Why are China and India of such importance to Apple, and is it really necessary for the company to produce a budget iPhone to grab market share in these territories.
The cheaper iPhone rumour is based on the idea that Apple needs a low-cost iPhone to compete in these huge markets. Here we examine whether such a device is really the right move for Apple, and what a budget iPhone might do for the companies image if it was available worldwide.
It is clear that China is well and truly on the map at Apple; Apple CEO Tim Cook has paid his second visit to the country in 10 months, and Apple has announced that will extend its plans to build 25 Apple Stores in the country. Apple currently has 11 stores in the mainland China and one in Hong Kong - six of those stores opened last year. Cook also revealed that Apple recorded $5.7 billion of sales in China during the quarter that ended in September.
We hear a lot less about Apple's plans for India, although in an unprecedented move, the company did slash the prices of the iPhone 4 and 4S one week after lowering them following the launch of the iPhone 5 back in October. Apparently Apple isn't too keen on the bureaucracy involved in doing business in India, where it has to tie up with national, regional and local distributors to get its products to consumers, according to this WSJ report.
With this information in mind, why are China and India of such importance to Apple and is it really necessary for the company to produce a budget iPhone to grab market share in these territories.
No. Apple already sells the iPhone 4, and iPhone 4S at a low price
Apple's usual practice that when it debuts a new iPhone it begins selling the old iPhone models at a lower price. For example, when Apple launched the iPhone 5 it reduced the price of the iPhone 4S and iPhone 4 with the entry point for an off contract iPhone 4 being £319. Apple did the same when it announced the iPhone 4 and the same when it launched the iPhone 3GS in June 2009. As a rule, Apple carries on selling the previous year's low-end iPhone and cuts the price of that model. This same practice could work in China and India.
No. Apple is already offering Chinese customers a deal where they can pay for their phone in 2-year installments
Apple has introduced installment payment plans for shoppers in China. Fees can run from zero to 8.5% and can be spread over a two-year period.
Payments can be split into three, six, 12, 18 or 24 installments. Choosing 12 or fewer installments carries no fee. A fee of 6.5% of the selling price will be charged for 18 installments, and 8.5% for 24 installments.
No. Apple doesn't care about market share. What matters is quality.
Senior vice president of Apple marketing Phil Schiller recently told the Shanghai Evening News that Apple would: "Not develop cheap smartphones in order to grab market share".
"Some manufacturers use cheap smartphones to replace feature phones, but this is not Apple's product development direction," he said.
No. The big priority is to sign up China Mobile
The one thing that would really make a difference to Apple in China is if it could sign up China Mobile as a network partner. The company has been in talks previously with China Mobile about selling the iPhone. The carrier has more than 700 million customers, and without China Mobile, Apple's growth in the country will always be constrained. RBC Capital Markets analyst Amit Daryanani expects that Apple will finalise the deal with China Mobile in early 2013. However, IDC projects that China Mobile won't offer the iPhone until 2014, after the carrier is expected to launch its commercial 4G LTE network.
No. It could damage Apple's brand
Apple is trusted for producing quality products that are reassuringly expensive. Apple has never sold a "cheap" anything. It is a premium company that believes in charging a premium for its products.
To produce a low-cost product is contrary to late Apple founder Steve Jobs' vision. Steve Jobs strategy was to offer a small number of products, focus on the high end, give priority to profits over market share, and create a halo effect.
The Apple brand is associated with quality. Apple products are aspirational. If the company lost that association it would find its popularity waning.
No. It could damage Apple's margins.
This is why investors got worried when the budget iPhone rumour broke. Even Apple bull Piper Jaffray's Gene Munster cut his target for AAPL, claiming that a less expensive iPhone will reduce Apple's margins.
Apple doesn't have to sell the most iPhones in order to make the most money from the smartphone market. It's profitability that matters, to Apple at any rate.
No. Apple should avoid becoming too mainstream
If everyone owned an iPhone Apple wouldn't be cool anymore. In the early days Apple was cool because it "Thought Different". Then because Mac users were cool while PC users were fuddy-duddy. Then just plugging iPod earbuds into your ears made you cool. Now the iPhone is becoming so popular that youths are said to be turning their nose up at it. The irony of the Apple Samsung court battle is that Samsung some how came out looking like the underdog, and that may have done wonders for its image.
Apple needs to go back to the Think Different mentality. People don't want to follow the herd.
Yes. The iPhone is too expensive
The entry-level iPhone 5 is priced at 5,288 yuan (£532). That's equal to about six weeks' pay for the average urban worker, according to data from the National Bureau of Statistics. The average monthly pay in China is about 3,585 yuan (£360).
Local handsets producers are luring customers with smartphones costing less than 1,000 yuan (£100) each, according to IDC.
Yes, China and India don't have the subsidized model for mobile phones
When we sign up for a new phone we rarely have to pay the full price of the handset, it is usually subsidized by the carrier (we basically pay for the phone as part of our contract). That is not the case in emerging markets. Piper Jaffray analyst Gene Munster notes that China and India don't have a business model where handset prices are subsidized by the networks, hence the need for cheap iPhone handsets.
Yes, to address the massive market potential.
A report from research firm Canalys claims that China's smartphone market has the potential to be twice as large as the US market. Apple's CEO Tim Cook has said that he expects China to become the company's largest market, surpassing the US. It's a big market - there are 1.1 billion mobile users in China.
As for India, with 850 million subscribers, India has the second largest number of mobile phone users in the world. Mobile device sales in India are forecast to reach 251 million units in 2013, an increase of 13.5%over 2012 sales of 221 million units, according to Gartner.
Like China, India is a very competitive market with 150 device manufacturers many of which are focused on the low-cost phone market.
Fitch thinks a low-cost iPhone will allow Apple to gain reasonable market share in emerging markets like China and India.
Yes. Or Samsung will win
Samsung's a formidable enemy with a wide device portfolio and an established presence in these emerging markets.
"Samsung is an extraordinarily good competitor," said former Apple CEO Sculley. "The differentiation between a Samsung Galaxy and an iPhone 5 is not as great as we used to see."
Yes, Apple needs more variety
Samsung has a wider variety of handsets in terms of both price and screen size than Apple. Apple can't have all its eggs in one basket. Variety is the spice of life.
Copyright 2009 IDG Magazines Norge AS. All rights reserved
Postboks 9090 Grønland - 0133 OSLO / Telefon 22053000
Ansvarlig redaktør Henning Meese / Utviklingsansvarlig Ulf Helland / Salgsdirektør Tore Harald Pettersen