Apple iPhone 5C freakouts unwarranted

Apple iPhone 5C freakouts unwarranted

Summary: Wall Street really wanted Apple to go downmarket with an iPhone and grow volume at the expense of profit margins. Apple refrained and whining over the iPhone 5C ensued.

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The handwringing over Apple's iPhone 5C pricing---starting at $99 with two-year contract and $549 without contract---borders on comical.

Just a few weeks ago, analysts were fretting about how Apple's profit margins and how a low-cost iPhone would be good for market share, but hurt earnings. Today, analysts are downgrading Apple, lowering unit projections and fretting about profit margins that are going to be better than expected.

Here's the reality. Apple is a mature company with products that are going to have nice incremental upgrades, but aren't going to wow us. Mature companies---especially Apple---will take profits over market share too.

Simply put, Apple took the profit potential over the market share. The iPhone 5C doesn't appear to be an emerging markets superstar, but it will also rake in cash. Meanwhile, a likely deal with China Mobile will give Apple a lot of air cover on emerging markets.

Also: CNET hands on: iPhone 5S, iPhone 5C | 10 new iOS 7 features for the enterprise | iPhone 5c, 5s coming to UK, France and Germany: Pricing and availability revealed | iPhone 5c not cheap enough for emerging APAC markets

Evercore analyst Rob Cihra quipped that you could call the iPhone 5C the 5BM for better margins. "While C may officially stand for “color” it might just as well have been launched as 5BM for likely “better margin,” after the now defunct iPhone 5’s cycle and less gross margin dilutive than we’d been expecting.

Apple had a clear choice: Stay mid- to upper-market or go downmarket to compete with smartphone makers with razor thin margins. Apple chose to be BMW instead of Chevrolet.

A few takeaways from the Wall Street analysts.

Oh no! My entire Apple model has to change now. Damn Apple profits. Piper Jaffray analyst Gene Munster had to back out the 50 million cheap iPhones he thought Apple was going to sell in calendar 2014. He now predicts revenue growth for Apple to go from 13 percent to 10 percent in calendar 2014 with margins going from 36 percent to 36.7 percent. Munster said:

While we view Apple's choice to change its mid-level offering instead of finding a way to more aggressively attack the low end as a disappointment, we still believe that Apple will realize that the low end market is important and find a way to deliver a ~$300 iPhone over the next 1-2 years. We believe there is a large market opportunity in the sub-$400 market (we believe 60% of total smartphone units in 2013) and believe the lower end market will grow in the 30-40% range over the next few years vs 8-15% for the high-end market.

Emerging markets matter. "In our view, the $549 price point of the 5C is too high to inspire much confidence in the company improving its emerging markets positioning beyond the fact that TD-LTE will open up some fraction of the 745 million China Mobile subscriber base," said JMP Securities analyst Alex Gauna.

Apple's iPhone 5c pricing is high, but could come down with scale. Morgan Stanley analyst Katy Huberty put Apple's iPhone 5c pricing at 4,488 RMB, which rates as expensive in China. The catch: 4,000 RMB is the "acceptable" price in China. Apple can see if Chinese buyers will pay up and has options if they don't. Support for China's version of LTE may also help sales.

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We want the Android value market, but Apple doesn't. Oppenheimer analyst Ittai Kidron noted that the iPhone 5C probably won't lead to a major expansion cycle that can ding the Android value devices. Has anyone seen the bloodbath in the low-end Android market? What company would want to enter that mix? It's a game only ZTE, Huawei and Lenovo can really win. Samsung can play along based on scale.

Topics: Mobility, Apple, iOS, iPhone, Smartphones

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21 comments
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  • truth is...

    Apple is now riding reputation. They are now doing the Microsoft, except that Microsoft has enterprises in their customer base. Enterprises will buy anyways, but consumers will go with the innovative.

    There is a clear Apple fatigue on Apple. I remember when in my company I was the only one carrying Android. Now, everybody carries Android...
    tatiGmail
    • Great

      Everyone I see has an iPhone. Now what?
      dhmccoy
      • Then

        You need eye glasses;-)
        Koymik
    • Ya, slow down on the everyone "carries Android" bit.

      Not everyone carries Android. We know this to be fact. We have all seen the numbers. There is no point in saying the numbers are any different than they are.

      I had an iPhone for just over 2.5 years. Great phone. My wife uses an LG Optimus G which is a very nice device, and Android. I now use a Samsung ATIV S. Quite frankly, with an independent eye, because I could give a rats hind end or care less who makes what when Im using a smartphone, the Samsung ATIV S is clearly the best of the three phones, for someone like me. I depend on my phone, cannot do my job without it. They are all good. I like the WP8 ATIV S best of all, not even a contest for me.

      I took a long look at all of them, almost went iPhone 5, had so many potential Android phones in my hand I lost count, but the ATIV S for me plays like a mobile powerhouse compared to the sort of unfortunate jumbled and a little messy that Androids come across as, and the iPhones screen is just too small and quite frankly the OS just isn't as high performance in terms of how it actually works, at least that's how it feels after you use it even just a little bit and are familiar enough with the iPhone experience.
      Cayble
  • There's downmarket and mid-market

    Apple's existing examples:

    o Mac Mini
    o iPad Mini
    o iPod Shufffle/Nano

    The Mac Mini is a lower but, not low, cost entry into OS X and the iPad Mini, besides providing a smaller form factor, is a lower but, not low, cost entry into Apple's tablets. Ditto for the iPod Shuffle and Nano.

    IMO, the iPhone 5C is not priced squarely at mid-market. It's a bit too expensive.
    Rabid Howler Monkey
    • yes, you are correct

      You are correct. The iPhone5c needs to be $399 or less. The iPad Mini can keep the price, if it goes Retina Display, though it really should be around $299. Apple has some good stuff, and a little extra to pay is not something people will fret over -- but the iPhone5c looks like a rip-off. I have the Mac Mini, and it is well built and properly priced, with the exception of upgrades being costly, off the base model.
      mytake4this
  • Is it just possible...

    ...that Apple researched this thoroughly and determined that this is the right way to go at this time? They have their internal projections and their critics do not. The proof either way will be on the bottom line for all to see in the coming year.
    gfeier
    • Not enough commonality

      Yes. Tim Cook's expertise is in exactly that sort of supply chain tradeoff analysis. These financial guys seem all excited about the huge opportunity to wash money in the market for low-end phones in emerging countries. By "washing money" I mean investing assets in an endeavor that has a razor-thin return that can even go negative if the wind blows the wrong way.

      That activity can make sense if doing it contributes in some way to driving volume in components that you also use in your high end goods, thus making them more profitable than they otherwise would be. If that opportunity were there for Apple, Tim Cook is the guy who would see it. And he apparently doesn't.
      Robert Hahn
    • Apple did plenty of research.

      Not that I was there for it or something, but unless Apple is either a flawless fortune teller, couldn't care less if they or successful or not or just plain enjoy the thrill of just guessing about the market, you want to believe they did some research.

      Then...they made a choice and the choice was based on what the feel is the right way for Apple to go given what the research showed.

      Right or wrong, that's pretty obvious how they generally went. Its how any company with money plays it. We now get to see exactly the kind of results their thinking and action on the issue produces.
      Cayble
  • Thanks for a rare bit of sanity today, Larry.

    I'm pretty %^%#! sick of all the "Apple fails to dazzle" pieces in the media today. If people want "dazzle", they should go to a strip show in Vegas. What they got from Cupertino yesterday was a look at some very solid, excellent engineering design, which I'm sure will show up in other Apple products in the future.
    What other company is expected to unveil a miracle at every product announcement??? Apple's problem is that it DID "dazzle"---several times! I continue to be impressed with the "evolutionary" changes they are making to the iPhone, but clearly, those changes are not "dazzling" enough for most of the tech press and the Wall Street analists. As is the case with a lot of Apple product announcements, it takes a while for the magnitude and importance of the announcement to sink in. Touch ID itself is a VERY important strategic feature, but people won't "get it" for a while. Anyway, thanks for injecting some common sense into this crazy Apple circus the media has going today.
    Userama
    • Live by the sword

      Well then, if you live by the sword, you die by the sword. Apple is all about the next best thing, the ultra cool, and hottest fashion or trend setting idea. Once you establish yourself as something, it is hard to change. The excitement is gone. Only the high price remains. The iPhone5c is a $399 phone if ya ever saw one! Top-line phones will be going for $600+ range. We are talking about phones without tiny and narrow screens -- full screen and high quality phones cost less than the iPhone5s and will be falling in price. The mid-range $200 to $399 phones would be where the iPhone5c is should fall into.
      mytake4this
  • RE:Mature companies---especially Apple-will take profits over market share

    Isn't Apple already in a postition where their market share is rapidly declining to the point where it might hit single digits, their revenue is flat YOY and the profits are down significantly YOY?
    Emacho
  • iPhone also fails on screen size

    I was upset when Apple did not make any statement about a 5.7 - 6 inch iPhone. I fear that many middle aged customers will be migrating to HTC One Max or Galaxy Note 3 or the Windows Nokia phone unless Apple takes steps to support larger form factor iPhones (Phablets).
    expertmagician
    • I'm one of them...

      I've been waiting for years now, and the thought of WAIT YET ANOTHER YEAR for a 5" iPhone is just too much.

      I'm one 5+ year iPhone loyal customer who will be shopping Samsung's 5" offerings this week. I don't want to wait yet another year.
      SbySW
  • Well Larry...

    ...as of 1330 EDT...Wall Street investors are "voting with their feet"...as AAPL has fallen 5.2% so far today. That's about USD$26.00 per share.
    IT_Fella
    • Beware of stock price snap judgements.

      If a 5.2% drop means Apple is wrong, will a 5.2%, or higher, rise mean they're right? And if you're putting a lot, ahem, stock in analysts' predictions, all you have to do is check Philip Elmer-DeWitt's regular Pros vs Amateurs accuracy charts (spoiler: amateurs almost always get it closer to actual results). I recommend it for no other reason than it's rather amusing to see alleged professional financial analysts be wrong by large percentages.

      The new iPhones will only be on sale for a week of Q4 FY13, so their impact won't be substantial. Let's see what Tim and Peter have to say in late January when Apple reports Q1 FY14 that covers the December "Holiday Season." We'll have to wait a bit longer for the real interesting number, Apple's Q2 FY14 which will include the results from Apple's second holiday period, the Lunar New Year. When we see those numbers and AAPL's price then.
      matthew_maurice
      • Apparently, you only care about predictions when they're good for Apple,

        but, when they turn sour, you'll discount them or spin them away. Apple fanatics have been touting the Apple market-cap in the last few years, with many of them even talking up the prospects of Apple becoming the first trillion dollar company. Now that the market-cap has taken major hits, the fanatics don't want to talk at all about market-cap.

        Then, you go on about predictions for the holiday period and their quarterly reports, which you hope will show fantastic sales and profits. But, when it comes to the holiday periods, they're not really reflective of a long-term success story, because, no matter what Apple puts up for the holiday period, it will sell well, because Apple still has the hype and aura from the past few years working for it.

        Apple's market-cap is still over the real value of the company, and when one considers and analyses what Apple has as products and services, it shouldn't be valued so high, and it's real value should be way below that of Google and of Microsoft; Apple's real value when it comes to market-cap, should be below $100 billion, and perhaps similar to HTC's market cap (look up HTC market cap).

        The iPhone is the only thing having Apple riding so high, but the mystique has worn off, and Apple will have to dream up another real innovation (not some incremental upgrade for a product), in order to remain relevant. As of today, and for another 1-2 years, Apple will do well with what is has for products and services, but the sales and profits will continue to decline.
        adornoe@...
  • Unwarranted? Let's recap

    It took a year to:

    1) Introduce multiple color housings for a phone that, unless Apple is using some miracle plastic, will feel cheap and junky just like every other plastic phone.

    2) Introduce a "new" version of the iPhone 5 that basically does nothing new except have a 64 bit processor. As others have pointed out, an iPhone has neither the screensize nor the memory to justify a 64 bit processor. If apple wanted to unveil something cool, that CPU should have gone into a new iPad along with a suite of cool new apps to take advantage of it.

    3) And wow, slap me silly, a (slightly) better camera.

    Maybe I'm missing something, but the iPhone's claim to fame when it came out was that you could browse the regular internet with a pocket device. No more being restricted to WAP-optimized sites. Other than that, it was a phone. But make no mistake, that was a quantum leap forward.

    Since 2006/2007, the web has changed. Sites are more complex, and it is self-evident that browsing is more comfortable on larger screens. That's not to say the Samsung Mega or the Galaxy Note 8 3G are the optimal sizes, but there seems to be consensus that something bigger than what the iPhone has is better.

    I would worry. Maybe not freak out, but worry. Plastic phones are devaluing the "premium-ness" of the brand, and there seems to be a total obliviousness to why people found the original iPhone so ground-breaking in the first place.

    Or, ironically enough, we can go back even further and reference the Apple Newton. Also a ground-breaking device, yet it's Samsung that makes a phone with a digital stylus. It's Samsung that purchased a stake in Wacom, not Apple.

    Kind of makes you think that maybe the iPhone was just a lucky grand slam...
    croberts
    • You mean like this type of plastic?

      "I'm impressed with how the 5C ends up feeling in the hand. The hard coated surface manages to not feel slippery but still have a certain heft and solidness to it. What's interesting about the 5C is really the way its rounded corners all seem to have the same radius, which gives it a very unified feeling in the hand. The front, edge, and sides all share that same rounded profile. It still retains the same overall profile as the iPhone 5 as well. Buttons on the 5C are clicky and responsive, and also have that same hard coated feeling without feeling cheap. That's really the important thing about the 5C, it had to be solid while still being made out of polymer, something OEMs in the Android space still haven't quite nailed down." -

      http://www.anandtech.com/show/7310/hands-on-with-the-new-iphone-5c
      yoshipod
      • WOW

        Did someone seriously write that???
        67cougargt