Maybe Apple cares more about marketshare than we thought

iPhone-5C-blue

Apple was never overly concerned with the market share of their products in the past. As long as their computers and mobile devices have been generating a healthy profit, they’ve been satisfied with a secondary position in raw sales numbers. However, this path hasn’t always worked out so well for them, as they were eventually overwhelmed by Microsoft’s strategy of working with many PC OEMs in the 80s and 90s to gain an overwhelming advantage in market share. Still, Apple has seemingly been satisfied with its yearly iPhone release schedule with a redesigned model every two years, with a spec and feature boost in the in-between years. They have added the sale of older models at cheaper prices and wider carrier availability over the last six years, but not much else has changed.

 

The Home Front

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Apple’s mobile strategy has actually worked just fine here in the United States to date, where premium smartphones sell in much larger numbers. In a recent report from commScore, Apple was said to have a 40% share of the US Smartphone OS market, as well as a 16% lead over second place Samsung among manufacturers. Considering that we are talking about one phone line from one manufacturer consisting of no more than three models at any given time, that is an impressive number. I honestly thought best case for Apple would be 30-35% a couple of years ago, having to go up against the growing tide of Google’s Android and Microsoft trying to spend its way back into relevance. Shows what I know.

However, these US numbers aren’t holding true across the rest of the world. In fact, they aren’t even close. A recent IDC report for Q3 of 2013 showed that iOS, only accounted for 13.2% of worldwide share in the quarter. Why? Apple is able to sell a $600-$800 new premium smartphone for $199-$399 in the US thanks to the subsidy model that three of the four major carriers here use. In fact, with the new monthly payment plans (or ripoffs if you look at them closely) that all of the US carriers rolled out this summer, it is now possible to get a brand new iPhone for no money down. Of course, this doesn’t just help Apple. It means that all premium smartphones sell better here in the States. But since Apple isn’t heavily invested in cranking out mid and lower tier smartphones that are inexpensive off contract, they reap the most benefit from this system.

 

Across the Pond

Unfortunately for Apple, the United States is the only country where the subsidy sales model pays for this much of a device, in return for a 2 year contract term. In most of the rest of the world, users are paying full price for unlocked phones, and are free to switch carriers as they like. Let’s be brutally honest. How competitive is a 2 year old iPhone 4 at over $300 full price when you can get any number of newly designed Android or Windows Phones for less than half that price. While the iPhone 4 may still be a higher quality device, there is a perception issue with buying the older model that certainly isn’t helping Apple in the rest of the world. Again, this is not an issue in the US. A Consumer Intelligence Research Partners report in July showed that the iPhone 4 and 4S have sold VERY well here, thanks to those subsidized free and $99 price tags. They accounted for a very solid 48% of all iPhone sales here in the States.

 

A Change in Strategy?

iphone-5c

And now, as we approach Apple’s big announcement on Tuesday, it looks like things are about to change in a big way. It seems almost definite that Apple will be releasing a second, less expensive model alongside the iPhone 5S in a few weeks. This is not going to be a “cheap” iPhone, but it will be less expensive than the 5S, and it will have the cache of being a new model, not last year’s retread sold at a lower price. And, the multicolored lineup of the rumored iPhone 5C brings a little fun and extra choice to the party.

What does all this have to do with increasing market share? This week, the rumor that the iPhone 5C will be released on China Mobile made the rounds. We already knew that Apple would be having a special China-specific press conference on September 11, one day after the big event held on their Cupertino, CA campus. The fact that the Wall Street Journal, which is usually very reliable when it comes to Apple rumors, is weighing in just adds more credibility to the story.

Now, just to give some background, Apple’s iPhone has been offered by China Unicom and China Telecom, the two smaller wireless carriers in China, but the impact hasn’t been substantial, especially considering the wide availability and popularity of cheap Android devices there. However, China Mobile and its world’s largest 700 million subscribers is the big prize. Apple has been trying to break in there for several years, and it now looks like they’ve finally done it.

Getting access to the majority of the Chinese mobile market for the first time is a BIG deal for Apple. While it is unlike Apple to sacrifice profits for numbers, this is one area where an exception is warranted. While Apple isn’t going to generate the same kinds of profit per device that they do for a prime new iPhone model, that smaller profit multiplied by an exponentially larger addressable market is worth the shift in strategy.

 

Will it work?

That’s the billion dollar question, isn’t it? While no one can tell you if it WILL work, the recent past indicates that it CAN. Just take a look at Apple’s release of the iPad Mini a year ago. When it was first announced, I was right there among the skeptics. A device with noticeably lower specs than the competition, especially the screen, and a $75-$100 higher price? That sounded like a recipe for less than stellar sales. Boy was I wrong.

ipad mini

Not only did the iPad Mini sell well, it cannibalized its larger and more richly appointed big brother. In turn, it also decreased Apple’s tablet revenue for the last three quarters, as it generates far less profit per device. However, Apple is making a play in the longer game, here. The management team saw the growing number of inexpensive 7″ tablet offerings, and they knew that it would impact their sales. They knew that they needed to be a part of that market, but they still did it on “Apple terms.” Instead of making a device with lesser specs that was priced at $250 or less, they went for a more premium feel with the thin aluminum frame, and also focused on great battery life, and maintaining a tablet feel. The iPad Mini wasn’t a cheap tablet. It was a smaller, less expensive iPad. And it sold very, very well.

 

Maybe this isn’t so new

So Apple’s shift in iPhone strategy isn’t new. And following in the path of the iPad Mini, the rumored iPhone 5C won’t be a cheap iPhone. If the reports are true, it is basically an iPhone 5S without the metal casing and fingerprint sensor. It is a less expensive iPhone. As such, this phone will NOT single-handedly take over the mobile phone market. It isn’t designed to. What it will do is make Apple’s middle iPhone offering more appealing and a little less expensive for people buying it at full price.

Also, opening the door to China is huge. That can’t be understated. The 5C isn’t going to be China Mobile’s top selling phone, but that’s the beauty of what Apple does. It doesn’t HAVE to be. Just siphoning a modest portion of that market away from Android increases Apple’s worldwide market share and brings new customers into their ecosystem that they never had access to before. It seems that Apple is banking on those new customers offsetting the decrease in profits.

 

Another potential wrinkle

There’s another potential ace up Apple’s sleeve when it comes to reaching new markets with the iPhone. Remember Apple’s recently announced used iPhone trade-in program? What is Apple going to do with all of those used phones? I’m sure that a large number will be used as replacement devices in stores, and some will be sold as refurbs on the Apple’s online Outlet Store. What about the rest? This will likely become a very popular option for repeat iPhone buyers, so there will likely be many.

However, it’s worth remembering that Apple is also going to start repairing more iPhones in stores, rather than just replacing those covered by the manufacturer’s warranty or Apple Care. So, if Apple will suddenly have a much larger supply of used devices, and will require fewer of them for in-store replacement, what are they for?

There have been rumors lately that Apple may be collecting these older devices to refurbish and resell in developing countries. This may seem like an odd strategy at first, but it actually makes a lot of sense once you think about it. If you look at the kinds of devices that are selling there, it’s a different story that what you see in places like Europe. In more developed areas, you have a lot of mid-tier devices sold, and the premium devices, while they are very expensive, still have a noticeable market presence. In developing areas, inexpensive and older model Blackberrys (the developing world is one of their few remaining strong markets), Nokia Asha dumbphones, Nokia’s lower tier Lumia phones, and again, low-tier Android devices, make for much more modest competition.

By offering older devices that they have already sold and turned a profit on in the past, Apple can afford to sell them at very competitive prices. All they will have tied up in these devices is the discount they offered to take them in, and the repairs that that they make to bring them up to standards. Most of the hardware these older iPhones would be sold against is be of much lower quality, so any model from the iPhone 4 and above should really stand out. The specs won’t be all that different between them and some of the competition, and may actually be better than a fair number. In other words, Apple will be able to charge a little more than the competition. My bet is that they will have no trouble selling to those who can afford them.

In this instance, there probably isn’t much profit to be made. In fact, there may be none. However, using older devices would give Apple a way to bring more users into its ecosystem with little risk, and no need for additional manufacturing resources. And there is a payoff there. In many developing areas, cell phones whether they are considered smart or dumb, are people’s only link to the Internet. If that’s the case, these users are more likely to purchase all of their music, media, and apps there, because it’s their only opportunity to do so.

 

Conclusion

Whether you look at the reasons for Apple to offer the 5C, its relentless pursuit of China Mobile, or its potential foray into developing markets with used devices. it is clear to me that Apple is now placing more importance on the market share numbers. You could also look back to the iPad Mini as the first example of this strategy shift. Either way, it’s my opinion that Apple is moving away from per device profits as the only barometer of whether a device should be produced, and whether it is successful if it is sold.

Now, don’t get me wrong. Apple isn’t turning into Samsung. This new direction isn’t “throw everything at the wall and see what sticks.” It also isn’t, “get share at all costs.” Apple is still going to be make products that they know will be profitable. They are also still incredibly focused on quality and design. However, they just seem to be more balanced in their approach now.

Apple’s sales strategy since the return of Steve Jobs worked incredibly well when selling premium smartphones subsidized by carriers in the United States. That got them 40% of the US smartphone market, which is a big success all things considered. Their revised direction should bring them more market share, and in time, more revenue overall worldwide. At a time when Apple’s every move is heavily scrutinized, and the stock price is well off its high of year ago, this direction is something the board of directors and shareholders should be very happy about. It opens the door for Apple to gain a wider audience for iOS, and not have to depend so heavily on hardware profits to remain successful.

Do you have some thoughts on the coming iPhone 5C, or in Apple subtle shift in strategy? Feel free to share your thoughts in the comments below, in the forums, or hit me up on Twitter @jhrogersii, or on Google+. I would love to hear from you.

 

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  • TheScienceEnthusiast1130

    “iPhone 5C”?

    • Apple Rocks

      Cheap

      • TheScienceEnthusiast1130

        Huh?

      • Renkman

        colors

    • Steven Cannan

      Color

      • TheScienceEnthusiast1130

        YAY!!!!

  • TheScienceEnthusiast1130

    Someone is downvoting…Who is it?

  • Xennex1170

    The question is profitability of phones traded in considering the discount towards upgrade phone, cost of shipping those phones a few times in the process till resold and the costs related to refurbishing may actually result in very little profit if not a loss. However I believe that this will increase respect for the company on a variety of fronts.

    As to the 5C, similar to the iPad mini it will most likely eat into the profit from customers that would have purchased the 5S otherwise. Also each new 5C customer may be less likely to also purchase as many apps since they will be more cost conscious having purchased the lower cost option.

    • James Rogers

      I agree of the refurbished models. I think that would just be a play to get entrenched into emerging markets, and get people into the ecosystem. An investment, of sorts.

      As for the 5C, I actually disagree. I’m sure there will be many cost concious buyers, but there are plenty of that sort buying iPhone 4Ss and 4s right. In fact, 48% of iPhone’s sold are the older models. Yet, Apple has seen large decreases in App or other ecosystem sales.

      • Xennex1170

        I wonder if there is anyone who has done a study comparing over a year how much new iPhone users of the ‘current’ model spends for apps vs new users of 1 year old models. This may show if users are applying the ‘savings’ from purchasing an older model towards more app purchases.

        • James Rogers

          Not that I’ve ever seen, but it’s a good idea. I think you’re right. Such a study would be the only way to really know that.