Can a Low-Cost iPhone Save Apple?

Actually, does Apple (NASDAQ: AAPL  ) need saving in the first place?

If the following two figures point to a company in poor shape, I don't know if I could bear to look at a healthy one:

  1. $137 billion in cash, cash equivalents, and short- and long-term marketable securities
  2. Zero debt 

Apple's stock price has been tumbling, from a high of over $700 a share just four months ago, to around $450 as of this writing.

What has made investors so nervous?

Perhaps it's because Apple worked itself into such an enviable financial position mainly on the strength of one product -- the iPhone. Sales of the iPhone accounted for 49% of Apple's 2012 fiscal year (ending Sept. 29, 2012) revenue of $156.5 billion. Even more critical, this past August, Business Insider estimated that the iPhone produced almost two-thirds of Apple's profits.

That's a lot riding on one product.

If one still doubts the iPhone, above all other Apple devices, is Apple, consider that sales of Macs (desktops and portables), the computing devices that started it all for the company, totaled just 17% of Apple's 2012 sales – a yearly gain in revenue of 7% compared to the iPhone's 71%.

One problem is that even though the iPhone has been selling at a record pace, it is no longer the only super-duper smartphone on the planet. It isn't even the world's best-selling smartphone anymore. Samsung's Galaxy S III is.

Another has to do with the smartphone market being on the verge of splitting into two main price segments, according to a study from Informa Telecoms & Media, and Apple will have to decide when -- not if -- it will begin producing iPhones at a lower price point.

The emerging marketplaces of the world -- places where carriers do not generally offer cell phone subsidies -- are powering a growing demand for more affordable smartphones. So far, producers of lower-priced smartphones running Google's Android OS, such as Samsung, Huawei, ZTE, and many so-called white label brands, are scooping up the first-time smartphone buyers.

It's no surprise, then, that during Apple's earnings conference call this week analysts were curious about Apple's iPhone pricing plans.

This from Kathryn Huberty of Morgan Stanley: "It's clear that iPhone 5 did incredibly well in the U.S. ... but ... are you confident that you have all the right price points and screen sizes to fully capture the non-U.S. demand for iPhone specifically?"

And from Chris Whitmore of Deutsche Bank: "There seems to be a lot of demand at lower price points for the iPhone. Why not get more aggressive at lower price bands and move down-market in the iPhone business?"

And then this from Toni Sacconaghi of Sanford Bernstein: "Realistically, how does Apple hold share given that the market segment that -- and price point that you play in is expected to grow a lot slower and you have pretty dominant share in that high-end?"

Apple CEO Tim Cook's answer to that one: "We could put the Apple brand in a lot of things and sell a lot more stuff, but that's not what we're here for. We want to make only the best products."

That would suggest that Apple is not interested in putting out a cheaper but less-featured product, but then Cook made this analogy with Apple's iPod pricing evolution: "I think we've had a great track record here on iPod of doing different products at different price points and getting a reasonable share for doing that. And so, one doesn't -- I wouldn't view these things as mutually exclusive as some might."

Quality and price -- not mutually exclusive -- hmmmm?

Well, maybe then Apple is not ignoring the pricing elephant in the room. With so much for Apple riding on that iPhone, not making plans for taking the low road would seem a costly oversight.

There's no doubt that Apple is at the center of technology's largest revolution ever. 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 (6) | Recommend This Article (2)

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  • Report this Comment On January 25, 2013, at 7:28 PM, jackbot wrote:

    I don't really understand all this talk about a cheaper iPhone. Don't we already have that with the iPhone 4? It's priced at $450 without a contract as opposed to $650 for the 5.

  • Report this Comment On January 25, 2013, at 7:37 PM, TimKnows wrote:

    Apple has a ton of cheap products already, just price them right now.

  • Report this Comment On January 26, 2013, at 6:16 AM, RattyUS wrote:

    "It isn't even the world's best-selling smartphone anymore. Samsung's Galaxy S III is."

    Misinformation. The Galaxy S3 is selling about 1/2 the rate that the iPhone is selling. Can you provide data to support this point or do you not bother to do research, relying on an internet meme?

    Yes Samsung sell more phones. But they have a stable of about 80 phones to do this with, a lot of them low end phones to emerging countries. They are not selling more of the Galaxy S III.

    Apple has 3 phones and in the last quarter sold about 2/3rds of the phones that Samsung did. 3 phones up against 80 odd phones.

    Also Samsung spent something like 12 billion dollars in marketing last year. And people complain that Apple is a mere marketing company.

    Here's the thing. Samsung shipped a huge number of phones in the last quarter. A huge number. Now they are warning that the market is starting to saturate.... Wonder if that means their sales will fall off a cliff in the next quarter? We shall see.

  • Report this Comment On January 26, 2013, at 11:54 AM, XMFDRadovsky wrote:

    RattyUS,

    My global top-selling smartphone stat was from this report for the third quarter:

    http://bgr.com/2012/11/08/best-selling-smartphone-2012-q3/

    But lets get our criteria lined up. Are you pitting all the iPhone models sold currently (5, 4S, 4, and so on) versus the single model Samsung Galaxy S III? Or just the iPhone 5 vs. Galaxy S III?

    If the former, then that's not quite cricket. But I also should have specifically said iPhone 5 vs. Galaxy S III, so that's my bad.

    However, if we are pitting all the iPhone models against all the Samsung models, then, according to data from IDC for 2012, globally Samsung wins hands down: a 29% share vs. Apple's 22% share.

    I got the above data from this link:

    http://www.mercurynews.com/business/ci_22451090/smartphone-s...

    But putting data points aside for a moment, I do really think that it will be a mistake for Apple to ignore that as smartphones become more a commodity product and less a cool device for hipsters, the three most important stats for consumers will become price, price, and price.

    Dan

  • Report this Comment On January 26, 2013, at 11:07 PM, RattyUS wrote:

    Yes, your data was based on when the iPhone 5 was not released. It was an internet meme that Samsung had won. If you had actually bothered to do your research then maybe you'd have a point.

    You are plain and simply wrong.

  • Report this Comment On January 26, 2013, at 11:54 PM, RattyUS wrote:

    Here's the thing.

    "My global top-selling smartphone stat was from this report for the third quarter:"

    But first of all that wasn't "global top-selling stat" data. that was shipments. IE channel stuffing. You have reported it as "selling" but that wasn't what strategy analytics said, but it was what BGR reported. As I said in my original post "Can you provide data to support this point or do you not bother to do research, relying on an internet meme?" At the moment it looks like you were relying on an internet meme.

    "But lets get our criteria lined up. Are you pitting all the iPhone models sold currently (5, 4S, 4, and so on) versus the single model Samsung Galaxy S III? Or just the iPhone 5 vs. Galaxy S III?"

    As I pointed out. Quarter 3 there was no iPhone 5. Only the 4 and the 4s. But hey, let's not let get fact get in our way...

    "If the former, then that's not quite cricket. But I also should have specifically said iPhone 5 vs. Galaxy S III, so that's my bad."

    But the point was the iPhone 5 wasn't in the metrics that you used to support your argument. As you say, you bad.

    "However, if we are pitting all the iPhone models against all the Samsung models, then, according to data from IDC for 2012, globally Samsung wins hands down: a 29% share vs. Apple's 22% share."

    At no point did I try to argue that. As I said.Samsung have 80 odd phones in the arena. unfortunately for you the Galaxy S3 was not the only phone, nor was it the vast majority of sales from Samsung. BTW. Samsung don't release sales, in fact, the only company that make mobile phones that do release actual numbers are Apple. Wonder if the are relying on hacks like you to do their promotion for them? BTW I would ask for some money. Samsung paid out 12 billion dollars last year on promotion, Apple about a billion. That money is going somewhere I'd ask them for some money for promoting their misinformation.

    "I got the above data from this link"

    you did actually bother to read the link?

    "Samsung Electronics Co. retained its bragging rights as the smartphone leader, shipping nearly 64 million devices for a 29 percent share of the global market."

    At what point does it say that "the galaxy S3" was the only phone they shipped? I will repeat myself. Samsung currently have 80 odd phones in their shipments.

    "Apple Inc. (AAPL) ranked second with nearly 48 million iPhones shipped during the fourth quarter, translating into a market share of 22 percent."

    With only 3 phones currently for sale.

    Do you now see the point?

    If you go back and do your homework you'll see how many SIII's have been sold over the last 9 or so months. then look back and see how many iPhone 5's have been sold in the last three - which is how long they have been available.

    Then do the math to support your argument "It isn't even the world's best-selling smartphone anymore. Samsung's Galaxy S III is."

    Now who is trying to play the game but not sticking to the rules of cricket? Please advise.

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