In the last 6 months the Apple Stock has fallen 40% making the case stronger for Investors to push for the Lower Cost iPhone or a SmartPhone that addresses the $300 segment. Why it makes sense for Apple for a lower cost iPhone is because of the market dynamics in the smartphone industry, especially the low-to-mid range segment and thus Apple has to encash on the potential launch of such a device. We’ll also see how this could impact iPhone’s total addressable market. Going forward, expect hardware margins erode and Apple has to innovate in maintaining its dominance in the Platform and Deliver Services to keep its growth chart healthy.
Smartphone saturation in mature markets should begin to weigh on the overall smartphone industry growth going forward. Data suggests smartphone penetration has reached 40%+ in developed markets in 2012, up from just 10% in 2007. At the same time, smartphone user penetration in emerging markets remains at just above 10% today. We see the mix shift toward low / midrange smartphones accelerating, as higher percentage of overall industry growth will be driven by emerging markets.
Apple’s focus on the high-end segment has allowed the company to drive outsized revenue and profit share in the smartphone market in the past. That said, an increasing percentage of high-end smartphone demand will be likely driven by replacement rather than new demand going forward, as smartphone penetration in developed markets inches closer toward saturation, and the subsequent growth deceleration could begin to weigh on Apple more so than other tier-1 smartphone OEMs with more diversified product portfolios.
Apple’s stagnant market share trends in the total smartphone market over the last few quarters (18-19%) are driven by its limited total addressable market – i.e. only targeting the high-end segment, which represents a smaller percentage and lower growth portion of the overall market.
Thus one can expect expect a potential low-end iPhone to be priced at $250-300 and leave a noticeable value gap from higher-end iPhone models. With concerns of cannibalization in markets like the U.S. where there is already a significant iPhone installed base and where a percentage of prepaid subscribers is relatively low, Apple would likely choose to introduce the new device selectively in emerging markets, similar to what other smartphone vendors have done to date.
The Challenge of Distribution in Emerging Markets Nokia and Samsung have significant advantage with their built-out distribution networks, and Apple would have to build out theirs to catch up.
To summarize, we expect the Lower Cost iPhone to be in the range of $250-$300 to be launched in 2014 when emerging markets are mass ready for wireless data adoption. What say ?