Does C-H-E-A-P Spell D-O-O-M for the iPhone?

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No matter how hard Apple (NASDAQ: AAPL  ) tries, its attempts at being the world's one and only smartphone maker are condemned to failure.

It may win a patent infringement case here and there against its nemesis, the South Korean electronics giant Samsung, but the smartphone genie is out of the bottle and no amount of legal leveraging will ever make it beholden only to Apple ever again.

Why? The inevitability of cost trumping cool.

Here's a telling stat. According to market research company NPD Group, for U.S. consumers, the iPhone 4S and iPhone 4 were, respectively, the No. 1 and No. 3 selling smartphones during the third quarter. The iPhone 5 was No. 4.

Even after Apple released the iPhone 5, many customers chose to save $100-$200 by buying a subsidized earlier-generation iPhone when signing a two-year contract with Verizon  (NYSE: VZ  ) , AT&T (NYSE: T  ) , or Sprint Nextel  (NYSE: S  ) .

That doesn't mean the iPhone 5 was a dog in sales. Even released at the very end of the third quarter, it still "had a notable impact on the market, but by no means did older iPhone generations suffer since carriers provided less expensive pricing for those models," said NPD Group VP of industry analysis Stephen Baker.

Handset cost, then, is a factor for iPhone buyers, often a bigger draw than having a talking digital assistant or being able to download videos at 4G LTE speeds.

But a much bigger pricing threat to Apple than its own older model iPhones is Google's (NASDAQ: GOOGL  ) Android mobile operating system. It is, by a large margin, the world's most popular mobile OS. Third quarter global market share for Android was 68.1% versus 16.9% for Apple's iOS.

More importantly, Android's share grew from 46.9% in the same period a year ago, while the iOS share shrank, down from 18.8%.

In the U.S., Apple's iOS didn't lose any market share, but it didn't gain any either; staying flat at 31% in the third quarter, year over year. Android's share grew from 59% to 63%.

China's Android syndrome
But in those markets around the world without as much discretionary income as in the U.S., sales of really cheap Android phones, so-called white label phones, are zooming.

In China, according to information from Gartner and Raymond James, sales of smartphones made by companies other than Nokia (NYSE: NOK  ) , Apple, Samsung, ZTE, Huawei, or Motorola grew from approximately two million units in the third quarter of 2011, to 22 million in the third quarter of 2012. iPhone sales grew from four million to 7.5 million in that period.

The no-name phones are beating up even name-brand Android phone makers in China.

Cost obviously matters.

Price effect on U.S. carriers
The increasing costs of long-term contracts and data plans from the major U.S. carriers have helped many consumers decide to switch to month-to-month prepaid mobile plans, doing so in spite of having to pay full price for their phones.

The difference between paying a carrier-subsidized price of $200 for an iPhone or other top-line smartphone, or paying $600-plus for the same device, means most would opt for a cheaper alternative.

This was borne out by NPD Group's finding a larger selection of cheaper phones from smaller carriers, such as Boost, MetroPCS (NASDAQ: TMUS  ) , and Virgin, has been taking prepaid smartphone sales away from the first-tier carriers.

The third quarter saw 70% of second-tier prepaid customers switching from a major carrier. Prepaid sales at the second-tier carriers rose 23% over the previous quarter, while prepaid sales at the tier-one carriers fell 12%.

As ever cheaper smartphones show up to compete with the iPhone for the mobile subscriber dollar, how much longer will the first-tier carriers be willing to underwrite the iPhone's cost? How much longer will the iPhone be the main drawing card?

When luxury becomes commodity
It's hard to think of something as mundane as a refrigerator being hip. But having a refrigerator back in the days when the masses made do with iceboxes, was -- sorry -- very cool. Eventually, of course, the refrigerator became just another mandatory appliance.

And that's what's happening to the smartphone; it's becoming just another refrigerator. Soon, it won't be an optional gadget in one's pocket but a necessary device for living in the modern world.

It's only a matter of time before the iPhone becomes the smartphone equivalent of the Sub-Zero brand refrigerator. A desirable device -- but only for those that don't have to worry about its price. And it won't even keep the milk fresh.

There is absolutely no argument that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On November 28, 2012, at 6:28 PM, MattVD wrote:

    I am not sure that I can arrive at the same conclusions as the author or agree with those.

    Apple only released the iPhone 5 at the end of September, and experienced supply constraints for several weeks. Wouldn't that better explain third quarter performance, or at least give it the numbers (and thereby the conclusion) a totally different context?

    And if the original conclusion were true, wouldn't it still be visible in the fourth quarter?

    Oddly enough, Kantar Worldpanel ComTech just posted a report yesterday claiming a strong uptake of the iPhone 5 over the past 12 weeks and a number one spot in the US for IOS, leading almost 2 percentage points over Android. I guess we'll have to wait for the 4th quarter to end before we'll get to digest the final numbers (especially word wide), but I don't see "D-O-O-M" for the iPhone based on the quoted NPD Group report.

  • Report this Comment On November 29, 2012, at 8:43 AM, jdmeck wrote:

    Not everyone wants the best. Nothing new there. SJ may have wanted to be the only one but that's not the Apple view. It's a really stupid view.

  • Report this Comment On November 29, 2012, at 9:42 AM, jafutral wrote:

    "No matter how hard Apple tries, its attempts at being the world's one and only smartphone maker are condemned to failure."

    Exactly when was this ever Apple's implicit or stated goal?


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