Apple's decision to price the plastic chassis iPhone 5C at $549 without a contract, the same price as the company as historically sold last year's model, has upset financial and industry analysts' models, which had expected much deeper cuts.
Wall Street punished Apple Wednesday, driving down the company's stock price by 5.4%, with some analysts claiming it was already "too little too late."
Meanwhile, industry experts have, if not consistently panned the pricing of the iPhone 5C, questioned the number and said it would not help Apple in its market share battle against Android, especially in China, long a treasure trove for the Cupertino, Calif. company but now where upwards of 80% of all smartphones are sold with Android inside.
But Apple's move was, in retrospect at least, in concert with its long-term strategy, one put in place decades ago by co-founder Steve Jobs, an independent analyst said today. In fact, it was an emphatic restatement that made plain where Apple stands on the tug between market share and margins.
"The entire presentation yesterday was about demonstrating why an iPhone is a superior value," said Ben Thompson, an industry observer and analyst who covers technology at his Stratechery.com website. "Apple essentially said, 'We don't need to be cheap, we don't need to be low-end.' Everyone in the tech press and financial press cares, but Apple's contention is that consumers don't care that they're not in the low end."
Apple showed its hand, said Thompson, from the very start of the event, when it devoted precious minutes in its most important product launch of the year to highlighting a music festival it's hosting in London. Thompson argued that the time spent touting the Apple "experience" exemplified Apple's attitude and its strategy.
Most analysts had anticipated an unsubsidized price of between $300 and $450 for the iPhone 5C, the long-rumored lower-cost model. That pricing would have meant a free phone in markets like the U.S. where carriers habitually subsidize customers' new devices. More importantly, a low-priced iPhone -- $300 would have been ideal, analysts speculated before Tuesday -- would let Apple compete with global smartphone brands powered by Android, like Samsung, and the plethora of in-country, Android-using handset makers in markets such as China, like the hard-charging Xiaomi.
Minus a lower price and the strategic shift necessary to support it, they warned, Apple risked losing its prominent place in developers' minds because it would continue to shed market share, notably in Asia, China specifically.
Instead, Apple ran an unexpected play: The 16GB iPhone 5C, a repackaged circa 2012 iPhone 5 inside a colorful polycarbonate chassis, was priced at $549 unsubsidized, and $99 with a two-year contract in the U.S.
The $100-$250 difference between iPhone 5C expectation and reality generated headlines as many expressed dismay that Apple had not followed the outsider consensus. "Apple's shares tank as new iPhones fail to dazzle," stated Reuters. "Analysts knock Apple for not announcing 'cheap' iPhone," said the Los Angeles Times. "Apple's 'Low End' Strategy Disappoints," reported the Wall Street Journal (subscription required).
Thompson, who wrestled with his pre-presentation pricing bet, first bought into the lower-is-better concept, he said in an interview. But last Sunday, he changed his mind and predicted Apple would retain its pricing structure with one major change: It would sell the new iPhone 5C at the price it has previously sold the old model from the year prior.
He nailed the outcome.
Today he explained why he thought Apple made that decision. It wasn't about protecting the brand, not explicitly, nor about concerns about possible cannibalization of its flagship -- going forward, that will be the full-priced iPhone 5S, which starts at $649 unsubsidized, $199 with a carrier assist after signing a two-year contract -- by selling the iPhone 5C.
Instead, it was all about reminding everyone, consumers most of all, that the iPhone is a premium smartphone that comes with a slew of extras, as one would expect from a luxury brand.
"The presentation [Tuesday] reemphasized that Apple believes the iPhone is cool, a brand, aspirational. It's not too expensive [Apple believes], because all these people will want it," Thompson said. "Apple doesn't compete on price. That would be to play against all of their advantages. Instead, they doubled down on the brand, the experience, the integration of software and hardware, all the things that they can do."
Thompson expanded on his analysis of the iPhone 5C and its price in a post to Stratechery.com today. "This was Apple, standing up and saying to all the pundits, to all the analysts, to everyone demanding a low price iPhone: No," Thompson wrote. Some other analysts agreed, although they put it in different terms.
"[The iPhone 5C pricing] is an extension of their strategy, it's not an overhaul," said Kevin Restivo, analyst with IDC. "The iPhone is still premium priced."
Restivo's rationale for Apple retaining the strategy, however, was slightly different from Thompson's, although the end result was the same.
"The smartphone market is still relatively young, and there's still a lot of profits to rake in [at the high end] from those who spend the most on their smartphones," said Restivo. "Apple can't rest on its laurels, but there's a lot of market here. It doesn't need to pack up its tent and go home by any means. There's a lot of room to grow still."
Others, while not expressly showing disappointment, said the pricing was strictly defensive.
"I don't believe the iPhone 5C is targeted at emerging markets at all, but is an attempt to defend the iPhone's margins and ASP [average selling price] in subsidized markets," said Sameer Singh, an analyst who tracks mobile technologies from his Tech-Thoughts site. "Apple was spooked when it saw a 'new,' and 'good enough' product [the iPad Mini] sharply eat into sales of their flagship tablet. As a result, Apple attempted to minimize the pricing gap between the two 'new' iPhones and attempted to differentiate them based on casing and color."
However, Singh reached the same conclusion as Thompson. "It seems that Apple's product and pricing decisions are aimed at retaining their premium positioning and hardware margins," he wrote Wednesday. "While this may work in the U.S. market, it leaves Apple vulnerable to low-end disruptors in other regions."
Neither Thompson or IDC's Restivo denied that.
"I do think they're a little bit playing with fire in Asia," said Thompson. "Apps could start going Android-first there, and bigger phones matter there. Clearly, Apple was caught by surprise by the sales of larger phones [ dubbed 'phablets']."
"There will come time when Apple will need to evolve and further segment the iPhone line," promised Restivo. "Apple's left half the market and more to its competitors. At some point, the gated community of Apple users will have to open up to that market because Apple will need to sell more services and software to each customer."
But Thompson's point, and Restivo's too, was that time was, in Apple's opinion, not 2013. Maybe not even 2014. It's holding to its premium lodestone.
That strategy, in other words, isn't going to be discarded. And anyone who doesn't realize or remember that will predict moves Apple simply won't make in the short- and mid-term.
Whether that expressed strategy works is another matter. "The strategy, then, is clear. Apple has decided to not even pretend to pursue market share, but instead embrace their up-market status. The question remains, of course, as to whether or not it is right," Thompson wrote on Stratechery early Wednesday.
The analysts were split there. Restivo believed the iPhone 5C would reward Apple, but primarily because it would add 25 million to 30 million units annually -- an increase of 17% to 21% over what Apple sold during the last year -- by soon announcing that it has struck a deal with China Mobile, that country's and the world's largest carrier.
Thompson thought the iPhone 5C and its pricing would pay off. "You can't dismiss the effect of being $100 cheaper," said Thompson. "That's what people don't understand. They're hugely underestimating the iPhone 5C, and too focused on China. Apple has moved to cover 16% more of the price curve. I think sales of the 5C in the U.S. will be absolutely massive."
Singh countered. While he said he would not be surprised if the iPhone 5C became Apple's best-selling smartphone -- replacing the flagship, which has always held that distinction when only older models competed -- he doubted that the color-coded handset would boost shipment numbers. Sans a truly low-priced iPhone, Apple was playing a zero-sum game where 5C gains would be offset by declines in the more expensive iPhone 5S.
Cook and Apple are taking a risk with its strategy, Thompson acknowledged. But he saw it as a calculated risk that relied on its strengths, not on its weaknesses.
"My criticism of Nokia and BlackBerry, but not Android, was that they chose to compete in an area, operating systems, that they had never excelled in," said Thompson. He has also slammed Microsoft's decision to push both devices and services, arguing that the two are exclusive and by claiming to compete in both, Microsoft may succeed in neither.
"Apple is betting on their brand," Thompson said.
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, or subscribe to Gregg's RSS feed . His email address is [email protected].
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