A recent Wall Street Journal article speculates that Apple will be forced to launch cheaper iPhone models in markets where the phone service provider does not subsidize the handset. Though Apple sells an impressive 37 million iPhones a quarter; its global market share at 16 percent in half that of Google’s market share with Android phones. The major reason for this market share differential is the high cost of iPhones in markets where the mobile carrier does not provide low cost handsets.
The AT&T model in the US
In the US, AT&T provides low cost mobile phones to its customers in return for a 2 year service contract. The phone subscriber can get the older iPhone 3GS handset free of cost, the iPhone 4 version for $99 and the new iPhone 4S for $199. The phone user gets unlimited data downloads for this fixed fee. There are penalties for short-closing the service contract.
AT&T is the primary GSM service provider in the US and its major competitors Verifone and Sprint both offer CDMA services. AT&T’s agreement with Apple prevents the iPhone maker from developing CDMA handsets for at least 5 years. This helps AT&T attract customers away from rival service providers and locks them in with service contracts. When the 2 year lock-in period ends, the customer is usually ready for a handset upgrade and that locks him in for another 2 years. In the week of the iPhone 4S launch earlier this year, AT&T added 1.2 million new customers and signed up another 1.2 million for handset upgrades.
In the UK, the mobile service provider O2, which is a subsidiary of Telefonica Europe has a similar business model, providing low cost iPhone handsets with extended subscriber contracts. Telefonica, however, does not provide subsidized handsets in Spain or Portugal. A company spokesperson argues that the consumer must buy his own phone and the service provider should concentrate on running his network. In countries like Spain and Portugal the new iPhone 4S costs as much as $900, and the older iPhone 3GS retails for $535. Whereas Android smartphones are available in $250 to $350 range.
Apple may develop a low cost strategy for the Asian markets:
Apple has an outstanding brand image in China despite having a very small retail presence. Apple only has 5 sales outlets in two mainland cities and 1 outlet in Hong Kong. Most of Apple’s China sales of over $4.5 billion are through independent retailers who also sell other products.
A Morgan Stanley study report says that an astounding 87 percent of Chinese phone buyers rated the iPhone as the brand they wished to buy. Over 93 percent of the same sample said they would not pay more than $350 for the iPhone 4S. Morgan Stanley concludes that if Apple were to achieve this price point, it could get a much larger slice of the $70 billion Chinese handset market. A recent report in the China Times newspaper claims to have information from Apple’s suppliers of a low cost iPhone for the China market.
India is another large handset market with smartphone penetration doubling each year. In India, the average revenue per user is one of the lowest in the world and mobile service providers are looking to make money on data usage. The large Indian phone service providers have not bought into the AT&T model of subsidizing handsets and providing unlimited data downloads for fixed monthly charges. The Indian market is even more price sensitive than the Chinese market and analysts believe a limit of Rs 10,000 (which translates to around $200) is the sweet spot for the Indian handset market.
The Apple pricing strategy has always been at the high end
The Apple pricing strategy has always been at the high end, not sacrificing profit margins for market share. Each time they introduce a new model; older versions are marked down in price, as has happened with the iPhone and other Apple products like the iPad.
The one product that Apple redesigned for price is the iPod music player. The first iPod mini (which was renamed the Shuffle) was introduced in January 2004 for $249, which was reduced to $149 in February 2006 with some new models and down again to $79 in September 2007. Simultaneously, new features were added to offer higher end models that were priced at the higher levels. Apple could adopt such a strategy for the iPhone.
Lower prices could help more people experience the Apple iPhone. It appears unlikely that Apple would launch a low cost iPhone and cut into the attractive profit margins it makes. The price sensitive emerging markets may have to use the older Apple products at marked down prices until their own purchasing power improves to that of US consumers.
Guest Post: Claudia is a blogger by profession. She loves writing on luxury and technology. She recently read an article on cellphone beat that attracted her attention. These days she is busy in her research work for bornrich.com.