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C is for Cognitive Illusion

My assumption going into this, sixth iteration, of the iPhone was that we would see the expansion of the iPhone into two distinctly positioned products: a low-end C and a high-end S. The assumption was based on what what we saw with the iPad: the regular iPad and the mini iPad.

By using the iPad as a template, my exercise in August was to forecast what the pricing[1] might turn out to be for such a split-personality product.

I expected the 5C would replace the “low end” n-2 variant[2] and the 5S would continue as the core product. This is reflected in the original graph as devised in mid-August:

Screen Shot 2013-08-12 at 8-12-11.44.05 AM

The surprise was that the 5C was not “low end” in any way other than having a plastic case. It has a minor spec increase over the 5 but is otherwise a 5 feature set in a plastic skin. It also is priced as if it was the continuation of the 5, with a modest reduction in ASP.

In addition, the continuation of the 4S and 4 (in China at least) means that the old strategy continues more-or-less unchanged.

Knowing the line-up and pricing all that remains to understand is the positioning, or how the products are defined relative to each other.

This is where there might be a shift happening. Under the old model the n-1 variant was meant to be a modest volume contributor to the portfolio, being essentially a cognitive illusion which encouraged buyers to stick with iPhone n at the expense of competitors. However, the new n-1 product (the 5C) has a distinct positioning that makes it seem fresh and not a lesser, stale version of the flagship. It is designed to appeal as a legitimate upgrade for iPhone 4/4S users.  It is, in other words, not meant as an illusion, and not focusing attention on the flagship[3]. Rather, it is meant to be a genuine, core product.

As a result, I expect the mix of iPhones to be more evenly split between the C and S variants. I expect the C to even become the most popular version in the mid-term. My expectations are shown in the following graphs.

Screen Shot 2013-09-11 at 9-11-11.57.11 AM

There are several implications for this shift in positioning:

  1. Apple is recognizing that the market is actually “segmentable”. This is the notion that one size does not fit all–a radical idea for the brand. Its mechanism to address it is a “good+better” portfolio. Note that this is not at all like the iPad where the Mini is actually suited to different tasks. The iPad can be thought of as a “small+big” portfolio. The iPhone shows a clear delineation within the same product.
  2. It is signaling that the premium may be more than what the mainstream needs. This is a corollary to the segmentation implication above but stands on its own because it also implies that the iPhone C is “good enough” and the S is more than good enough (or, to spin it another way, it is for “more demanding” customers.) It also implies that the premium “S” version will be a lower volume contributor.
  3. The third implication is that the basis of competition is shifting.[4] The shift is toward competing for late adopters in advanced markets and with early adopters in trailing markets. The new C model is still not suitable for trailing markets as it still over-serves and is over-priced[5], but it is at least signaling the “end of the beginning” phase in the smartphone market.

In summary I’d say that the C signals the beginning of the “good enough” phase which was also evidenced by the increasing mix of the older models during the last year. Financially it shows up as lower ASP, which, as the graph above implies, I expect to drop to $600 and lower during the next year.  Margins may not be affected much as the C is still very highly priced relative to its cost of production.

Finally, if the good enough alternative is being “pinned” by Apple as the mid-range it also begs the question of why there isn’t a specific “low end” version. It took six years for Apple to fork the product into two variants. Maybe it will take another year for it to stretch to a third.[6]

 

Notes:
  1. Revenue/unit to be more precise []
  2. Older by two generations as the iPad mini replaced the iPad 3 []
  3. It might still be an illusion for many but I’m suggesting that it won’t be for most. []
  4. It has always been expected to shift, but the timing is where all the value is captured []
  5. This post deals with the iPhone portfolio structure or the placement of iPhone models relative to one another. It does not deal with a separate question of why the overall pricing is so high. That question needs to be dealt with as a discussion about the jobs iPhone is hired to do and by whom. I’ll re-visit this job-based segmentation of the market in a future post. []
  6. For more on the subject see S is for Service. []
  • d_n

    Brilliant analysis as usual. Kudos, Horace.

    • iRush

      As usual!

  • markwilcox

    Would be interesting to know what you think the mix would have looked like if they’d retained the previous strategy and simply reduced the price of the 5 rather than replacing with the 5C? I suspect the 5 would have significantly outsold the 5S. By going with the plastic case they’ve improved margins on and taken the shine off of the n-1 version, while still making it fresh and new.

    For short term profits it seems smart to me. For the all important ecosystem it seems short-sighted. How many developers will target high-end device capabilities while they’re still selling the 4S and even 4. Android is becoming good enough very fast. Apple appears to be handing most of the market (outside the US) to Android without a fight. Some developers are already starting to target Android first. Apple seems to be happy to stay at the high end and aim a bit more towards the Enterprise. It’s a valid strategy but a little disappointing that they’re leaving the rest of the world to an Android monopoly.

    “What ruined Apple was not growth … They got very greedy … Instead of following the original trajectory of the original vision, which was to make the thing an appliance and get this out there to as many people as possible … they went for profits. They made outlandish profits for about four years. What this cost them was their future. What they should have been doing is making rational profits and going for market share.” – Steve Jobs.

    • http://www.asymco.com Horace Dediu

      The top quintile may not be a bad niche.
      Those one billion users might allow them to hang on until the next big thing.

      • markwilcox

        Yes, the smartphone market is so huge a 10-20% share (at the high end, not the low-end Microsoft) can probably sustain a very happy developer ecosystem. Apple is only hitting 20% in the launch quarters now though – they appear to have saturated the “people who want to afford a $500+ phone” market (which is many more than I ever expected) – a billion users seems optimistic. Unless there’s a mid-cycle update to devices or pricing I’d expect another record launch quarter for volumes but still below 20% market share followed by an even sharper drop in share than last year in the next 3 quarters.

        That said I don’t actually doubt they can hang on until the next big thing financially – it is just disappointment that they don’t want to sacrifice margins for market share to give Android some real competition.

      • redoak

        “hang on”. LOL

      • iRush

        No!

      • obarthelemy

        Risk is as in PC market: ecosystem disaffection by devs, once 10-15% market share turns into 10-15% installed base. Even with higher spend/device, that’s too huge a gap.

      • gap

        It’s not too huge a gap if the spend per device is 6.66-10x more, obviously.

      • markwilcox

        But it’s not, it’s closed to somewhere around 2-4x already.

      • iRush

        But is it

      • iRush

        if it is 6.35 it would be good?

      • iRush

        cOMPARING to [c Market is yksir. What about system affection for iOS. What about system (dis)affection for the An misexperience hat is too big An cow pat.

      • redoak

        I’d describe it differently than “hanging on”

        I think most people are under estimating the impact of the lower 4 and 4s prices. These are strong, viable products that will run iOS 7 and most of Apple’s core services (e.g. iMessages, FaceTime, Siri, iTunes).

        Also, I assume they will continue to sell the 4 in all emerging markets – India, Brazil

        With promo dollars, I would not be surprised to hear the 4 selling for < $300

    • tmay

      I just don’t see Apple as wanting to join the race to the bottom and all the cost that would entail. Better to shore up your developers with new opportunities and your customers with new services and let Samsung clean out some of the weakest Android OEM’s before going any further down market. A duopoly suits Apple just fine.

  • Liberty

    The 5C has the same, much improved, LTE connectivity as the 5S. This is why it replaced the 5: the iPhone is sold to carriers to sell broadband, and LTE is hugely important to them because it is so much more spectrum efficient. We are starting to overserve, and I suspect that once their customers are all on LTE, carriers will reduce their willingness to subsidize, especially outside the US where the iPhone is unlocked at the end of the contract period, and customers can change carriers for a cheaper deal.

    So after Apple has milked the carriers for all their worth, I suspect they will reduce their margins to a more typical 35%, dropping the price from $649 to $499, and happily accept that the smartphone upgrade cycle will lengthen by a year or two.

    • http://www.asymco.com Horace Dediu

      This will be addressed in a future post, but broadly this is the case: the iPhone generates most of its revenues from provisioning data services.

    • peter

      I think it is important to consider the role of the carriers in the pricing of the iPhones.

      A $450 subsidy on a 5s makes sense to a carrier because the top-end iPhone is so good at selling data plans to business users, gadget hounds and the well off. However, a $450 subsidy on a 5c — which targets a more budget constraint demographic — is a more dubious proposal for a carrier.

      If Apple really wants carriers to push the 5c to their customers (and not have them diverted to lower subsidy Android phones), they will need to ensure that the required subsidy on the 5c is lower. That means the sales price to carriers might need to comes down, in that respect it is helpful that the 5c is easier to produce than the 5.

      However, I have to say that by not offering a lower-cost model to address a broader market, Apple leaves an awful lot of money on the table that will sustain its competitors. Also, if I look at iPhone’s market share in Asia and certain key European markets (Germany) then they are missing out on a lot of the action.

      • anon_coward

        but how much PROFIT are they really leaving? what are the margins on $300 unlocked phones? and the fact that a lot of people go iphone for their second smartphone purchase after an initial cheap phone

      • peter

        I think that Apple could have a very healthy business selling $350-400 phones that can compete with no-brand phones that are $100 cheaper; however, they have chosen not to introduce a product this cycle that captures that market.

        They may be losing part of their future profits. Competitors that are operating at break-even may not share in this year’s profits, but they remain in the market to fight another day — some of them will chance upon a winning design sooner or later. In addition, not being the number 1 platform carries a penalty in terms of network effects — not an issue now for Apple, but also this may change.

      • anon_coward

        outside the US a $350 phone means apple owes $70 VAT to the local government along with the costs of a 2 year warranty. add in all the other costs and you are looking at a fairly cheap phone with no profit margin

      • DarwinPhish

        Well, let’s pull out the back of an envelope…

        Let’s assume a 5C costs $175 to manufacture (that’s about 15% less than a 5 cost a year ago). If Apple sells them for $300, they make $125 per device. If they sell it for $550, they make $375 per device. So, to make the same gross profit, they would need to sell 3x more at the lower price.

        This also assumes they can produce 3x as many devices and that their existing sales channels (i.e. the carriers) can move 3x more devices. Those are big assumptions. In fact, Apple’s pricing suggests that there are production and distribution constraints.

      • anon_coward

        you also have to figure selling costs, and all the costs for services that go into supporting the iphones. apple’s net profits aren’t that high now

      • peter

        I think the distribution limitations are a function of the carriers’ willingness to subsidise handsets. Obviously there is no point in giving a $450 subsidy to a light user, much better to steer them to a low-subsidy handset (there is an Android for that).

        As soon as you start worrying about cannibalising your own profitable businesses, you really have to worry about being disrupted.

        I take the point that selling cheap handsets is not a shortcut to riches, but there is no safety in a flight to high margin either. The ultra high margin days of the iphone are truly exceptional in the hardware business, they are unlikely to last forever.

      • StevenDrost

        The better question is how much pain would a 300 dollar low margin cause to the more expensive lines. Right now IOS has a high barrier to entry and people are willing to pay it. Why let them in for free. That’s bad business.

  • Lun Esex

    I was JUST thinking along similar lines right before reading this.

    A thought came to me: How much of Apple’s maintaining their current iPhone strategy (primarily addressing/targeting the premium segment) is dependent on untapped, unaddressed markets? How many unaddressed 1st tier iPhone markets remain after China Mobile and NTT Docomo? Now that these markets are going to be covered, is Apple’s current strategy in essence “reaching saturation,” requiring a new strategy?

    As you put it, the “end of the beginning.”

    Before it was announced I had been thinking that the iPhone 5c was going to be the iPhone equivalent of the iPod mini to iPod nano shift. Instead it looks like the 5c is the iPod mini itself: It’s only a little cheaper, but it addresses different needs. It’s the “good enough” iPhone. The ‘C’ line is the one that can have its price gradually reduced over time to address broader markets, without as many spec bumps. Meanwhile the ‘S’ line pulls away from it, widening the gap over time in terms of specs, features, and technology.

    This year’s ‘S’ model got a 100% boost in processor and graphics. I can imagine next year’s ‘C’ model won’t actually reach the performance of this year’s ‘S’ model. It’ll only get a more modest bump (25%-50%), allowing Apple to drop its price more.

    What I could see is that next year Apple keeps up the pattern, dropping the 5c to free on contract, and introducing a 6c and 6 or 6s, but the 5c and 6c would see a reduction in their unsubsidized price positions, maybe to $350-$400 and $450-$500. The following year a 7c might eliminate both the 5c and 6c, coming in from the beginning at the $350-$400 price unsubsidized.

    Potentially Apple might not wait that long. One thing I could see is the 4S being discontinued completely (outside of China/India) in only 6 to 8 months, and replaced by a cut-down 5c (8GB, $450/$0), like Apple did with the low-end previous generation iPod touch. In this case the 6c could replace the 5c entirely next year, starting all the way down at free on contract.

    • Jessica Darko

      Consider the impact of processors. Your analysis is on the money I expect, and I think the factor that fills in the gaps is the processor life-cycle.

      New processor designs are expensive, front heavy, and require high volumes to pay off. The 5S has a new processor design. Apple has to spread new designs over high volume over time to pay them off, while initially they simply can’t be made in high volume due to process difficulties and higher cost.

      The past model had the older processors declining in volume when the phones became the “one year old” lower priced models.

      Now we have two product lines and the lower end one (which currently is boosting volumes on last years processors) will soon be boosting volumes on a variant of this years processor. The next AX chip will probably be an increment over this current one (you can’t double every year), but a variation of it could go into the 5C replacement to boost volumes on that now, one year old design. (They could do this by using the 64 bit processor but at a lower frequency extending battery life, or a variant with fewer cores.)

      It will be interesting to see what processor the iPod touch update has, and what processor the iPad mini has.

  • Stefan Constantinescu

    I find it telling that Apple is going to take preorders for the iPhone 5c, but not the 5s. That’s pretty much confirmation that they expect the 5c to ship in greater volumes, while the 5s will be a higher-end product, as you said.

    • http://www.asymco.com Horace Dediu

      And it’s the C that’s featured on apple.com

      • obarthelemy

        Pushing the actually available model… that’s sales 101.
        Also, margins might actually be higher on the 5C ?

      • DarwinPhish

        I think Stephen Elop skipped that class!

    • rattyuk

      I think that just points to supply issues. We shall see next month when Apple release a new iPad and see how many of the features make it there. (Fingerprint scanner, new processor, better camera)…

    • GuruFlower

      One week delay on the 5S. Preorders start on 9/20. Perhaps they want to have two weekends of massive sales to brag about instead of one.

  • http://www.isophist.com/ Emilio Orione

    The problem Apple is trying to solve is more complex, I believe.

    The good enough quality is not only dependent on hardware but also on ecosystem.
    The iPhone 5c is good enough both as hardware spec for a phone and as a platform device for current phone apps.
    The iPhone 5s has a doubled processing power, every software house should be happy of that, who doesn’t want more processing power with same battery life?
    The problem is that good software able to use that power will take time to be developed and this kind of difference in time is gonna to be continuous in phone market.
    New models will arrive with new hardware capabilities and the software ecosystem will take its time (six month – a year) to use them (if they find them attractive).
    So the top tier model will be always overserving from now on, it will be the one with the new hardware specs that software will use in the next year, while the mainstream model will be the only one fully used by current software.
    The two level segmentation of the market is due to economics but also to the different velocities of development of hardware and software.
    There is no meaning in releasing every year only a new model with hw specs very few apps use, this is a spec war apple won’t fight.

    The third low end option will be needed perhaps for economic reasons, but from the usage point of view and the iPhone reason to be is not an option.
    The less than good enough phone won’t be able to use all the apps developed for the new mainstream in the preceding year, so it will be a lesser experience. Better use a last year model as an illusion than create a minor experience iPhone, because sustaining the ecosystem development is the main reason for the iPhone development and an iPhone that does not contribute to the ecosystem has no reason to be.

    As an example consider the 5s specs. The 64 bit, the M7, the fingerprint scan, the photo hardware improvements will be used only by apple sw for some time. That would be sufficient for enthusiast, not for most.
    A 5s buyer will have to wait to have the new software that can give value to his purchase, while a 5c will find all the software ecosystem developed to fulfill his phone capabilities.

  • http://epochtim.es/greyman Peter Greyman

    Why do you expect the C to sell better than S? I myself can’t justify to buy C, when for just $100 more, I can have faster machine, with metallic body and much better camera.

    I would also like to add, that I wasn’t surprised that the C is not low-end. If they want to ship it with iOS7, there isn’t much room to downgrade the specs. (I wonder how well my 4 will run with iOS7).

    • peter

      I agree that for $100 more the 5s is very attractive compared to the 5c, because it is faster and more future-proof. However, if you really want to be future-proof then you don’t want to skimp by getting the 16GB version of the 5s; you would get at least 32GB, which suddenly gets you a $200 difference. Therefore, I think there is good reason to expect the average sales price of the 5s to be more than $100 higher than that of the 5c.

    • http://iddqd-technology.com/ Chris Blanchard

      This is a very persuasive argument to individuals who take the time to debate the nitty gritty of the smartphone world on a niche website (including myself!)

      However, the rest of the world is many times larger than our demographic and I think they’ll be judging the iPhones using different criteria. I think most normal people don’t really see the spec sheet. They act on what it looks like, how it feels (software and hardware), what their friends say, etc…

    • studuncan

      Because Android sales numbers show that lots of people are price sensitive. To the point of buying junk because it’s cheaper.

      • Jessica Darko

        It doesn’t make sense for Apple to stimulate demand that it cannot meet.

        Alas, we don’t have any android sales numbers to show that. All we have is speculation and propaganda.

        It is logical that lower prices will result in higher volume, and I agree that people are price sensitive.

        The question is, to what extent, and that we can’t know without knowing actual sales numbers. Apple has better visibility into the competitiveness of the market than we do.

        Further, hypothesize that Apple had a way to make phones for free, which would result in near infinite volume— say they could make money doing this– would they do it? No, because they are volume constrained.

        It doesn’t make sense for Apple to stimulate demand that it cannot meet.

      • studuncan

        “It doesn’t make sense for Apple to stimulate demand that it cannot meet.”

        Apple’s MO from the beginning has been to stimulate demand that it cannot meet. Heck, it’s done that half a dozen times just for the iPhone.

    • StevenDrost

      It will appeal to people who don’t care about the added features of the 5 and for the price conscious its half as much in a subsidized markets. For once people can get the cheaper one and its still the new one. Also, I think the style will resonate with teenagers and women more.
      FYI, IOS 7 runs on an IPad 2 and IPhone 4, they could easily have put the A5 in the phone and still make it a good product.

  • GuruFlower

    What are Apple’s current business objectives? I think they are to maintain its core market of value added customers and reduce the cost of goods line in its income statement.

    Value added customers buy media and software from iTunes and the App store on a regular basis and satisfy all their computing needs with Apple products. With their investment in the ecosystem these are Apple’s sticky customers and the 5S is aimed at this segment of their customer base. They should be delighted with the new phone.

    The 5C is targeted to recover the margins that were lost when the iPhone 5, with its costly machined aluminum case, was released last year. I expect that one machined mold for a 5C can replace 10 CNC machines that would have been required to continue the 5 model. This is a huge reduction in the cost of manufacture and should go straight to the bottom line. Other than the one time cost of the injection molds for the plastic case, the 5C’s development costs have already been recovered since it’s an iPhone 5. It’s a good upgrade for 4S users coming off contract who want to save $100 or new entrants for whom any iPhone is a financial stretch.

    Although a China Mobile announcement would be great news, as an American with experience buying Chinese products regularly, I have seen that most Chinese consumers will not spend one cent more for any goods than they absolutely must. The Chinese are extremely cost competitive and price averse. Markups for most Chinese goods are in the single digits. I doubt that there will ever be a mass market for Apple goods in China because the company will never accept a 10% or lower margin on the products they sell there. The Chinese market for Apple goods will be the value added customers who can afford and desires the highest quality products, a minority of the population. There may be many of these but I do not expect Apple ever to dominate in China. We’ll have to see if the iPhone 4 and 4S can compete effectively with the Chinese middle income group against Android models.

    The dip in initial ASP for the Q313 on Horace’s 2nd chart is to about $610, down from the usual introductory ASP of $640 in prior years. That $30 drop should be made up by the lower cost of the injection molded 5C and Apple’s recovery of its fixed costs to develop the iPhone 5 line. The 5S will protect Apple’s investment in its value added customer base and the 5C should protect or improve its profit margins.

    • http://www.isophist.com/ Emilio Orione

      For Apple money is the result not the objective. They stated it clearly and they truly believe it. If they make the product money will come.
      So they objectives can not be something like: maintain iphone value, that is the result.
      They want to make the better product, but what defines better in current phone market? It is the ecosystem, because as Steve Jobs said the iPhone is software.
      So they objective is to maintain the best ecosystem and that will maintain demand and iphone value as result.
      How can you maintain the best ecosystem? Giving value to developers.

      Say you just made a wonderful app for iphone 5. The new iphone 5s alone would have made your app obsolete.
      No 64 bit, no touch id, no avanced motion detection, million of new iphone users will find your brand new app old.
      With the 5c apple created a mainstream high volume iphone that maintains app value, since the same app is at home in the brand new iphone.
      (I know the app must be upgraded to iOS 7, but that could be done without requiring to update also to new hardware specs).
      In due time you will upgrade the app also to use the new iphone 5s features but your work has gained a bigger time span of value for your customers, and that exactly what can keep an ecosystem happy.

      Both the new ios7 and the new hardware split are meant to improve developers opportunities and so to maintain the ecosystem, that what is apple pursuing.

      • GuruFlower

        I agree with you on everything except the money. If money were not a major objective Apple would cut its 30% margins and rule the world.
        An old adage says, “When someone tells you ‘it’s not about the money, it’s the principle of the thing’… you can be sure it’s all about the money.”

      • http://www.isophist.com/ Emilio Orione

        Well that’s a cynic view, but yes, money makes the world go round.
        Nevertheless how to make money is the question. If your objective is to make money you don’t really know what to do.
        If you have an objective that is pursuable and reaching your objected gives money as result than you are making money and you have reached the principle of things.
        Knowing the good objectives is hard, but apple apparently has found them, they pursue them without rest and make a ton of money in return.
        In my view they current objective is maintain the lead in the ecosystem, that will make the money continue to come.
        Android is fragmented and new model with new hw specs come and go at high speed. Software can’t keep up, at least not at iphone speed.
        So improving app duration and improving API and kit is a smart way to assure a future in which the best apps will be in iOS and in development for Android for a limited set of devices, and forget about windows phone or blackberry.

      • Accent_Sweden

        Apple’s well aware of what life without enough money is like. Steve swore they would never let that happen again. And while they seem to be swimming in it now, things can change quickly, especially with dividends, acquisitions and regulatory authorities all around them. They have a business model based on getting what the market will bear for the best they can produce and they are doing everything they can to optimize this model. We should be wary of confusing Apple’s commitment to its philosophy with greed. Yes, they want to make money. The best way they know how to do that is to do the best job they can for their customers. Obviously the numbers seem to support what they are doing. Be happy they don’t want to take over the market completely with cut rate phones. No one would be happy. Wall Street would punish them for lower ASP and customers would not like what they got. Leave that to Samsung and others.

      • GuruFlower

        I indicated that financial reward is a major consideration for Apple, not the only consideration or even the primary one. Job one is make brilliant products, job two is make a lot of money on them.
        Apple has always sacrificed market share for financial margins as far as I’m aware.

      • Jessica Darko

        You seem to believe that they could cut margins %30 without risk. I disagree. Part of the reason they use this pricing strategy, I think, is to avoid becoming another HTC, Palm or Nokia. A lot of companies have tried to rule the world with small margins, and while Samsung may seem to be winning at this strategy (though I question their actual sales numbers) there are clearly a number of companies who have failed or are themselves in jeopardy of no longer existing.

  • Anurag31

    Hi Horace,
    Yes you are right that Apple is positioning 5C as the main phone and 5S as the Premium/Pro, only question is that price differential between the two is low (15%) and would it be sufficient for people to accept especially in US where with contract it amounts to $4.25 fee for contract.
    The more important question is that for past 5+ years Apple has two great things going for it (in comparison to competition) , excellent hardware and application eco-system (including content providers).
    Now end of 2013, that gap has narrowed or non-existent in hardware and competitors are seriously threatening it’s dominance especially in non-US markets where Apple does not have such a strong lead in second category i.e. apps/content.

    In my opinion 5C might be “good enough” phone in US due to its subsidized pricing and content domination but in non-US market persons are going to shell out that extra 15% to own a premium product or opt for better spec phone from Android stable (Sony Xperia Z/Samsung Note 2/3 etc). Add to the fact that Google apps (Google Now, YouTube, Maps etc) provide a more integrated and better experience on Android which was not the case earlier.

    I definitely feels “its beginning of the end” but not that Apple dominance will be gone, but its dominance to command such a high ASP with huge profit margins would be seriously challenged and should see in next 2-3 years margins heading towards in Ipad range. This necessarily wont be good for competitors since they have used/using iPhone price as reference to command fat margins.

    This is nothing unusual but usual cycle that any product goes through (PC is a good example).

    • StevenDrost

      I think if you look at the selling points as being the screen and processor then there is little room for a meaningful improvement that the customer will appreciate. But there are so many hardware or software features they could add to improve the phones. For the subsidized western markets, $200 dollars for a device you use all the time, every day is nothing. People pay thousands of dollars for watches, the utility and status of a smart phone is far greater. Also China’s economy is growing fast. Their products may be too expensive now, but wait a few years and they may not seem so bad.

  • r.d

    Basically 5c has to have dual purpose.
    1. Still serve the contract subsidy model where the price has to be stable.
    2. 5c also will be discounted in China and India once older models inventory runs out.

    6 months we shall see the true intentions.

    Plus one of the reasons 5c is still expensive it is because of LTE chip which is not needed in India.
    If apple had come with 5c with just 3G chip then it would be replacement for 4S

  • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

    Instead of creating a low cost product, Apple has created a high cost product (5S). Applying the disruption theory lens, this smells more like a retreat to the high end, rather than a self disruption from below.

    • GuruFlower

      High sales price, low cost to manufacture vs 5 and 5S.

      • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

        You are correct, it is expensive, not high cost, corrected my comment.

      • Jessica Darko

        New designs using new manufacturing techniques are not generally low cost to manufacture.

        The cost of manufacture should go down faster with volume, but it’s unsupported to imply that there are high initial margins on the 5C.

      • GuruFlower

        Apple could have offered the iPhone 5 aluminum in different anodized colors if they just wanted the color choices. They could have even clear coated them if they wanted a glossy look.

        I believe they did not want the cost of setting up another huge number of CNC machines for the 5S line. That’s why the 5 was abandoned for the 5C.

        The main cost of injection molded plastic is the one time cost of machining the mold. Making the plastic part is a trivial cost compared to machining it from aluminum once you recover the cost of the mold.

      • Jessica Darko

        I believe Apple has a huge fleet of CNC machines they built for the 4, and used on the 4S, 5 and now 5S. So, we agree that the plastic case for the 5C allows for a higher-volume, lower capital cost ramp up. So that fleet sticks around to handle the volume of the 5S (Which itself will be higher, I expect, than the volume of last years’s 5 that is being built.)

        Next year, though, the 6 should be coming out. I wonder if it will also be a machined design or will change significantly. Apple’s about due for a redesign like the one that produced the iPhone 4.

      • StevenDrost

        The question in my mind is what is the lineup next year?
        6 650
        5S 550
        5C 450

      • Lun Esex

        That’s the old strategy. The 5c signals the new strategy, where a 6 or 6s will be accompanied by a 6c. Like the 5 this year, next year the 5s is simply going to go away and get replaced by the new top-end model.

      • Mark Jones

        I wouldn’t be so sure. There’s no guarantee that the 5C gets updated every 12 months (see iPod touch history). It could be as StevenDrost said, 6-5S-5C in 2014. Followed by 6S-6-6C-5C (5C at 350) in 2015.

      • Lun Esex

        iPod touch is a poor indicator of what things *won’t* happen, as it is a distant secondary product to iPhones.

        S-class/C-class iPhones are now like MacBook Pro/MacBook Air, or iPod (Classic)/iPod mini or nano.

        Apple wouldn’t have split the iPhone into two product lines if it wasn’t intending on keeping them both updated with new models every year.

      • StevenDrost

        The non yearly update on the C line is entirely possible, but there are many strategies they could employ, with no one right answer. I think we need to let go of the assumption that C=cheap, or that in a couple years C will become cheap. This is an optimization of the current strategy and price wise not much has changed or is likely to change in the future. If anything the 5C is designed to be an upsell from the 4S. Regardless of what the lineup looks like next year I would anticipate the prices to be 650,550,450. With the chipsets being A8,A7,A6.

        There is a potential for apple to target a lower price point, but I’m not sure that IOS or the IPhone brand can sustain it. This is like BMW buying Mini, they need something else to go down market with.

      • StevenDrost

        I’m going back and forth on if they keep two plastic models going forward, but I’m leaning away from that strategy and this is why.

        They like using the same machinery and process for at least 3 years. The exceptions are the 3rd generation IPad and IPhone 5, but those models kept the same external appearance and swapped the internals. Its possible your right, but its unprecedented for the 5 body style to only last 2 years. My guess is it will see 3 years of action in the states and continue in china for the 4th year. The implications of the 5S having a long life is that it would be unlikely for the 5C to receive an upgrade next year except for a color change. But keep in mind the 5C customer is likely not as focused on technology.

        Here is my crystal ball prediction.
        2013
        5s a7
        5c a6
        4s a5
        4 a4 (china)

        2014
        6 a8
        5s a7
        5c a6
        4s a5 (china)

        2015
        6s a9
        6c a8
        5s a7
        5c a6 (china)

      • Lun Esex

        What you’re missing is that next year a new 6c gets upgraded internals and the 5c plastic case, in new colors. It’ll be the mid-range model, instead of a 5s at a lower price. The 5s gets discontinued, like the 5 did, and a new 6 or 6s takes its place as the premium iPhone with an A8 in an aluminum case.

        Keeping the 5s would mean lower margins due to its precision aluminum case, and there would be more consumer confusion with next year’s new top-of-the-line aluminum-cased model.

        If Apple keeps the “S” designation for all top-range iPhones from now on, a 6s could even come in the same case as the 5s. At that point they could broaden the line even further, with a larger-screened 6HD / 6XL.

      • nizy

        A typical injection mould tool for a product produced in iPhone-like quantities would not be a 1 time cost. Firstly the tooling itself wears out and has to be replaced. Depending on quality and complexity of the tool this could be anything from 10k units to maybe 100k.

        Secondly to produce the quantity they need, Apple has lots of injection moulding machines running each with its own tooling.

        Finally the 5C case is not just a simple injection moulded part. Watch the video, they show it having holes machined out afterwards and also some machined finishing processes.

        That said it mostly likely is cheaper, but I suspect the delta is not as large as you might think.

        Also you should bare in mind that Apple also uses CNC machines for many of its other product lines including the iPads, iPods and MacBooks. They have a huge fleet of them.

      • GuruFlower

        We’ll find out what the delta is in February when Q1 is reported.

    • http://iddqd-technology.com/ Chris Blanchard

      You may be right. But if you look in the past where Apple performed well in the market with relatively more expensive products such as iPod and Mac, it then disrupts itself with yet more relatively expensive products

      In the iPod case, the iPhone. In the Mac(Book) case, the iPad

      • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

        It’s a valid strategy and it worked well for Apple in the last 15 years, but it assumes that the next disruption exists (sort of speaking, because this is about the future), that it is within reach, that Apple will discover it, that they will build first.

      • Space Gorilla

        Correction, Apple rarely builds a new product first (if ever?). What they do is build it right.

      • Jessica Darko

        I disagree. I believe Apple regularly builds new markets created with new products. The iPhone was the first (real) smartphone. The Mac the first windowing computer. The LaserWriter the first laser printer, etc. etc.

        Yes, all of these products are not “first” in the sense that they “existed” in the year 1900. There were telephones in 1900 (you had to use an operator) There were “computers” then too (what we’d call a calculator, and mechanical.) There were printers also- thought they were hand operated and we called them typewriters.

        This may sound extreme, but the point is to show just how far you can take the analogy or rationalization that “apple wasn’t first”.

        People will say “there was nothing new about the iPhone”, which if it were true would have obviously resulted in the iPhones failure… but they want to believe it to try and rationalize the copying of the iPhone.

        So, you’re right that Apple “builds it right”, but I think doing it right often creates a new market segment or a significantly new product enough to call it a “first”.

      • Space Gorilla

        I agree, but most people don’t see that by finally building something right you are indeed ‘first’. My point is more that Apple doesn’t feel the need to be ‘technically first’, and their success does not depend on them being technically first. That’s a good point, that by getting it right Apple does often create, or ‘popularize’, a new market.

      • StevenDrost

        Agree, Apple rarely invents the brand new major technology. It existed and has likely even been put into a product, but they understand timing and a go to market strategy. They could have built an IPhone in 2004, but it would have sucked and there would have been next to no data networks. Google built one of the best phones going into last Christmas with the Nexus 4, but could not put product on shelves until long after the better GS4 came out. Much of what people want Apple TV to become already exists with the Xbox and Kinect, but the price is too high to appeal to non gamers.

        Great technology does not equal great consumer products, there is so much more to it.

      • StevenDrost

        Agreed, the Smart Watch, TV, Car, etc have not been built yet.

      • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

        You can qualify my statement as much as you want. That won’t change the core idea: Apple are not the only smart people in town. Someone else will build the disruptive product before Apple at some point. My statement is more philosophical than practical, because I don’t know when that will happen. Might be next year or 20 years from now, but when it happens, it will be game over for Apple.

      • Space Gorilla

        People have been predicting the death of Apple for over two decades, saying largely the same thing you’re saying. It stems from a fundamental misunderstanding of why Apple is successful. Apple succeeds because they build great products and sell them at a profit. A big part of why their products are great is Apple’s ability to do what works best. Again, a simple idea, but very hard to do.

      • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

        Well… Les than 2 decades ago Apple almost died. The greatness of IBM, Microsoft, Sony or 3M also lasted for “over 2 decades”, because they had their own special abilities. 3M and Sony are especially interesting, because their special ability was to be serial disruptors.

        I am not predicting the death of Apple, just stating that the pre-requisites for the success of their strategy, continuous existence, discovery and build of new disruptions are hard to sustain over long period of time. I hope that nobody challenges the fact that Apple has a big chance to disappear in the next 50 years, but I do not claim that to be any big discovery or news. It has no practical value, other than being a hypothesis about why it is hard to be a long term serial disruptor.

      • Space Gorilla

        Is Apple really a serial disruptor, or are they simply making great products that meet a need and the natural result of that is disruptive? Apple didn’t discover most of the products they make. What they did was build it right, looked at the market and the problem that needed solving, and then did what works best. In that sense, will Apple ever run out of problems that aren’t solved all that well?

      • StevenDrost

        Its possible, but what all the financial analyst and naysayers don’t get is that the smartphone is hear to stay. What replaces a flat piece of glass that goes in your pocket? It’s not a watch, its not a pair of glasses, frankly I’ve yet to hear any good ideas. With regards to the phones getting commoditized, it’s possible, but not with IOS, they are the only ones who make it. Some other industries may get disrupted, but nothing will challenge the size of the smartphone industry for a long time and Apple will be fine.

    • mieswall

      yet they priced that expensive product just $100 higher than 5C. Or the same as 16Gb of memory increase of the “cheaper” model. Either 5C is too expensive, or 5S is too cheap, or no matter what you you put inside a better model, you can’t price it, signaling an exhaustion of the phone market.

      Or, better explanation: the high pricing of 5C is due to the low yields achievable, and Apple is forced to go for margin instead of market share. That would still leave open the question of why such a little price difference, if features really have some value; if they do, as it is obvious I think, 5S is leaving money on the table.
      Alternatively (or forced consequence of the above?), Apple may be viewing them as wholly different products, instead of price segmentations of one market: like “color for youth; security for business”, and so, with little cannibalization among them. More or less the thesis of Horace here?.

      Unless purposely looking for inefficiencies (aiming for cheaper buybacks until yields are much better and China mobile is in?), this may be a non-optimal pricing strategy, imo.

  • Shoe On Head

    cogent thoughts.

    concur this is not about a land grab under the demand curve. they could have done this a long time ago.

    slightily hubris strategy. largely buoyed by the relief Ive has pulled off iOS7 and a genuine belief in the medium-term it will outcompete everything else.

    • Jessica Darko

      The iPhone 5C was in development when Steve Jobs was still alive. I knew this was coming last fall, long before any of the rumors simply by reading Apple’s SEC filings. It has nothing to do with iOS 7 (which, by the way, wasn’t intended to be such a redesign, that is a result of Steve dying and Ive being promoted.)

      iOS 7 is from Tim Cook’s leadership.
      The 5s/5c is from strategy enacted under Jobs, and has been in development for nearly 3 years at this point.

  • Canada Bob

    I think there is one obvious layer that isn’t being discussed mostly because it’s almost exclusively guys on these types of threads. The 5C is skewed toward female customers who love the iPhone and its ease of use but are looking for something that isn’t a rather masculine design of the glass and metal slab. The 5S will appeal to mostly guys as they love their specs and latest tech, plus they tend to have slightly more disposable income. I don’t think the 5C will be that appealing to men judging by the comments on the web, but at the risk of appearing sexist, women won’t mind paying the traditional cost for something that has some colour and a new style and is easy to use. It’s not an all or nothing factor but it seems that this is at least part of the strategy. People often overlook that women are at least half the market for this sector and their priorities are not same as men. It’s an excellent strategy to make their tastes a focus in product development.

    • http://iddqd-technology.com/ Chris Blanchard

      Agreed, but I think the appeal of the 5C will be broader.

      It feels like the Bondi Blue iMac… the tech-savvy would
      deride it as nothing but a cosmetic makeover. But everyone else buys it in droves because the design is friendlier and more approachable. I think it’s a design that speaks to a normal consumer.

      The 5S by contrast is a bit more utilitarian and thus appealing to nerds like myself

      • Jessica Darko

        “the tech-savvy ” People who deride design are not “tech savvy”.

        They’re tech-posers. People who aren’t actually technical themselves but are fixated on knowing all the stats and then “comparing” them, even though they don’t understand how the technology works. For example- comparing clock speed of an intel and powerpc chip, and thinking the intel is faster because the frequency is higher, despite executing less instructions per clock cycle.

        I agree that the line is segmented into the higher end, more utilitarian variant and the lower end more colorful variant, and that these will appeal to different markets.

        But I don’t think it’s appropriate to call those who want the higher end variant “tech savvy”. This segment includes celebrities and other non-technical people with high disposable income who want the status symbol.

        Further, I’m more interested in the C models because the “high end” is not relevant to me when testing software that needs to run on customers phones, and of course, there will be another model in a nother year which will be even better, so why spend more to have the fastest for only a year? That’s a prudent decision that has nothing to do with how “tech-savvy” I am. (and I built my own CPU from scratch out of 7400 logic gates as a kid. I know how this technology works.)

      • Space Gorilla

        You hit the nail on the head here, the spec geeks are often posers. As an example, the programmers I work with all have their Masters in Comp Sci, and they all use Apple gear. And yet the tech posers routinely say Apple products are toys and not for real work.

      • Jessica Darko

        For engineers, the computer is the tool to achieve their engineering goals. For non-technical, the computer is the end in itself. The engineer uses the mac because it makes him a better engineer. The non-technical uses a PC which he “built himself” (from off the shelf parts) to maximize his braggagio.

        Alas, on the internet, people think the second guy is the “geek.”.

      • Bruce_Mc

        “It feels like the Bondi Blue iMac…”

        I am feeling it as well. I was doing Mac tech support at that time, and I noticed a big change in how people (particularly women) perceived and bought computers when the iMac came along. The 5C could bring the same kind of change.

        Another, perhaps better comparison would be in the 1970’s when people stopped buying Nike and Reebok shoes for running and started buying them for day to day use. How well the shoes performed became secondary to how they made the wearer feel. An iPhone is more like shoes that get worn on the body several times a week than like an iMac that sits at home on a table.

    • GuruFlower

      The 5C will be a huge fashion statement.

    • StevenDrost

      Interesting point. But I would argue the they did not forget women with the 5S. The new leather cases are certainly target at women and compatible with the 5 as well. Both lines of cases will be a big hit this year, I would look for accessory revenue to be up significantly in January earnings.

  • Fran_Kostella

    I checked Virgin Mobile USA (owned by Sprint) last night and they list iPhone 4 8G for $280 and iPhone 4S for $360. Pay as you go, no contract. Will likely change as this might just be inventory that they need to clear out.

    • Tatil_S

      No contract, but the phones are locked, so the prices do not reflect the full sales price. ~$100 for loss of flexibility, the ability to use it outside the US etc.

      • Fran_Kostella

        Right, I was just noting how they fall in line with the forecast. It is not clear how long the 4 model will be available. Personally, I don’t find them attractively priced since they will not likely accept anything beyond iOS 7.

      • obarthelemy

        Unlocked, Apple store vs Amazon.fr, the iP4S is at the price of the GNote2, the 5C at the price of the GS4. Doesn’t feel compelling.

      • StevenDrost

        If not similar specked, their performance would be very close. The 5C is much more attractive looking and has IOS (if that is your thing).

  • sombrero

    please use thicker font, as it is a bit unconfortable to read.

  • http://iddqd-technology.com/ Chris Blanchard

    This move shows that Apple’s core values have not changed in spite of external pressures. Producing a low cost phone, which would arguably be compromised in quality, is not something we’ve seen Apple do.

    I don’t think Apple see success through the lens of market share. What their DNA tells them, is to focus on making a good product and then adding a fat margin on top of it to stay alive. If they achieve a monopoly-like level of marketshare, they probably just see it as an incidental byproduct of their core activity.

    I think C really stands for consumer in the mind of Apple

    This bifurcation of the iPhone line hints at Apples desk/laptop strategy in the early 00’s. Have a high end product competing along the dimensions of spec and performance for people who need/want it (i.e. professionals, tech-savvy etc.). And then have a consumer oriented product which caters along the more “touchy feely” dimensions like approachability and friendliness.

    • yenic

      How do they not have majority marketshare? Does the GS4 outsell the iPhone5? The iPad wrecks any other tablet out there in sales.

      The whole marketshare commentary is misleading to say the least, based on operating system marketshare. Not all of which is beneficial to Google (eg Amazon Android), while all iOS sales directly impact Apple.

      I have no dog in this fight, and I’m not really attempting to argue with you, more making a point. I use a GS3, just attempting to inject some perspective.

      • Jessica Darko

        It’s hilarious how right you are. When looking at models, Apple outsells the competition by a wide margin. When looking at any version of the operating system, it also outsells by a wide margin. iOS 7- not yet released- probably has more market share already than any single android version.

        The only way android “wins” is to compare total cumulative BS “activations” numbers against just iPhones. (ignoring iPads, and iPod touch sales.)

        Ignoring two thirds of apple’s product line alone isn’t enough to show android winning, they also have to use a made up stat.

      • obarthelemy

        Maybe because Ipad and iPods aren’t smartphones so don’t go into smartphones stats ?

      • http://iddqd-technology.com/ Chris Blanchard

        I fully agree with you that Apple have a majority, if not very significant, market share

        Rather I’m suggesting that market share may not be at the top of Apple’s priority list given that they didn’t release a low cost iPhone

      • Mark Jones

        Yes, iPhone 5 outsells GS 4 but Samsung sells more smartphones than Apple. Everyone (except some Android supporters) agrees that Apple has majority market share of high-end phones. However, analysts think Apple must gain a majority market share of all smartphones and soon. Apple has shown by its approach that it doesn’t agree with the analysts.

      • yenic

        That’s true. But then the discussion shifts to Apple vs Samsung. Which is definitely a more relevant discussion than a free OS like Android (which doesn’t even benefit Google at all in some cases) vs iOS. I’d question the value of the fact to anyone here that Samsung sells more smartphones or not, without even questioning the margins on the majority of those devices or appstore income after the sale going to Samsung.

        It’s an apples to oranges comparison once you look at the money being made. Android is distributed freely, iOS sales and appstore profits go straight to Apple uninterrupted in all cases.

        That said, it’s the ‘free’ segment (I say in quote because Android is not as free as people think due to Google Services agreements typically signed)- has the most to lose.

        Companies, like Samsung are tired of losing spare change to Google. Tizen as a more profitable OS that all the carriers, Intel and Samsung are going to push. Tizen isn’t really a threat to iOS, which isn’t in the ‘free’ space. Add in FirefoxOS and Ubuntu Mobile, both minor players, but both who will chunk out of Android’s large marketshare and I think we’ll see big changes in the near future.

        Not that Android’s marketshare today means a whole lot, that was my original point. I’m an Android user, always have been but I’m personally moving to FirefoxOS for my next phone. At $80 outright, a simple unlocked phone is a no brainer for my use case. Between Tizen, FFOS and Ubuntu this space currently occupied by Android is going to be reduced.

        As you said, the high end market is pretty much locked up by Apple. Those people aren’t going to leave their top-notch iPhones for cheap FFOS, UbuntuMobile or Tizen.

        But consumers looking at whatever Samsung pushes in the GS5 will buy whatever is on the billboards. It may well be Tizen.

      • Mark Jones

        I think Chris’ point was like yours, that marketshare (including Android marketshare) doesn’t mean a whole lot. Analysts seem to think consumers won’t switch from Android handsets to iPhone because of the services/ecosystem.

        For now, Samsung has negligible services/ecosystem, even with huge sales. Samsung knows it; they’ve been trying to differentiate from Android for awhile. As more SGS3 buyers upgrade, we’ll know if they’ve become sticky.

      • StevenDrost

        I was an early adopter of the Galaxy Tab 10.1, what a mistake that was, there was no apps. It got returned fast. You seem like you know what your walking into with th FF OS, but i can’t see it getting much traction in the market. Tizen seems like it has a lot more support behind it, but Windows will be the only true consumer grade 3rd operating system in the near future.

  • poke

    I suspect C is for “ran out of milling maChines.” They’re adding two major carriers and expect to sell significantly more phones. Apparently they can’t do that in aluminum. I do agree that this is the core product now.

    • StevenDrost

      I doubt supply is the cause. This is an optimization of the current strategy, one in which they sell old product in a cheaper casing to drive margins up.

    • Boltar

      Oddly put, but there certainly were reports that the 5 was difficult to build. Perhaps the C is just the refinement of their previous (n, n–1, n–2) strategy whereby they expend some redesign effort on improving manufacturing yields and increasing margins as a design clocks through the generations. It does seem that the original 5 might have seriously damaged their margins as it moved down the price ladder without addressing the assembly difficulties.

  • dicklacara

    Recent articles have suggested that the “sweet spot” for an iPhone was the equivalent of US $489 for the masses in BRIC countries.

    At $549 for the 5C entry model, Apple missed that by $60 or 12%.

    Likely, Apple sells the $549 phone to resellers for $400-$450 (based on volume), net 30.

    So, an agile, high-volume, high-turnover ( > 12 turns) reseller could hit the sweet spot and make a tidy profit — no cash outlay and just ring up the sales.

    In addition, Apple and some resellers have been experimenting with low or 0% financing — which, in effect, could raise the sweet spot.

    My first thought was that Apple missed the boat on the 5C pricing and will lower the price if/when it doesn’t meet sales objectives (as they did with the original iPhone).

    On reflection, I think Apple knows exactly what they are doing:
    Apple will make sales and margin objectives
    Resellers will set the “street price”
    Consumers will get a top-quality iPhone at an acceptable “sweet spot” price

  • http://coolchaser.com chaodoze

    Instead of the 5s being viewed as “more than good enough”, could it be that, with the motion chip and the fingerprint sensor,it is better viewed as a way to lay “new jobs” for the smartphone to do, so that in some future, phones without such apps/features will be viewed as not good enough?

    This is of course with the assumption that some fingerprinting API will be opened up, just as core motion is available to devs now.

    • StevenDrost

      I would not go so far as to say it opens up new jobs, a pass code lock currently serves the same function. This is both better security and convenience, two things that have until now been at odds. Its a breakthrough and a selling point, but it will take people a little while to realize, as usual.

      • Jessica Darko

        It’s also a feature that, like forward facing cameras, will take a couple years to spread across the full line (iPads, iPod touches, etc.) But, once that’s done, it opens up a huge opportunity for Apple in mobile payments. A couple years for the hardware to spread also means a couple years for Apple to build up a payments platform… and since the feature is on a device now, Apple can use that device to show potential partners the possibilities to get them to come on board.

        In a few years, you’ll be able to buy furniture via “in-app purchase” using the fingerprint, I bet.

      • Space Gorilla

        Yes, yet another example of Apple slowly building out a serious competitive advantage that very few people recognize while it’s happening.

      • StevenDrost

        The fact that they are not storing the biometric info on their servers somewhat limits the potential. I can see why they chose not too, but if they did, then there would be the potential to pay for everything by putting your finger on a terminal. No need to take you phone or wallet out, just place your finger down and go.

      • Mark Jones

        No, you wouldn’t touch a terminal. I think you will touch your iPhone (or in the future, your iWatch/iBand while the iPhone stays in your pocket/purse).

      • StevenDrost

        It used to both me that people were so convinced that the cell phone would be the payment solution of the future, when it was no better than carrying a piece of plastic. Well this is, it’s far more secure. Now that there is an actual use case, then the debate shifts to “will Apple do it themselves, partner or just empower others. Keep in mind this is the same company who brought you MobileMe and Photostream. It’s my belief that they certainly could, but there money is in setting standards and selling software. I could see them selling small cheap payment terminals, ibeacons or liscensing the tech. It could be a huge business, but I don’t see them doing it on their own using ITunes.

      • http://coolchaser.com chaodoze

        I think my operative word here is “opens”. I’m not really talking about the current pass code bypass feature, but what future apps can build on based on these new functionalities such as payments that Jessica pointed out. I’m expecting many apps that we have not even imagined today that may become the staple tomorrow.

    • tmay

      Ubiquitous sensors is the next niche that Apple goes after. No NFC (“NFC is dead Jim”) but plenty of BLE (Blue Tooth Low Energy) devices to interface with the iPhone (iBeacon) and (cough, rumored) fitness band/watch. The motion sensor is the keeper of position when GPS is unavailable, as in a retail outlet.

      Here’s an iBeacon compatible device from Estimote

      http://estimote.com/?gclid=CNfVxJiAxbkCFUQ6QgodTEYAAQ

      BLE is creating the next big job for smartphones to do.

  • Jessica Darko

    Segmenting helps the other side with its propaganda too.

    Now Android Zealots can compare the 5S (or whichever model sells less) to their made up “activations” number for all android devices. (much like they count android tablets in their number but exclude the iPad when comparing.)

  • TomG

    How much does the aluminum/glass case add to the production cost
    and limit production volumes? In looking at the Y+1 and Y+2 price reductions of
    prior models, I have to wonder if we will see that the 5C will have even longer
    legs.

    Maybe the real
    impact of the 5C will be seen in 2014 or 2015.

    • Jessica Darko

      I’m pretty sure- but can’t prove- that Apple will be updating the 5C along with the 5S every year. That there are now two iPhones. The High End and the Medium End. The names may vary but I think they are two separate product lines and will be updated each year.

      • TomG

        The “low cost” play many expected Apple to make yesterday, may actually be hiding in plain site. They may simply be playing a few moves ahead of us.
        I agree that it’s likely we’ll see a 6C next year. The point i was making is that when the 5C becomes the n-1 or n-2 model, we may see an even steeper price drop than we’re currently seeing with the n-1 4S and n-2 4 this year.
        Perhaps we should look at the 5C as laying groundwork for expanding the product line even further next year to include a larger device?

      • Jessica Darko

        The next redesign may be a larger price. I think we’re in agreement that the delta between the high and medium end devices is going to grow, with the medium end device settling in price a bit, providing a bigger gap.

        It may end up being the “low cost” device, or there might be a third model that becomes the “low cost” device.

        But I think the answer to these questions will depend on how the market evolves, how apple’s designs need to be manufactured, and the economics of producing custom CPUs.

    • http://www.lazyprogrammers.com Eugene Kim

      I agree. Offering a premium last generation phone seems to have capped Apple’s ability to scale lower down the market. It doesn’t help that the iPhone 5 was the most difficult iPhone to build and was plagued with manufacturing issues from the get go. It would be interesting to see how low they can go with last generation C models and if the timeline for it to reach a price point sufficient for pre-paid markets is adequate.

    • handleym

      It depends on what you consider the “essence” of the 5C vs 5S.
      There’s value to Apple in moving their entire iOS world to 64-bit ASAP, simply because it means an easier life for their developers, internal and external.

      The A7 is a transitional CPU which has to support both the 32-bit ARM-7 instruction set and the new 64-bit ARM-8 instruction set. Depending on how fast Apple can push things, there’s value in ditching that 32-bit part ASAP, both to save area and to make the chip design simpler. The points to watch are when does Apple start making it compulsory to submit fat binaries to the app store, and then when do they start removing from the app store any binary that is 32-bit only?

      Point is, they may only move the low-end to 64-bit at the point where they can ship a 64-bit only (and so smaller and cheaper) CPU. Doing this within a year may be possible, but seems ambitious. To my mind the most interesting question is whether the 6C/6S split has the 6C using today’s A7 [the most unlikely scenario], or sticking with the A6 (probably clocked a little faster) or moving to an A8-lite. (ie 6S gets the full A8, which is 64-bit only, high clock speed, maybe three cores; 6C gets the A8 at a lower speed and only two cores). Another way to make the split would be that they both get the (one and only A8), but 6S gets 2GB RAM, 6C only 1GB.

      My overall theme is — obviously Apple wants segmentation, but their life is much easier if they can simplify their OS offerings and build setup, so what’s the fastest way they can reconcile segmentation with getting to all-64-bit ASAP?

      • DarwinPhish

        The real issue is how upgrade-able the 5C’s design is. If Apple can easily upgrade the internals, the 5C form factor should have a long life.

      • obarthelemy

        Transitioning to 64-bit only in less than 6 yrs after the last 32-bit phone stops selling would be a major slap to customers.

        64-bit doesn’t have to be premium though. Intel’s Atom is 64 bit.

  • Bruce_Mc

    In the US, someone walking into an Apple store will see three models with obvious differences: the small one, the colored plastic one, and the big metal one.

    What if Apple moves the 5S to a plastic case next year? The new 6 would be metal. If so, then perhaps the 5C becomes available only in black or white, and only 8GB.

    If this is where Apple is going, then they are getting a distinct product line with the cases while continuing to use the internals for three years.

    • Nevermark

      Good thought. An efficient production strategy matched with differentiation highly visible to customers and their peers.

      N phone – $200 subsidized, Metal, new high end features, range of GB
      N-1 phone – $100 subsidized, Color, last years features, range of GB
      N-2 phone – $0 subsidized, B&W, two year old features, lowest GB only

      They should expand this next year to a $200, black only, unsubsidized N-3 phone which they only sell in emerging markets.

      Locking low end customers out of the Apple app, media, services and peripheral (AppleTV) ecosystem with a missing price point seems like a huge missed opportunity to me, on top of the lost hardware sales. Third party developers would appreciate Apple reaching lower.

      • Space Gorilla

        I have no doubt Apple will go non-subsidy at some point, but they can’t do everything at once, and I would guess they have a fairly complex long term vision as far as the iOS mobile computing platform is concerned. Apple isn’t just building phones, they are building computers which fit in your pocket. I’m quite sure Apple could build a great basic smartphone tomorrow and hit a very low price point, but that’s not their long term strategy.

      • Nevermark

        You are right, their long term strategy is the question. They would have no problem creating a differentiated lower end (but quality) product new customers would love to own. A 3G-only model sold where 4G is not widely available would serve emerging market customers well, and provide the Apple ecosystem to them, increase ecosystem value to developers, without undercutting mid/high-end models or margins.

        So, is Apple’s long term strategy to keep prices high? If so, why?

        Or is their long term strategy to eventually provide quality phones that the other half of the planet can afford? If so, what specifically are they waiting for?

      • Space Gorilla

        Apple’s long term strategy isn’t about price, it’s about building a robust computing platform, a transactional ecosystem. The 5S is a taste of what is coming. The 5C is essentially the floor now.

        I see a future with a range of iOS devices, as computers, real post-PC devices, the next Windows, so to speak. Is there any question now that it is ridiculous to compare a low cost Android phone to a device like the iPhone 5S? The two exist in different universes.

      • Nevermark

        We agree Apples long term strategy is not about price. Where did I say it did? But that does not imply they should not have a lower cost product.

        They have already dropped the price of an entry iPhone three times: the original iPhone price drop after launch, the introduction of one year old models, and then two year old models.

        They are pricing iPhones beyond the reach of a substantial percentage of phone buyers who they could easily serve without giving up Apple-y stuff like good design, quality, margin, etc.

        Therefore, I predict we see a cheaper iPhone for those markets by March. :) Maybe they want the 5C/5S to have its day in China before introducing a cheaper version there.

      • Space Gorilla

        You asked the question: “So, is Apple’s long term strategy to keep prices high? If so, why?”

        I agree that Apple will eventually go lower on price, I call it non-subsidy. But I think they have to roll this out slowly. Each iPhone is tied to the platform, they have to grow together and I think there’s a limit to how fast that can be done.

        When iOS has an active user base of a billion, that’s large enough to call it the next Windows, just in manner of speaking. I have no doubt iOS will be a self-sustaining computing platform within a few years. Apple is looking far beyond just smartphones.

      • Nevermark

        Supporting features they released 2-3 years ago wouldn’t complicate their ecosystem, its the new stuff that takes great care to implement well (i.e. fingerprint + keychain, new API’s, etc).

        They will never get Windows-like marketshare before they come out with a more affordable non-subsidy phone.

        Very much agree they are looking past smartphones. I think the next leap won’t undermine smartphones, but be a sideways step, like a full computing environment within Oculus Rift type glasses. No screens or screen edges, hand gesture interface. A keyboard and trackpad that become visible in the Rift when you put your hands physically on them, disappear when you take your hands off. That would raise productively, have a huge wow factor, be great for games and work, and kill off another large percentage of Windows and Macs.

      • Space Gorilla

        Apple will almost certainly reach a billion plus users. It’s important to note I didn’t say anything about market share. The total number of users isn’t the same thing as market share. Apple will never have Windows-like market share, but they will have a user base that is in that ballpark size-wise.

      • StevenDrost

        Agree, most people don’t realize that they are already in overdrive with how many extra SKUs need to ship this year.

      • Space Gorilla

        Yes, plus building out retail, plus new iPads, plus work on iCloud, Siri, iTunes, plus new products, new Apple TV, and on and on and on. How much do we expect one company to do? And then the Android crowd points and says “We’re winning!” Yeah, good for you, every company on the planet making Android devices combined is beating Apple. Duh. Ever stop and think that maybe Apple’s long term plans don’t include having a larger market share than *all other devices combined*? Do these analysts even have the ability to think critically?

      • Bruce_Mc

        “They should expand this next year to a $200, black only, unsubsidized N-3 phone which they only sell in emerging markets.”

        Everyone seems to think Apple needs to sell more phones and make less profit. I don’t agree. What is important to Apple in emerging markets is to make sure people *want* iPhones, rather than make sure people can afford them.

        If 75 percent of phone owners in China would rather have an iPhone, I think Apple is doing a good job, even if they only sell to 15 or 20 percent. In that regard, I think Xiaomi (with MIUI OS) is a bigger threat to Apple than ZTE or Huawei. I tried MIUI a while ago and I think it’s a lot more fun than vanilla Android.

      • obarthelemy

        MIUI is actually available for all Android users. I agree that Android is more fun :-p

  • Scott Sterling

    Apple has brilliantly, subtly, wickedly jabbed Samsung with their new lineup. Samsung sells the GS4 as a “premium” phone. Apple has now clarified that premium phones are made of aluminum and look like a million bucks, and that plastic phones are “fun” and second-best.

    Now every time someone buys a plastic GS4 it will cross their minds that they are not buying the best.

    • Jessica Darko

      Very astute point!

    • obarthelemy

      Only people concerned with the superficial *and* who don’t use protecting sleeves on their phones.
      Probably a very profitable market, but not very big ?

      • StevenDrost

        Never underestimate how superficial people are. The 5/5S is an amazing piece of engineering and a lot of people choose not to keep it in a case. I see the same with the HTC One. We are beginning to entering a phase in the market where the internal improvement are going to be less important than the external appearance. You can call it superficial, but think about jewelry, cars, houses, clothes. Appearance is a extremely important in all of those markets, why not cell phones.

      • obarthelemy

        Indeed.

        1- Some objects are squarely in the “aesthetics” category (ie jewelery… except when a girls needs a best friend ?), some squarely in the “utilitarian” corner (ie hammer), and most in-between. Exactly where in-between depends on the customer as well as on the object itself: my wallet was chosen to be as compact and practical as possible, my current guest’s wallet is some big branded shiny leather thing.
        2- with most smartphones overserving, there’s more freedom to get aesthetically fancy. Or to go cheap.

      • StevenDrost

        The prevailing wisdom is that the market will race to 0$, but it makes no sense in western middle class markets. We pay 20-40K for a car, 200-400K for a house, but only $650 for a phone is a much better status symbol these days. If anything there is a market for nice better more stylish phones. Sapphire crystal unbreakable glass, more premium materials, better specs/camera. When ever I hear “why have they not made a cheaper phone” I ask “why have they not made a more expensive phone”.
        But to answer my own question, I don’t think its in their DNA to make premium products. They very much target the average consumer, it just happens their average consumer is an American making 50K a year, not an African making 500.

      • obarthelemy

        i think the main issue with grafting “luxury” onto tech in general, and on mobile in particular, is it’s still a short-life, very feature-driven market.
        There is a sub-market for ephemeral luxury (“last season” and all that), but most premium/luxury does imply durability, both in the functional and fashion sense.
        Tech products can’t be durable, a phone is obsolete 6 months after launch, and hopelessly 2 yrs on.
        They can’t really be trendy either, because form is strongly determined by function. Once you’ve replaced aluminum with gold and stuck Swarovski glass all over, you end up with something a lot more expensive, but neither very different nor much better looking then the original aluminum. Some are doing just that though.
        And drifting from the mass-market features is both rarely feasible, very expensive, and not the point.

        But hey, Vertu is still around…. http://www.vertu.com/

    • Kenton Douglas

      So a premium device is defined by aluminium?

      • Scott Sterling

        Apple has defined the phone market and Samsung’s responses for some time now, wouldn’t you say? ;)

  • GuruFlower

    C is for Cool, Colorful Choices.

    With its polka dot enabling covers the 5C becomes an instant fashion statement that broadcasts its presence at a distance. For many this will be hugely cool. Now everyone will know you own an iPhone. They’ll be able to see it thirty feet away! When these phones hit the streets in a week they’ll be walking billboards for Apple.

    For a company that only offered black or white before, you now have 5 colors and 5 cover options, 25 color choices. For anyone who understands the value of accessorizing to match wardrobe, this is huge. And for $29.00 your phone can have multiple personalities. Wait until the fashion industry gets their hands on these. With multiple covers that $100 price differential is starting to shrink.

    The real choice in iPhones now is 25 color choices or a 2X faster processor with a fingerprint reader. It’s going to be a tough choice and I think the 5C is going to be a real barn burner.

    • StevenDrost

      I would argue they have been doing it for years with the white headphones. Its great branding, but this better. By this time next year all phones will be colorful with special OEM made cases.

      • GuruFlower

        I divide my time between NYC and Vermont. In the city I count cellphones while walking, but it’s hard to do because the copy-phones all look like iPhones (except the phablets). As you point out, the white earbuds are the giveaway at a distance. Now it will be so much easier! BTW, half the cell phones in NYC are iPhones.

  • JT

    So, you would assume that next year we would have a three tiered option of iPhone, iPhone C, and iPhone S. Similar to the pricing of the 4S, 5c, and 5s we have now?

    • Mark Jones

      Here’s one projection:
      Now: new iPhone 5S (A7 chip) at 649, new 5C (A6) at 549, 4S (A5) at 449
      2014: new iPhone 6 (A8) at 649, 5S at 549, 5C (added new colors) at 449
      2015: new iPhone 6S (A9) at 649, 6 at 549, new 6C (A7) at 449, 5C at 349

      If this happens, the stock market will again be disappointed in 2014.

  • gbonzo

    Prices in Germany

    5C
    16 GB 599€
    32 GB 699€

    5S
    16 GB 699€
    32 GB 799€
    64 GB 899€

    • luxetlibertas

      4S
      8 GB 399€

      This is a much larger price gap with the 5C than in the US, and that makes the 4S a significant budget option in Europe.

  • Chaka10

    I disagree, strongly, with the “good-better, but both good enough” segment view of the 5c and 5s. As I posted on the Apple 2.0 yesterday, I believe the “good enough” analysis is theory-speak for commoditization — as in, when tech products reach “good enough”, modular substitutes produced by low cost producers start to catch up in the overall experience and begin to overwhelm the integrated producer.

    I do not think the smartphone is “good enough”. I believe the mobile revolution still has a way to run, and the virtuous cycle — hardware advances open new possibilities for software/apps which drive demand for further hardware advances — will continue and Apple will remain the leader with its integrated hardware-software platform. I believe Apple amply demonstrated that yesterday with a host of tech innovations — less bling and more substance, as I like to think of it. I can’t wait to see what developers (including Apple) do with the performance from the 64 bit A7, M7, finger-print sensor — the latter in particular is TYPICAL Apple, in so far as it provides a new solution to an existing technology that’s been so poorly done as to be virtually abandoned.

    It’s not that I disagree that Apple is taking a segmentation approach with the 5s and 5c — they obviously are. Rather than good-better, I think Apple believes they are both great, for their respective target market segments which I would describe as (a) for the 5c, “young/fun/casual” and (b) for the 5s, “affluent/luxury/serious” (maybe “business”). The potential for the 5s in business/enterprise is clear. I predict the 5c will soon expand its color palate (no purple?).

    • Mark Jones

      What if you view good-enough instead as good-enough-threshold-for-now-for-a-premium-aspirational phone? Where excellent performance of iOS 7, Siri, Maps, LTE, etc. are viewed by Apple as essential for a satisfying user experience.

      In other words, Apple believes that for a large % of the population, the 5 or 5C capabilities (improved by iOS 8 and 9) can satisfy them for the next 5 years.

      • Chaka10

        That’s the start of commoditization. If the current Apple package is and will be “good enough” for 5 years, it will get chased down by the pack in much less time than that (iPhone has been around only ~6 years). I think we are early innings of mobile and, as I said, devices/software cycle will drive new possibilities for a while — possibilities that are hard to imagine now, because they are yet to be invented.

      • Chaka10

        I think the devices Apple sells today will be “good enough” — for what they can do and can foreseeably might be asked to do — for the next 2 years. Happily, that’s the replacement cycle for devices. That might even accelerate, as the pace of mobile innovation accelerates. The 4 is not “good enough” vs what the 5 does (in the sense that there is user demand willing to pay for the difference), and so I think the 4S is not good enough vs what the 5s will do, and I don’t anticipate that the 5s will be good enough to do what the 6s will do.

      • Mark Jones

        You misunderstood what I meant. Let me try again. There is a group of people (e.g., early adopters) who will always want more – the iPhone won’t be good enough for a long time. They will most likely buy between 12 and 18 months. Apple satisfies them with its high-end line (current model is 5S).

        There’s another group of people who infrequently shift up – they buy and hang on up to 4 years. They are late adopters. They still have featurephones or if they already jumped to smartphones, the iPhone 3GS or 4. They’ve skipped upgrades because their phones have been good-enough. These people take awhile to recognize that they want to do the newly-made-possible jobs on the new device. They have no interest in paying for or having the latest and greatest, but would like a phone that will last for another 4-5 years. Apple can use the 5C to show off these new jobs (iLife, iWork, Siri, Navigation, LTE) while at the same time be able to delight them with iOS updates for the next 3 years because the A6 chip still has room for more and better capabilities. (The A5 probably ends with iOS 8, but maybe iOS 7.)

      • Chaka10

        9/12 8:45 am reply to Mark Jones on Asymco

        Thanks for clarifying. Yes indeed, I very much agree that good enough must be assessed relative to the required jobs, and that evolves differently for different people. I don’t believe that is inconsistent with my broader point.

        The way Apple prices its newest products relative to its n-1 and n-2 products doesn’t suggest to me that it seeks to extract a significant premium just for the “newness” factor. I think that is demonstrated in the iPhones retaining value well (very limited instant depreciation, like new autos).

        If I may respectfully point out, for an additional $100, you not only get the immediate performance benefit (which you may not need) and the “newness” (whatever that’s worth — subjectively), but the additional specs also increase the likelihood that your device will actually serve your needs adequately for your full desired 4 years (decreases obsolescence risk IOW). In fact, the premium is even less meaningful if you think of it on an amortized basis over its intended useful life ($25/year if spread over 4 years) — I think that’s the correct way to look at it.

        Lastly, as discussed elsewhere, the carrier subsidy is real value that carriers are willing to pay — not just to Apple but to the iPhone buyer — to have you as a committed customer. You’re leaving that money on the table (in Wall St parlance), if you stay with your carrier but don’t take that money. It’s not theoretical value, but real money that you can put in your pocket (eg, by upgrading on time and selling your old phone). This further erodes, if not completely overwhelms, the premium for the latest iPhone in my experience. The carriers, and Apple, know this of course — in fact they continue to look for ways to encourage and accelerate upgrading — it gives them a chance to sell you on all the new jobs (translating to demand for carrier services) that you may be missing out on in your old phone.

      • Chaka10

        Thanks for clarifying. Yes indeed, I very much agree that good enough must be assessed relative to the required jobs, and that evolves differently for different people. I don’t believe that is inconsistent with my broader point.
        The way Apple prices its newest products relative to its n-1 and n-2 products doesn’t suggest to me that it seeks to extract a significant premium just for the “newness” factor. I think that is demonstrated in the iPhones retaining value well (very limited instant depreciation, like new autos).
        If I may respectfully point out, for an additional $100, you not only get the immediate performance benefit (which you may not need) and the “newness” (whatever that’s worth — subjectively), but the additional specs also increase the likelihood that your device will actually serve your needs adequately for your full desired 4 years (decreases obsolescence risk IOW). In fact, the premium is even less meaningful if you think of it on an amortized basis over its intended useful life ($25/year if spread over 4 years) — I think that’s the correct way to look at it.
        Lastly, as discussed elsewhere, the carrier subsidy is real value that carriers are willing to pay — not just to Apple but to the iPhone buyer — to have you as a committed customer. You’re leaving that money on the table (in Wall St parlance), if you stay with your carrier but don’t take that money. It’s not theoretical value, but real money that you can put in your pocket (eg, by upgrading on time and selling your old phone). This further erodes, if not completely overwhelms, the premium for the latest iPhone in my experience. The carriers, and Apple, know this of course — in fact they continue to look for ways to encourage and accelerate upgrading — it gives them a chance to sell you on all the new jobs (translating to demand for carrier services) that you may be missing out on in your old phone.

      • MarkS2002

        I’m still using the original iPad. I miss the OS upgrades, and at some point am likely to buy a mini. If I were in the market for a postpaid smartphone, the 4s with OS7, would likely be enough for me. (Yes Siri, I do still think you are pretty.) Not everyone needs all of the features of the latest and greatest.

    • Nangka

      ‘I do not think the smartphone is “good enough”’

      Agreed but it all depends on the job the smartphone is employed to do. At this point of time, the jobs are IM, email, web, social so I suppose the smartphone is approaching “good enough”.

      As more complex jobs like security, cashless payment become essential, the current crop would be grossly inadequate and Apple will be in a good position to capitalize.

      This has always been Apple’s strategy – introducing advanced technologies in their products with an eye for future mass market adoption.

  • Steff

    Why didn’t they bring a facelifted iphone 4c (color) to the market at the price of $399 it would have made a lot of sense as a “low cost” variante for the 90% of the world apple is still not adressing
    Any thoughts on that?

    • Mark Jones

      Some possibilities:
      1. Apple believes the A6 SOC, and not the A5 SOC, is the good-enough performance floor for its iOS 7 to iOS 9 core capabilities. So that is the spot for a mass-market phone that it has to support for another 2-4 years. Next year, Apple could move down another $100 with or without a casing redesign.
      2. Apple knows that the majority of iPhone owners have 4S and 4. An iPhone 4C with an A5 chip would not be of interest, even at free. (iPhone 5 owners would presumably be interested in the 5S or be waiting another year.)

    • DarwinPhish

      There is little reason for Apple to invest more into the 4 line: it has the old screen ratio, the old 30 pin connector and does not have LTE. To change any of these requires a significant re-design.

      The other problem is that Apple is still focused on the subsidized, contracted market. There is little benefit to them to offer an iPhone below $450. To go strong into the pre-paid market, they would need something under $250.

      • MarkS2002

        Once you start that, the winner is the first one to get to $0, BOGO, or free slate with the latest Galaxy X. At that point, only the phone companies are making money.

    • Jeff G

      Apple wants customers that have money. It’s the same reason Mercedes doesn’t come out with a car to compete with Kia. Apple wants people to buy devices that will be able to link a credit card to their iTunes account, buy apps, music, movies, books, tv shows and other stuff.

      Apple has, perhaps 500 million of the wealthiest customers available on the planet.

      This whole idea that capturing a larger share of the broke people is mystifying to me. I think their mission is on track, and that through:

      1) Converting feature phone users to iPhones, and
      2) Gradually earning recruits through platform churn, and
      3) Repeat sales to thrilled customers

      The empire is alive, well, and thriving… and will continue to do so. Fragmenting their efforts into low margin products in order to sell them to the other ‘90%’ (not sure that’s a real #) reminds me too much of empires that over extended only to collapse (Think England or Rome).

      Apple can always go cheap later, if they want to accept a lower return on invested capital… but that idea is pretty unappealing, in my opinion.

      • Steff

        Considering your points I have the following to add:

        1. Even Mercedes and BMW build cars for different market
        segments Their range streches from 7er to 1er where the 1er is
        low end but still luxury but it competes with the offerings from
        VW Golf, KIA, etc. Where is Apples offering ?

        2. The iPhone 4s is by all means not a “low margin” product,
        considering the price tag, the “cheap” because old components
        components and the already achived scale in manufacturing. And the iPhone 4s even with iOS7 seems to be a “good enough option for Apple to keep for another year those broke people in countires like india and china.

        3. If Apple is not adapting its strategy no further growth is to be
        expected in countries like china or india where Apple is basically not existing. Apple will end up with only serving 5 to 10% of the global smartphone market. If that is the strategy than I am sceptical how that works out in the long run for their whole developer/app ecosystem.

        So I am still asking why not facelift the iphone 4s for the 90% of the global market?

      • StevenDrost

        To counter your argument, even the 1 series BMW is a premium car. It is not competing with a Toyota Corolla, nevermind a Tata Nano. When BMW decided to move down market they bought the Mini brand. Mercades did the same with Crystler. The premium brands could not sustain the low end. Porche, Jaguar and many others never even tried. The low margin, high volume market is tough. Apple has both, they wisely chose to sustain their position.

    • nextyear

      Think about what price points their models will have next year.

  • LRLee

    Perused the article over at LinkedIn. Man, the comments over there are poor. No value there. I know. This comment has no value either but I thought I’d give my opinion on how much I value the commentary here for the most part.

    • http://iddqd-technology.com/ Chris Blanchard

      Interesting to see that the vocal majority over there think Apple is doomed though

      • LRLee

        Yeah, not sure why. Didn’t see anything that specifically calls out the instrument for Apple’s doom nor a timetable for their demise.

      • MarkS2002

        Everybody stares at a big highway accident or a large fire, and are glad it missed them. I think the preponderance of people who seem to relish the failure of Apple have inhabited that space for a long time (or learned from others who have), have a lot of personal ego wrapped up in their predictions, and believe that volume trumps facts in any argument.

        ANDROID SUCKS! WINDOWS SUCKS! (See, it is really easy to do.)

    • Nangka

      Yeah. For or against, this place has by far the most intelligent comments compared to the rest. Very educational for me personally.

  • http://pavelnovel.com/ Pavel Konoplenko

    “…but it is at least signaling the “end of the beginning” phase in the smartphone market.”

    This line sticks out to me the most, especially in the context of Google’s Glass and Samsung’s Gear smartwatch. Like you mention in the article, I believe that Apple is covering themselves with the late adopters before they make a push for the the early adopters with whatever product line they introduce in the coming 12-18 months.

    • StevenDrost

      I believe he was referring to a point in the market where internal specs become less important than aesthetics. The 5S looks to be a powerful machine, but a lot of people won’t care and will want the Blue one instead.

      • http://www.gmgauthier.com/ Greg Gauthier

        Seems the actual sales numbers, one month on, don’t bear any of this out. 5s sales are far outstripping the 5c. People who buy apple products don’t do so for the visual aesthetic. They do it for the SOCIAL aesthetic. The 5c is “inferior” to the 5s. So, I’ll take the 5s any way I can get it, in order to not be seen as “inferior” through my choice of phone.

  • def4

    The second footnote makes no sense.
    There’s no way iPad mini was meant to replace iPad 3 and the iPad 3 never even lived a full life cycle, let alone get the chance to be sold as an n-2 product.

  • Jeff G

    C is for Camelot:

    Apple may not have the most territory, but for several years they’ve had a castle built on the most valuable – and admirably defensible – high ground. Now, they’ve built a mote around it and filled it with bright colored alligators.

    The 5C is clearly not a land grab, but if you’re the opposing army your chances of ever breaching the castle walls, just plummeted…

  • def4

    Good explanation, but over-complicated.
    There’s a simpler and more grounded view.

    During the last cycle, the sales volume ranking looked like this:
    1. iPhone 5
    2. iPhone 4
    3. iPhone 4S
    As time passed along the cycle, the share of iPhone 5 decreased and just about all of it moved to iPhone 4.
    The reasons are obvious so I won’t go into details. Demanding customers buy as early in the cycle as they can. Less demanding customers entered the shop, saw the new shiny for $199 and two seemingly identical models for $0 and $99.

    iPhone 5C is the result of the following forces:
    1. Apple wanted to switch the bottom two positions of that sales rank
    2. Apple wanted clear and obvious differentiation points between the models
    3. Operators want LTE on all new models they subsidise

    I strongly believe that the fascination with the prepaid market is deeply misguided.
    An iPhone without a data plan is not an iPhone because the user simply cannot get anywhere close to the amount of value the product is designed (and priced) to deliver.
    Even worse, the lack of a data plan denies the user exactly the ecosystem benefits that are Apple’s strongest competitive differentiators.

    As long as data on prepaid SIMs remains as ridiculously expensive and/or limited as it is now, an iPhone for the prepaid market makes absolutely no sense.

    • elliot noss

      This misses the fact that a significant majority of the benefits can be achieved with simply wifi. Mobile data is of course better, but not necessary.

      The prepaid market is where all the growth is, however I think looking at the distinction between “prepaid” and “postpaid” is a mischaracterization. I would describe it as a distinction between “overpaying incumbents” and “paying a reasonable cellphone bill”. [disclaimer. I work for Ting.com so I drink koolaid]

      • def4

        No, it doesn’t.
        WiFi-only iPhone = iPod Touch which is priced at the level pundits wanted for a cheap iPhone.

        Ting is cool, but will remain insignificant in the bigger picture.
        Prepaid may be a mischaracterisation for you because you have no clue what it really is. There’s no shame in that because in your market it doesn’t exist.

        In most markets it means no recurring cost. Never ever. Zero.
        That means you can receive calls and SMS and initiate a call that goes unanswered for free for ever. It costs more than postpaid when you do actually call and send SMS, but that’s just fine for light users.

        This means many households get one postpaid plan and several prepaid SIMs. Prepaid users short ring to prompt the postpaid user to call them back using cheap or included same network minutes.

  • obarthelemy

    I’d say C is for Carriers.

    Apple seem to be afraid to disrupt their relationships with carriers because their expensive devices are overwhelmingly bought with subsidies, so Apple can’t lower prices too much, as that would make unsubsidized contracts look more approachable.

    So Apple went the other route: raise margins. Add a phone that is much cheaper to make, but sell it for only a little less, and count on carriers to effectively fight off uncarriers and prepaid.

    Keeping the 4/4S still is weird, this screams for a 4C.

    • peter

      The Carrier angle is important here.

      Clearly Carriers are not interested in subsidizing low value light users, much better to steer them towards phones that require lower subsidies. The lower production costs of the 5C will give Apple room and incentive to price the 5C attractively for Carriers – lowering the required subsidy – and thereby removing a bottleneck in their sales. The Carriers are experts in price discrimination because they know exactly who their low value and high value customers are; you can leave it to them to deliver the 5C to the medium/high value customers to boost their data usage, but only if the required subsidy is not too onerous.

      The 4S is a bit weird because it is a two year old phone with a different aspect ratio screen, old connector and ‘old’ CPU/camera/etc. Consumers will clearly see this as a considerable step down from the ‘new’ 5C. Given the small difference in price it does not strike me as terribly attractive.

    • davel

      Carriers get their profits from the data. In the USA all major telcos have a early upgrade program. They get their money from the data plan. A lower end phone would allow a fresh Apple device to be sold at zero down price while retaining the data plan. A win win.

  • Nivlac Yelpat

    Horace –

    As I look at the news from Apple over the last 2 weeks, it appears to me that they did, in fact, announce a low-end phone… on August 30 when they launched a trade-in program in combination with Brightstar. (see: http://9to5mac.com/2013/08/30/apple-confirms-apple-store-iphone-trade-in-program-launches-today/)
    I think this is a fascinating announcement, that isn’t getting enough attention.
    What will Apple / Brightstar do with these devices that they are collecting?
    Consider the following:
    1) The program seems to be targeted at the US market – which is arguably the largest volume market for iPhones / high-end phones in the world. This makes it a good market from which to source significant volumes of reusable devices
    2) We know that Brightstar has global distribution reach — making developing markets more accessible.
    3) We can also assume that Apple/Brightstar can refurb the devices for relatively low cost, and likely re-sell the devices at break-even (worst case) or with margin (more Apple-esque don’t you think?)
    4) As we watch Apple approaching this opportunity, we should note that this offer is designed to drive traffic into their retail outlets. While in the store, they must purchase a phone, and they are likely to pick-up a case for their iPhone (assume 50% take rate, with 80%-90% margins).
    All-in-all, it would appear that Apple is slowly transitioning their business to address a broader spectrum of customers without denigrating the premium position of their brand in their core markets.
    I’d be curious in your thoughts.

    • StevenDrost

      I’m sure there is a financial incentive for them, but I’m not sure it’s in selling old phones.
      They want to make it easy for a customer to trade in their phone for a newer (high margin) one and they want to maintain their brand image by removing old product from the market. Also TC was asked about starting a trade in program earlier this year and he said that he liked the concept from an environment perspective, which makes sense based off their track record.

      • Nivlac Yelpat

        Removing old product from the market, and offering customers discounts for the privilege, is value destructive.
        Also not sure what incentive Apple has for setting the floor for the resale value of there product.
        We still need to understand what Apple is doing with the returned product.

      • DocNo42

        “Also not sure what incentive Apple has for setting the floor for the resale value of there product.” If those devices are sold in China, how does that do anything but preserve or increase the resell value floor in the US or other western countries?

    • obarthelemy

      Funny, I draw the opposite conclusion: Apple are tuning their system to focus on existing customers, putting a floor on the resale value of phones and making the process easy.