How Will Apple React to Inevitable Pricing Pressure?

The smartphone market will split into two main segments within the next five years, according to a new study from Informa Telecoms & Media. That polarization will be a major factor in the direction each smartphone maker, and especially Apple (NASDAQ: AAPL  ) , will decide to go.

The most expensive smartphones, ones with the state-of-the-art features pioneered by Apple's iPhone, took 85% of total smartphone sales in 2011. By 2017, however, Informa predicts that the high-end smartphone market will slump and those handsets selling for over $250 will shrink to a 33% market share.

At the lower end of the smartphone pricing continuum, handsets priced at less than $150 would take over the majority of sales, 52%, by 2017. The growing demand for entry-level smartphones in the emerging markets is powering this trend.

"As the market develops," writes Informa principal analyst Malik Saadi, "the supply chain will increasingly be divided between two camps -- the innovators who will continue to introduce new features and high-performance components to the market place and followers who will take this innovation to the mass market in later years."

It is obvious, then, that the iPhone would be competing for that ever-shrinking percentage of the global smartphone market, and Apple has a very important decision to make.

On the one hand, the Cupertino heavyweight could decide not branch out into the lighter-weight classes and keep slugging it out with the Korean contender, Samsung, for the high-end smartphone crown.

But Samsung has an advantage over Apple in that battle: It does not have to rely on its priciest handsets to prosper. Samsung can fall back on its wide-ranging smartphone lineup as the market changes. It already has fallback positions.

In Apple's case, though, the iPhone is Apple. Last January, Barron's reported that the iPhone provided 53% of Apple's total revenue for the company's first quarter.

And this past August, Business Insider estimated that the iPhone produced almost two-thirds of Apple's profits. Not only that, according to BI, the iPhone is more profitable than General Electric (NYSE: GE  ) , Microsoft (NASDAQ: MSFT  ) , Google (NASDAQ: GOOGL  ) , or Walmart  (NYSE: WMT  ) , and almost as profitable as ExxonMobil (NYSE: XOM  ) .

That's just one product.

It's pretty clear why Apple holds nothing back when it comes to the iPhone. What will become of Apple when the iPhone gradually loses its draw?

On the other hand, Apple could look at the emerging world, count the huge numbers of wannabe smartphone customers, and provide them with an entry-level iPhone. That iPhone would not be as cheap as the so-called white label Android phones, but still within reach of a decent percentage of the masses.

Such a phone would still have the cache of the Apple brand, instill brand loyalty, and provide the stepping stone to the full-blown iPhone model.

The lower-cost iPhone model(s) could be made with fewer bells and whistles -- less memory, smaller screen, slower processor (the same as Apple does with its Mac Pro and iMac computer lines). That pricier hardware would be just plain wasted on those who don't store a ton of music, watch videos, or play games on their phones.

Right now there are two kinds of smartphone users. Those with an Apple phone, and everyone else. That won't change five years from now, but if Apple chooses not to take the low road, there will likely be a much smaller percentage of the former.

Considering how much fiscal weight the iPhone bears for Apple's bottom line, how the company answers the looming pricing question will likely have a lasting effect.

There's no doubt 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.


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  • Report this Comment On December 12, 2012, at 7:13 PM, scottkorvek wrote:

    The viewpoint of this article is completely betrayed by the math. So you are saying that the high-end smartphone market will "slump" to 33% of the total smartphone market by 2017. The reason given for that is growth in the low-end smartphone market. So you are not saying that less people will go out and buy the latest and greatest iPhone or Android device, but that billions of people will buy their first smartphone in Africa, India, and China-- and it won't be a $600 phone. So what? That makes no difference to the profits fo Apple, Google, and Samsung-- and is a big potential upside if they make capable, less expensive devices that can turn some profit.

    It is not the case of companies fighting for a slice of a fixed pie--- the pie is growing by leaps and bounds every year.

  • Report this Comment On December 12, 2012, at 7:45 PM, marv08 wrote:

    Indeed, the maths here are deeply flawed. 33% of the smartphone market in 2017 will likely be more smartphones than 85% were in 2011, as the smartphone market is growing and feature phones are on the decline. Concluding that 'pricing pressure' will be 'inevitable' without considering that is not going anywhere.

    Now, if you would talk about market share, there would likely be a point. But Apple has never addressed market share by lowering prices. Not with iPods, not with computers, not with phones or tablets. So, I assume, they will 'react' as they always do: deliver the best products on the market and sell them to those willing to afford them, while others kill themselves in a race to the bottom. As long as Apple does not listen to analysts, pundits and their brain-dead suggestions... they're safe.

  • Report this Comment On December 12, 2012, at 9:35 PM, XMFDRadovsky wrote:

    To both Skorvek and marv08,

    I am talking percentages, not absolute numbers of smartphone customers.

    Dan

  • Report this Comment On December 13, 2012, at 12:10 AM, deasystems wrote:

    How Will Apple React to Inevitable Pricing Pressure? I guess the same way it has for the last 35 years.

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