The two iPhone specifications can be found here and here respectively.
While the introduction of the iPhone 5S with its upgraded A7 processor, new M7 processor – devoted to handling data originating from the gyroscope, accelerometer, and compass –  and new software in the form of the iOS7 was more or less expected, the move to introduce what many believed to be a cheaper iPhone 5C in a bid to compete with alternatives met with mixed reactions.
In the past couple of years, Apple has been severely challenged, primarily by Samsung through its Galaxy line of phones as well as Google’s Android operating system, which powers other phone makers such as HTC, Sony, LG Electronics, Huawei Technologies and ZTE.
The battleground is particularly acute in Asia Pacific, as smartphone growth rates for the region has grown some 74.1% in the past year, according to Gartner.
The analyst firm noted that Samsung maintained the No 1 position in the global smartphone market, as its share of smartphone sales reached 31.7%, up from 29.7% (in the second quarter of 2012). Meanwhile, Apple’s smartphone sales reached 32 million units in the second quarter of 2013, up 10.2% from a year ago.
The polycarbonate-constructed iPhone 5C comes in five colours – blue, green, pink, yellow and white – and starts at US$99 with a contract, but retails for a high price of US$549 without a contract. In China however, the iPhone 5C's unsubsidised, post-tax price is a whopping US$730.
Most analysts had expected the introduction of iPhone 5C to address a part of the market that they feel Apple had been weak in addressing – between the US$300 and US$400 price range.
Some even believed that providing a lower priced alternative iPhone was the only way for the world’s most valuable technology company to stay ahead of the competition.
“Investors were put off that Apple's price point didn't go low enough to attract a new market,” Reuters quoted Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, as saying. “It doesn't have the same range in price that Apple's competitors have.”
And in another Reuters report, Shannon Cross of Cross Research noted that “It means Apple will hold on to margins, but clearly they are not going after the very low-end of the market, which will disappoint some investors."
Apple’s new iPhones continue to aim at high-margin sweet spotCharles Golvin (pic), principal analyst with Forrester Research, believes that the iPhone 5C will sell but 'underwhelm' in emerging markets.
In a research note, Golvin noted that Android phones have vastly outsold Apple's in market segments where price is the overwhelming determinant on choice, particularly in developing economies such as South-East Asia, China and India.
“In developed markets like the United States and Western Europe, the iPhone 5C colour options will appeal and consumers will be happy to show off that they have an affordable new model instead of last year's aging version.
“However, in most emerging markets, customers will view the iPhone 5C (pic below, click to enlarge) as less valuable and priced excessively, inhibiting sales. For example, compare the iPhone 5C's unsubsidised, post-tax price of US$730 in China to the cost of a Xiaomi Mi-3, a flagship Android device launched on Sept 5 from a rising local smartphone vendor, at US$327.”
Still, all eyes are still fixed on China as Apple has yet to announce a subsidised tie-up with the nation’s top operator, China Mobile.
“We haven't heard what they might do with China Mobile, but there's a potential over 740 million user base to target, so it could be a game changer if they manage to hammer out a deal.”

Jan Dawson of Ovum, in a press statement before the announcement, said that Apple must not only get the price for both devices right, but also figure out how to make the lower-cost variant feel like a real iPhone while stripping out significant cost.
“Regardless of how Apple resolves this, it will definitely come at the expense of lower margins, [even] if it is able to get back to higher growth,” the chief telecom analyst at the London-based research firm said. “The combined high growth rates and astronomical margins of the past [experienced by Apple] are gone.”
The iPhone 5S hype
Meanwhile, Forrester's Golvin believes that the iPhone 5S will succeed like the 3GS and 4S before it, as he believes that while each of these previous iterations apparently offered customers little motivation to upgrade beyond increasing performance, nevertheless, they sold in greater numbers than their antecedents.
“The 5S brings a more significant bump in processing, a much-improved imaging experience, and a clear benefit in improved security via its fingerprint recognition.
Apple’s new iPhones continue to aim at high-margin sweet spot“These will be enough to drive even more enterprise support and sales beyond the iPhone 5, assisted by the addition of NTT DoCoMo and — we expect, eventually — China Mobile’s massive subscriber base.”
Still there are other industry watchers who believe that while there are reasons for consumers to upgrade from iPhone 5 to 5S, the incremental value of doing so is very minimal, at best.

“There was nothing transformational announced,” Janney Montgomery Scott’s Luschini told Reuters. “It has the fingerprint scan and new colours, but bigger features, like different screen sizes, don't seem to be at the ready.

"This was less than expected from a company that has a reputation for surprising with a killer product or strategy.”  
In Time Magazine’s tech section, Matt Peckham, its technology correspondent, believes that the iPhone 5S’ features such as its 64-bit technology and fingerprint security scanner aren’t a deal breaker for him.
“Don’t fall for the marketing hype: The A7 processor’s ‘64-bit-ness’ is about future-proofing, which is an argument for waiting and giving developers a chance to catch up,” he argued. “A 64-bit processor offers significant benefits if you want to address more memory, but applications have to be written to take advantage of its architecture.”
Peckham also noted that fingerprint scanners aren’t as secure as people think they are.
“I’m not saying a fingerprint scanner on a smartphone can’t be interesting or cool or a smidgen more convenient (or safer while driving) for authentication than tapping out a passcode, but don’t kid yourself: Fingerprint scanners are eminently hackable, and buying an iPhone 5S for this feature alone, mistaking it for Batman- or James Bond-calibre tech, is a bad idea."
And finally on battery life, Peckham argued, “All Apple has said about the iPhone 5S’ battery life so far is that the A7 processor delivers more without draining the lithium-ion pond any faster. [But] its battery life’s probably about the same as the iPhone 5.”
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