Apple is thinking about the mobile phone market in a whole new way

September 10, 2013

Apple's big announcement Tuesday boils down to this: An acknowledgement that the market for mobile phones is growing up.

Since introducing the original iPhone six years ago, the company has gone through round after round of upgrades in which each one was a little sleeker, a little faster, a little better than the one that came before it. The company did not, by contrast, make "cheaper" one of the areas for improvement, at least not in any major way.

For those last six years, the company could manage to achieve astronomical growth just by riding the wave of middle and high income people across the globe adapting to smartphones and preferring Apple's products to the alternatives. In 2008, the first full year after the iPhone's introduction, Apple sold 11.6 million of them for $6.7 billion; by 2012, that had risen to 125 million phones for $79 billion.

But now most of the people who want an iPhone and can comfortably afford one already have one. That doesn't mean the business will collapse anytime soon; people still need to replace their phone every couple of years amid regular wear and tear and the modestly improved features. But nothing Apple introduced Tuesday, or which seems to be on the horizon, represents as big an improvement against the current iPhone and other leading smartphones as the original iPhone did in 2007 compared to its competitors.

So one approach for Apple would be to resign itself to being a seller of premium phones--if you do the math above, the company is pulling in a whopping $632 in revenue per phone sold. But it wouldn't be a growing one. And even in that premium category, it is facing stiff competition on price and, increasingly, quality from Samsung. So at best it would be a slow-growing business, at worst they could find themselves losing market share, cutting prices and thus decreasing profit margins, or some combination of both.

A second strategy would be to play in a different sandbox, to have a product marketed for the billions of earthlings who are only now entering the market for a smartphone and cannot dream of a product that costs $632. (India's per capita annual income is only $3,600). In richer nations, a cheaper iPhone could particularly appeal to lower income people, particularly the young.

Apple's strategy, formally revealed Tuesday but long telegraphed, is: Both. It is simultaneously introducing the iPhone 5C, with a slower processor and bright plastic casing in funky colors, that will give the company a product better able to compete with cheaper competitors among the cash-strapped around the world. Its price will be as low as $99 with a two-year service contract. (Does the "C" stand for colorful, or for cheap? Both, one assumes.)  And it is introducing the 5S model, which will be more expensive and offer all sorts of bells and whistles--a better camera, better processor, fingerprint-based security, new sensors that will enable a new wave of fitness apps, and more. The colors are a dignified gold, silver, and gray, and the cases made of aluminum.

The risk here is obvious. Apple is trying to have it both ways, and if they make the 5C too good, it will start to cannibalize sales from their higher-margin, higher-priced premium phone. If it's too bad, then people will still favor Samsung and other competitors' products.

So the colorful plastic surely isn't just about using a less expensive material to lower the 5C's price. It's also trying to make sure the 5C model has a goofy, slightly cheap look that an affluent attorney or financier wouldn't want to carry in their pocket.

More than anything, the mobile device business is starting to look an awful lot like another business with which Apple has more than passing familiarity: The personal computer business circa the early 1990s.

Apple had been the great innovator of the 1980s, with its Macintosh computer (first introduced, famously, in 1984) introducing the mouse-and-windows-driven user interface that has become standard. It offered a first-rate user experience and elegant machines, all at a significant price premium. But by 1990, personal computers with Microsoft operating systems and Intel processors had made great strides catching up. They were still clunkier than Macs in important ways, but were way cheaper, had lots more software options, and were good enough for most people.

In mobile phones, Apple was again the great innovator with its original iPhone, and this time it is Google (with its Android mobile device software) and Samsung in the position of rapidly catching up on quality and beating Apple on price.

In the 1990s, Apple dealt with this somewhat similarly, introducing new models to appeal to families and other budget-strapped consumers (my family's first computer was the newly released Macintosh Classic for Christmas 1990) while also continuing to sell ultra-expensive high-end models that appealed to those who could afford them.

It didn't go well for Apple at the time. The company could never get prices low enough to truly be price-competitive with Wintel PC's. That Mac Classic, to the best of my recollection, cost around $1,300, or around $2,500 in today's dollars, and had a tiny black-and-white screen at a time similarly priced Windows PC's offered color. At the same time, the premium market that could pay high prices was by definition a small one.

Later in the '90s, when Apple, once again with Steve Jobs as CEO, introduced the colorful iMac line as its entry-level, accessible machine, the strategy worked better. But even then, Mac computers remained a niche business at a time that PC sales were starting to level off. Bright colors helped win a battle, but that came after Apple had already lost the PC war.

The lesson for mobile phones in 2013: Market segmentation of the sort Apple is trying can work. But if the company is going to continue its gangbuster growth rate of the last several years, it is probably going to take some genuinely new and innovative product, not just some pretty new colors.

Comments
Show Comments
Most Read Business
Next Story
Brad Plumer · September 10, 2013