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.

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  | i Phone 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.

aapl5cpricingchina

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

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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