Will Apple Need to Re-invent the Phone All Over Again?

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While Tim Cook may have the capability to match Steve Jobs in management efficiency, it remains to be seen whether he can do the same for innovation and the ability to think up market-grabbing product lines.

And that difference is exactly what could come to Apple's (Nasdaq: AAPL  ) rescue over the next few years as it battles a slew of ever-cheaper smartphones under the Android umbrella. Add to that the Windows smartphone factor and maybe there are real threats on the horizon that Apple needs to think about in the near future.

Why Apple is the best
Apple's truly amazing on the marketing front -- that's a certainty. This company doubled its earnings in 2011, despite that fact that almost all its products, including the iPhone, cater to the premium segment. Given its easy-to-use technology and ability to connect with its customers, it's not hard to understand why Apple is the world's most-valuable organization.

The company's USP seems to be its ownership of virtually everything associated with the iPhone, from the software platform to its beautifully and strategically designed retail stores, most of which have a very high productivity per square foot. The seamless integration that is available across its phones and other products such as the iPad, thanks to the iCloud services, is also another huge plus point. And wireless carriers have actually benefited from offering the iPhone to attract new customers.

But the question remains: Are these enough to stay ahead in a market which is changing by the day, maybe the hour? Let's take a quick look at some of the areas that Apple needs to think about in the near term.

Factors to watch out for

  1. Apple is yet to release a phone which caters to the lower end of the market or even the middle-income group. While that may give it exclusivity, that's where competition could eat at its profits, as phones that match the iPhone's capabilities are increasingly becoming available at less than half the price. If you look around at the stunning range of Samsung smartphones which are tailored to fit every kind of consumer budget, you will understand what I'm trying to say. And when I find that the percentage of smartphones below $200 is set for an almost five-fold increase -- to 24% -- by the year 2016, it does give me something to think about.
  2. The other stark reality Apple will have to contend with is the competition that its iOS software faces versus Google's (Nasdaq: GOOG  ) Android. What worries me is that while Apple's software is restricted to its own range of phones, market leader Android seems to have proliferated into handsets made by Samsung, LG and Motorola (NYSE; MMI), just to name a few. And again a significantly large proportion of these handsets cost much less than an iPhone.
  3. One-time market leader Nokia (NYSE: NOK  ) is putting up an all-out fight to retain market share as well. It partnered with tech giant Microsoft (Nasdaq: MSFT  ) to produce the Windows Lumia line of phones. Having announced recent plans for cheaper Lumia phones alongside expansion into areas such as China (which is one of Apple's biggest overseas markets), you never know when consumers might tilt towards the combination of "good to use" and "easy on the pocket." And there seem to be more reasons for it than against, given that most Asian and Latin American economies are slowing down.

Some Foolish last words
Apple iPhone is the smartphone to be seen with, and everyone's still saving up for it, which also makes it the world leader in smartphones. And it's set to grow at an even more phenomenal rate, with some analysts predicting the company is slated to capture around 60% of the industry's total profits this year. But we should also perhaps remember that the day may not be far when a set of consumers might want to take a break from a "mainstream device," something Apple wishes its iPhone to be. And when you look at it from that angle, all that Apple has been doing until now is making innovations on the existing iPhone, not bringing out altogether new phones. The competition certainly has far more to offer.

Apple is certainly a stock worth fighting for, but consider this: The hugely anticipated iPhone 5 might just have features which already exist in a present-day high-end Android smartphone. Is it time for Cupertino to get back to the drawing board once again?

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Fool contributor Subhadeep Ghose does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Google, Nokia, Apple, and Microsoft; creating a bull call spread position in Microsoft; and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2012, at 9:18 PM, haysdb wrote:

    I don't give a damn about being "seen" with an iPhone. I use it because it's a great product.

    The day Apple makes a "cheap" phone is the day I sell my Apple stock. It will be proof that they have lost their way.

  • Report this Comment On March 15, 2012, at 9:26 PM, haysdb wrote:

    By the way, Apple does make a phone for the middle income group, it's called the iPhone 4. And it's false economy anyway. If you pay $80 per month for your service, you're going to spend $2000 over the course of your contract. The difference in cost between a $200 phone and a $100 phone is the difference between $2200 and $2100.

  • Report this Comment On March 15, 2012, at 9:56 PM, Realexpectations wrote:

    I always wonder if the people that run these huge companies actually read articles like this.

    Or if they just stay in their own little bubble.

    I think staying in the bubble is good, because why stop doing something thats working. but at the same time, it seems Rimm or GM stayed in their bubble and refused to look outside of it and bad things happened. The thing about companies is, almost nothing happens overnight. Whether you become a champ or a complete loser it seems.

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