Yesterday Apple made the iPhone 5s and iPhone 5c official. And Wall Street collectively shrugged at the news. Rather than simply attack Apple's strategy or dismiss investor reaction, let’s talk about Apple the company and the stock. Let’s have a discussion about what these guys are doing (or perhaps failing to do) when it comes to meeting the expectations of the market.
The news from the big event came off pretty much as expected with one noticeable difference. This one difference likely explains Apple’s stock dropping from about $505 yesterday to $470 as I write this.
That one thing is pricing. Specifically pricing of the 5c. Nearly everybody was expecting a less expensive iPhone. Instead we got a replacement for the iPhone 5. If Apple hadn’t launched the 5c, the iPhone 5 probably would have dropped by $100 as the one year old model always does. So the 5c simply fills that spot. No real change in pricing at all.
Wall Street isn’t happy. Investors and analysts think Apple is missing a huge opportunity to gain traction in China, India and other emerging markets where price is a major issue. In fact, the iPhone 5c will cost over $700 off contract in China. That’s a huge sum of money to the average consumer in that country.
To be honest, I share this concern. But I realize that Apple knows more about how to price and market its stuff than I do. Same goes for pretty much any professional analyst or money manager out there. Very few of them know anywhere near as much about sales and marketing as Apple.
So I’m willing to sit back and watch. Let’s see what happens. The current free phone (on contract) in North America and many other countries is the iPhone 4S, which has a different screen size than the 5c and 5s. By this time next year we’ll almost certainly be looking at a full portfolio of iPhones that have the same screen size. Maybe at that point they’ll take a bigger step towards emerging markets and lower prices.
In the mean time the 5c is clearly not aimed at super price conscious people. It’s aimed at people like my wife. She doesn’t currently have a data plan because she never felt it was worth paying for. But she loves her iPod Touch and has been an Apple user for a long time now. Last month she told me she’s decided to buy an iPhone and wanted my input on which model to buy. I suggested waiting for yesterday’s launch. We watched a replay of the keynote last night.
You know what? She couldn’t care less about the feature enhancements of the 5s. Fingerprint sensor, 64-bit processor, colour balanced flash ... she couldn’t care less. But she freaked out when she saw all of the cool colour combinations between iPhone 5c and the covers with the circular cutouts.
The cool colours and the neat covers sold her. People buy on emotion and justify with logic. The $100 lower price tag was that logic. I suspect there are a lot of people out there just like my wife. She’s fashion conscious and budget-minded without being a total miser. She’s not a tech geek and would never think to ask about specs. Guess what folks? That’s a huge chunk of the market. Colourful fashion, high function and a $100 savings wins them over.
Just because Apple didn’t launch a much lower cost iPhone this year doesn’t mean it will never happen. And I’m not making excuses for them. I thought it would be the right thing to do, and the right time to do it. I might be wrong. Maybe they take small steps towards cheap phones over time. Maybe they never do it.
This morning I was out for a run listening to an interview-style podcast. Funnily enough, the person being interviewed was the well known Silicon Valley entrpreneur and former Apple Chief Evangelist Guy Kawasaki. He talked about defining success and failure as an entrepreneur. He asked if Porsche is a failure because it only has a tiny sliver of the car market. Are they? Of course not. They’re massively successful within the market they go after.
Apple has also been successful despite having perhaps one tenth of Microsoft’s market share in PC land. Yet in Mobile they have significantly more market share than in the PC market. And just like in the PC market they aren’t going to be #1. Android is #1 and I think it’s reasonable to suggest they hang onto that position for the foreseeable future. Maybe Apple is willing to sit back and collect its profits from the 20 or 30% of the market that is willing to pay a premium for its brand, while Android vendors compete for the rest.
I can’t say there’s anything wrong with that strategy. And as a shareholder, I recognize that the tablet & smartphone market is bound to be much bigger than the PC market ever was. If Apple can keep delivering awesome products in a market that is much larger, and they can do so with 3 or 4 times the market share they earned in the PC market I think they’ll do just fine.
But I’d be lying if I didn’t say I still hope they go after emerging markets in a more meaningful way.
