iPhone 5C and 5S - too similar in price to bring big market share gains

So now onto the iPhone product line split that I have been calling for on this blog for 3 years now. Thank you Apple for giving this split. And yes, the new 'discount model' iPhone 5C is as rumored, more plastic and blatantly visually different than the top model, now the new flagship 5S.

The 5C has quite good specs for the lower price model, but the price differential is very modest. The world average price of smartphones according to brand new IDC numbers out this week, is 372 US dollars this year. The unsubsidised price of the 5C converting from UK prices is about 619 dollars (from 390 UKP price before VAT) This price is obviously without the 2 year contract, most of the smartphones around the world are sold without contract. Thus the cheapest new iPhone model in its entry price level, is nearly twice as expensive as the average price of smartphones sold around the world. Yes, its slightly cheaper than the new flagship, iPhone 5S, but not by much. This means, that the iPhone 5C will not be able to achieve significant gains to Apple in the price ranges where most smartphones are sold. So this means that the Android opportunities keep growing and the big winner is Samsung. Oh, and who did color versions of the same phone first? Nokia. And who did a colored phones line of the currently popular touch-screen form factors? Nokia. Not in its Lumia line but already before on the N9 model where Lumia stole its good looks.

Meanwhile the new flagship iPhone 5S has the fingerprint sensor but didn't get NFC. The screen size did not grow (am surprised) and the camera sensor still keeps its pixel count at the modest 8mp. At least Apple grew the pixel size, added a larger aperture optical unit and added some clever software to make the camera better, in particular in low-light conditions. And the flash is now a two-element flash allowing for color control in flash situations (more natural colors in varying conditions)

Oh, and yes, the iPhone 5S comes in a few glitzy colors including gold. And what a nice idea, many like the gold-colored phone. Now, where had we heard that before? The old joke still holds true, to find out what is in the newest iPhone, look no further than the 5 year old Nokia. Nokia introduced a flagship gold-colored model, the 8800 in 2008. Literally, 5 years ago. Bling-bling.. Apple and Nokia, who was the leader, who was the follower...

So the Apple iPhone product line has been split, two new models in one year. About time! Shoulda been done a few years ago. And for all those who were on this site saying Tomi is crazy or Apple will never do this, or Apple doesn't need to do this.. what do I know, eh?

What will happen to Apple. The market share is currently 13% (Q2, 2013, traditionally the lowest point per year in the cyclical nature of iPhone sales). Last year the annual market share of the iPhone was 20%. This split in the product line will not help grow Apple much, maybe pick up a few points. I'd say Apple ends this year with about 22% market share for the full year, not more. The price should have been nearer the world average price, or even better, near the Emerging World typical price points, which IDC reports for example in India the average price will be 200 US dollars by the end of this year. That is the market where Apple hoped to bring strong gains with the iPhone 5C, but its too expensive for that. The iPhone 5S will definitely get plenty of buyers and Apple is doing well, but this pairing is not differentiated enough, and not a big leap ahead, enough, to give Apple a strong jump in market share. They roughly hold steady. The big gainer will continue to be Samsung who offer smartphones in ever wider variety and price points and form factors. 

Comments

[Dipankar]

If price of the 5C is $619, then it's really high. It's in the flagship-phone range for India. But I think, Tomi, they may price it lower in emerging markets.

[i wanna bet with tomi]

Tomi,

i dissagree with you. just because apple release 2 phone doesn't mean it market share will increase. especially when iphon 5c is 100% iphone 5 but in plastic.

i think we will see even erosion of apple market share. for the full year apple will ended with 15%-17%.

and i also dissagree that samsung will be the beneficiary. i think the other player also starting to becoming better and better

[virgil]

Ben Thompson explains iPhone 5C/S strategy very well (note, the article was published before Apple's announcement!). In particular, 5C is the mid-priced phone, not the low-price one:

In fact, the primary mistake Apple has made, if they made one, was in determining exactly where the “good enough” line is at. The iPhone 4S is arguably “good enough” and could have been the basis for a mid-range model last year. Apple thought otherwise though; I would imagine a not insignificant factor is that the iPhone 5 is the first iPhone with a fully Apple-designed SoC, the A6.

Regardless, the line has been set; clearly we won’t see a truly low-priced iPhone until Apple can include iPhone 5-level technology at a price they are comfortable with.

See also the footnote:

I previously argued rather stridently that the iPhone 5C ought to be very aggressivly priced, although even then I was struggling with the subsidized versus unsubsidized pricing problem, and quickly changed my mind. I do think that Apple has been slow in moving the iPhone to lower price points, and are suffering for it particularly in Asia. Perhaps I’ve been influenced too much by what I see, but there’s no question there are fewer iPhones relative to Android here in Taiwan than there were two years ago. Still, it really would have been out of character for Apple to be that aggressive; it increasingly seems the iPod, which was always price-competitive, was more of an aberration

[virgil]

Forgot to include the link to the article: http://stratechery.com/2013/thinking-about-iphone-pricing/

[jamu gopek]

@virgil

the asian market is very different from usa. cheap phone alone wont make it.

1. screen size is really matter in asia
2. price & especially price/performance
3. specs. asian love spec.
4. openness. believe it or not. asian put everything on the phone. from presentation powerpoint, office document/excel to company/product presentation. for non worker... funny video (cat??), comic book, manga video.

[jamu gopek]

5. the ability to transfer everything without the need of computer or installing iTunes.

[RottenApple]

@jamu gopek:

Asians seem to have more common sense. ;)
But there's also lots of Eurpeans valuing the same things. And Apple just has nothing to serve such a market.

[letsberealistic]

And then there is those of us who are valueing our privacy we will probably buy the Jolla phone :-)
and what I meant by the above statement is that I will never get an iphone as long as apple is:
1. Giving all my data (including Contacts, sms'es etc.) to NSA
2. Forcing me to install ICraponyoutunes.

[QtFan]

5C seems to be a move to protect margins. Instead of selling the old model cheaper with almost the same costs, they made a cheaper to produce version of the old model.

5C is a cheap to produce 5.

[Lusekofte]

Nokia was first with gold colour on a phone. Maybe they were inspired by the golden iPod Mini, another portable device that was released in 2004?

Maybe even Apple was inspired by their previous use of gold as a colour on a portable device?

Nah, it must be that Apple totally forgot about doing gold as a colour, and then copied Nokia ... who never saw the gold iPod ... or any of the other thousands of gold coloured devices that predated the gold iPod.

http://reviews.cnet.com/mp3-players/apple-ipod-mini-4gb/4505-6490_7-30657030.html

/L

[The Recusant]

As I have pointed out to you Tomi on Twitter earlier today, this 5c is priced the same as the original 5 if it would have stayed on. So expect the remaining stocks of the 5 to go even higher & the used market for it to stay high since no one in their right mind would trade cheap plastic for aluminum. And that explains why they had to discontinue the original 5, instead of doing what they have done in previous years of continuing to offer the older model at a discount.

5s=5same
5c=5cheap (but not cheap enough)

Anyway, enough of overhyped crApple products Tomi, I'm more interested in that Newkia from Singapore (led by an ex-Nokia senior exec who tried to buy Nokia last year) and Jolla Sailfish.

[DesDizzy]

Tomi, I'm not sure why you think all phone companies have to follow the same strategy. Apple has stated that it is not interested in the bottom end of the market. They have brought out a lower spec "5" model which together with their "4" models gives an average to high market coverage. Samsung is currently making hay, especially in China. However, let's see in a years time where their margins go when they are fighting it out with the Chinese at "cost". Yeath, great strategy (See Dell).

As for phones in different colours, Tomi, please! Are Nokia the only company that has ever done this! As much as I am a Nokia fan (still have every generation of communicator). Nokia lost the plot through arrogance and lack of focus. Nokia RIP. The thing about Apple that you do not seem to get is that they have focus, and unlike the asian manufacturers who seem wedded to a scatergun approach, are focused on making as few products as possible, as perfect as the tech of the time allows.

Tomi, you may not appreciate quality yourself, but as a commentator you should allow that many consumers do and that many successful businesses cater for this market (see BMW, Mercedez, Jaguar, Sonus Faber, Naim, B&O et al), Apple just happens to be bigger than is normal for such companies. Everybody doesn't have to do CHEAP!

[MyPhone]

Even while I hate Apple's business practices and what they stand for, Apple has the real problem of not diluting their perceived "premium" brand to gain market share.
For example: On the one hand it would be great for their market share numbers if they got a government contract to provide an insane number iPhones for Obama's phones giveaway program(Obama Phones. On the other hand, the last thing they need is to taint their brand by having iPhones being given away (free) to welfare people in breadlines, along with free government cheese and furniture vouchers.

Instead of splitting the iPhone off into multiple price points (as you've been advocating) as they've done poorly, they should instead keep the iPhone brand only for their premium phones, while branching off an entirely different "just plain Apple phone" phone line to compete on the mid and low end. That way they retain the snooty factor (selling their premium iPhone brand to arrogant a-holes with more money than brains), while also offering competent/yet cheap, entry/mid level hardware able to access their locked-in walled garden to the masses to compete on the lower tiers.
You gotta get them knowing your products while they're young and upwardly mobile, and while they're aspiring to be able to waste money in the future on stroking their egos, and having their property controlled by control-freak corporations like Apple.

[KPOM]

I'm not sure why Tomi was surprised that Apple didn't release a bigger screen phone. That's not their style. They are keeping the iPhone 5 basic design for a second year, just as they did with the 4/4S. The 5C is a way to grow margins while selling "last year's" phone. Apple may release a bigger phone, but not until next year.

I do see that the Street isn't happy with the iPhone 5C pricing, though. I think they were hoping that Apple would produce a "cheap" version for emerging markets. Again, that might come next year (with the 5C taking the place of the 4S).

[Boris]

No, no, Tommi, you are wrong.

As other already said, 5C is 5 with cheaper production cost, but the same price. AAPL rised up price of 5S. It's all about protecting margins. They see failing margins and think they can fool potential customers.

@leebase

I mostly agree with you this time, except Nintendo. Sony is crushed (Vita is dead), but 3DS is good (not smashing hit like DS) and is gaining market because of release of excellent games (finally).

@Baron95

Do you know that AAPL revenues crashed in Q2 in China (-46%)?

Xiaomi crashed iPhone sales in China, and I think if they can deliever Mi3 enough (Mi phones are produced in Foxconn factories, too), I don't think AAPL can do too much. Remember, Mi3 will be sold on China Mobile for the first time, too.

[RottenApple]

@KPOM:

"They are keeping the iPhone 5 basic design for a second year"

But that's not because it's such a great strategy but because they've simply been too late to release a large screen phone this year.

At the time when they would have had to start to develop they were still under the mistaken impression that 4'' is 'good enough' and didn't bother. But look what the competition has done in recent months! When the development cycle for the iPhone 5S started some so-called 'experts' were still mocking Samsung for the Galaxy Note!

But let's be clear about one thing: If Apple sticks to the '2 iterations until some real improvement' they will fall further behind. The competition is not this lazy and will push the boundaries constantly. Just like with Nokia last decade, at some point the customer will realize that all the buzz and hype is not worth much.

Some competitor just needs to do a serious disruption of the market with a product that really bridges some gaps. What I'd like to see is a smartphone that can be used as a desktop computer if the necessary hardware gets attached. And for that Apple currently is badly equipped with their locked down platform.

[So Vatar]

LeeBase wrote:
"So how is it...with a market that is vastly larger, and Apple DID rise to the number 2 player...that Apple is in a position of imminent doom?"

Why do you think that Apple is in a position of imminent doom? Who has said that?
Not sure what you referring to, Tomi's post stated that he expects Apple's market share for the year to be roughly the same or a few points up. Nowhere close to "doom".

I personally expect iPhone's market share to be actually down a few points for the year, but still nowhere close to doom. And I can see that they will have very healthy margins. They will continue to own the US market, will go up in Japan, will slightly go down in the European market, and have no (volume) growth story in the emerging markets.

I just think that Apple as an overwhelming growth story won't happen, not based on these 2 new iPhone models. But no doom by a long shot.

[The Recusant]

I see the usual suspects have made the usual RDF spin for a yet-another boring incremental release. Let's just tackle 3 for the edification of the easily impressed:

1. fingerprint sensor - done before on both mobile phones & countless laptops. A nice-to-have but ultimately insignificant feature for the target market of hipster d-bags w/ little tech knowledge. Anyone can make this feature as well in the remote chance it does gain traction.

2. "64-bit" CPU - a laughably unnecessary feature on mobile phones. First of all, as in desktop & laptop computers, 64-bit CPUs are used to enable access to *greater than 4GB of RAM*, nothing more. Even today on desktop & laptop PCs, more than 4GB of RAM is unnecessary for basic home/student/office tasks or even high-end 3D gaming. More than 4GB of RAM is used for memory-intensive scientific/technical computational tasks, high-end video/photo editing, running multiple Virtual Machines, etc. So for mobile phones that have an average of 1-1.5GB of RAM (recent high-end Androids have 2GB RAM), it's just a waste of silicon space & just increases power draw.

So this boast of "2x the CPU power" of previous A6 CPU can be attributed to other improvements aside from this useless 64-bit, and that's nothing unique & everyone else can have that in accordance with Moore's Law.

3. dual-colored LED "flash" - another silly non-starter gimmick. Firstly, it suffers from the same limitation as all the other LED "flashes": a 3-foot effective range! LOL. So it's only good for color-balanced selfies for those suffering from NPD. As Nokia has shown with the 6-year old N82, N8, 808PV, *real men use real Xenon flashes*. External flashguns from Nikon & others have had colored filters built-in for years already; Canon doesn't bother w/ that silliness because they know real pros either shoot RAW and can change their White Balance at will anytime they want, or, they know (and *should know*) that the color temperature for flashes was selected that way to give the most neutral color balance for flash exposures for the greatest number of lighting situations. In short, no DLSR shooter, even the most ignorant, has complained that the color balance of his flash exposures was "off", precisely because color temperature is a bigger concern for ambient (no flash) lighting where you have no control of the location, number, & intensity of light sources.

In summary, as has been the case for several generations now, there is absolutely nothing to get excited about for these "new" crApple releases.

[Boris]

Price of 5C in PR China:
4.488 yuan - 16 GB version
5.288 yuan - 32 GB version

China Mobile deal is not official.

Xiaomi Mi3
1.999 yuan - 16 GB version
2.499 yuan - 64 GB version

China Mobile deal is official.

Remember, Hugo Barra left Google and joined Xiaomi and their revenue incresed 100% per year. Xiaomi already launched cheap people's phone (HongMi), they introduced MIUI TV, they already sell TV box, and tablet is next (probably Android gaming console, too), and above all of that, they have their own OS - MIUI (powerful as Android, simple to use as iOS) which updates every Friday.

If that is not ecosystem, I don't know what it is.

I think AAPL is done in China.

[Huber]

@Boris: MIUI has its lovers around the world :-)

Here is a MIUI version for the SGS4

http://forum.xda-developers.com/showthread.php?t=2306650

Explanation for Apple freaks: Yes, the SGS4 _IS_ just a little PC with a built-in phone, so you are free to install different OSes (if you are OK voiding your warranty of course)

The new iPhones are more underwhelming than I expected.

The fingerprint sensor is a useless gimmick, like Android's face recognition.

The camera enhancements are nice, but let's wait for a real-world comparison with the competition before we draw conclusions.

64Bit is marketed well, but it is just a change which is unevitable. As soon as phones with >4GB RAM are released, you need 64Bit anyways. The Samsung Galaxy Note 3 already has 3GB, so we are already close.

From a performance perspective, 64Bit-wide integer register add nothing to the speed. I don't remember when I used a 64Bit integer variable the last time, 32Bit usually is enough. For really big numbers you use floating-point anyways, and these are stored in different registers (except if the A7 lacks an FPU, which I doubt).

I expect the iPhone's market share to further decline.