These Numbers Suggest Apple Had Better Get a Low-End Smartphone

iFolks are still reeling from Apple's (NASDAQ: AAPL  ) precipitous drop after it reported earnings Jan. 23, not to mention the pressure on its shares leading up to the news. Without rehashing the particulars, slightly depressed margins, and concerns regarding opportunities for future growth, seem to be driving Apple's share price down.

So, what's Apple CEO Tim Cook and his 80,000-person team to do? According to a recent study completed by the research folks at IHS, the answer's pretty clear.

The data
After selling nearly 48 million iPhones in its recently released fiscal 2013 first quarter, Apple solidified its dominant top-end smartphone position, particularly here in the States. According to Kantar, Apple now accounts for 51% of the domestic smartphone market; which is both good and bad. On the good side of the ledger, that kind of market penetration is an incredible accomplishment and drove Apple's record revenue and earnings results.

The downside of Apple's market share is part of what's been driving its shares down of late -- is the market saturated with iEverythings? If so, how does Apple continue growing sales at such a phenomenal rate, something investors and market pundits alike will punish unmercifully (as we've seen) if it can't?

According to IHS, the answer lies in further infiltrating the fastest-growing segment of the smartphone population -- the international, low-end smartphone consumer. By 2016, as per IHS, low-end smartphone shipments will nearly triple from 2012's 206 million units, jumping to 559 million. That kind of explosive growth equates to a 51% compound annual growth rate, compared with a 12% annual growth rate for the global high-end smartphone market.

So where will all those new phones end up? Not surprisingly, China is expected to lead the way, and Cook's trips to the Far East of late make it pretty clear he gets that, too. Unlike many international markets, as Nokia (NYSE: NOK  ) learned recently, some Chinese carriers will actually subsidize the cost of the phones. Nokia's deal with China Mobile (NYSE: CHL  ) to offer its Lumia phone to China Mobile's 700 million customers was a coup. The icing on the cake for Nokia was China Mobile's decision to subsidize the cost of its Lumia, making it essentially free for its customers.

Other areas of international growth are expected to be in the Asia-Pacific region, Eastern Europe, followed by the Mid-East and African markets. Smartphone growth in North America will bring up the rear; IHS expects we'll see about 4% annual growth. The data is pretty clear: Low-cost phones in emerging markets are critical for future growth -- not just for Apple, but for all the usual smartphone players. For the countries that shy away from subsidizing the cost, and there are many, price point becomes a critical component of any strategy. No matter the features, it's hard to imagine a typical smartphone customer in a Third World country plopping down $500 or $600 for an iPhone.

Where Apple fits
For Apple fans, Nokia may not warrant mentioning in the same breath, but Cook and team can take a page from the Finnish phone maker. Of the 86.3 million mobile devices (primarily phones) sold during Nokia's recently announced Q4, 9.3 million of them were its new Asha phone. What does that have to do with Apple? Nokia released its new Asha lineup for one reason, and one reason only: ti directly target the mid and low-end phone consumer-primarily overseas. And it's working.

Samsung took over the No. 1 spot in global phone sales, surpassing Nokia last year, in large part because of its wide array of phone alternatives, touching multiple price points. Google (NASDAQ: GOOGL  ) is another major player that, like Nokia and Samsung, has a smartphone directly competing with Apple's iPhone 5, and based on its recent earnings report, hardware sales were strong. However, Google has also shown a willingness to move into lower price points other hardware players wouldn't. While its Nexus 4 starts at $300, its Motorola unit could easily attack lower price points to secure better Android positioning in the low end. 

What's the plan?
If we can agree that the domestic smartphone market's growth is limited -- not saturated, but limited -- and come to terms with the fact that no one's paying $600 for an unsubsidized phone, we return to the original question: What does Apple do about it?

I recognize that Apple's margins will be pressured offering a low-end smartphone alternative, but those concerns need to be set aside to address the larger problem: Where does continued sales growth come from, if not the low-end market? Yet another iteration of a high-end iPhone? Apple TV? A double-decker, super-mini iPad? No, the data is undeniable. It's time for Apple to come down from on high and take a look at what Nokia, Samsung, and, yes, even Google, are doing.

The recent drop in Apple share price has fueled a sometimes contentious debate: Does Apple remain 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 (15) | Recommend This Article (5)

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 January 26, 2013, at 11:26 PM, techy46 wrote:

    Apple can get all the devices they need by purchasing Nokia for $6.50 PS for a total of $25b. They can then be the largest Apple and Windows phone vendor in the world and see what Google and Samsung think about that.

  • Report this Comment On January 27, 2013, at 12:26 AM, applefan1 wrote:

    They don't make any money with a low-end phone. Those don't make any profit. That's why Apple is more profitable than their counter parts.

    Apple is not trying to compete in the low margin, no profit business. They are in the business of making money, making the best products and serving the customers.

    WIth their current strategy, the iPhone 5 will be their low priced model when it gets reduced in a couple of years down to $0 on a two year service contract.

    If Apple can barely meet demand for a high price/high margin phone, it makes ZERO sense to change those production lines to make more of a no profit phone, when they can't meet demand for a high margin phone. When Apple has reached a point where they always meet demand for the high margin phones and they want to branch out into the low margin phones, and they want to open production lines to do. But why go after a market segment of business where there's NO MONEY?

  • Report this Comment On January 27, 2013, at 12:28 AM, applefan1 wrote:

    I doubt Apple's going to buy Nokia. Apple TYPICALLY doesn't spend BIG BUCKS buying those types of companies. They typically spend less money buying key technology companies, like what they did with Anobit, and other others along the way.

    Those large big dollar purchases end up taking forever recouping the money and Apple doesn't need to buy market share.

  • Report this Comment On January 27, 2013, at 12:34 AM, applefan1 wrote:

    There are certain industries that are basically, for all intensive purposes iOS Markets. Go to NAMM show, it's being held this week end. I have not SEEN a single video or product announcement for a tablet/smartphone device that's on anything other than iOS products. That's ranging from the beginner apps to high end apps. It's all iOS, OS X, and maybe some Windows 7 based, but mostly it's iOS and OS X. In fact, some companies have decided to abandon WIndows, or to just be Mac specific.

    Home Automation is primarily for iOS. There are some that will do Android, but for the most part, it's IOS controlled by iPads and iPhones.

    The medical field, iPads.

    Government is split but time will tell how long Android lasts. I'm really surprised it's lasted this long.

    The Education market is predominately iOS for tablets.

    Smartphones that Android caters to are kids and those that don't want to spend any money because most likely they don't have any money to spend on apps, third party hardware/software and they just want a cheap smartphone. Why go after people that don't have or want to spend money on something that won't give you any profit? Samsung is giving guidance which spells out trouble for Samsung because they cater to the low end market.

  • Report this Comment On January 27, 2013, at 9:26 AM, luxetlibertas wrote:

    This article is based on misunderstanding of Apple the company, in a big way. It basically asks Mercedes to sell cheap cars in China and India to gain market share. It is wrong on so many counts that it boggles the mind.

    Apple wants to innovate, to create the very best devices on the market. Everything is in place for that: the best run ecosystem in the industry, the corporate culture that demands the highest standard and a broad view of what the future can bring, so much money that it has in itself become a problem, and so on.

    Apple's investors may want short term earnings growth, but that should not be Apple's focus. The focus needs to lie squarely on creating the best products. Profits are a byproduct of that strategy, if well executed. To attract the best people, it needs to be on the cutting edge of industrial design, technology and manufacturing. Producing as many mediocre stuff as you can, just to grow the top line is the best way to run the company into the ground.

  • Report this Comment On January 27, 2013, at 11:30 AM, SRNoyes wrote:

    I can't believe the arm chair quarterbacking with poor understanding. Somehow, Apple was able to grow their daily shipments of iPhones 40% YoY and iPads by 60%. Their Mac line showed a solid slow down but the revenue was easily offset by the growth of iOS by shipping over 900,000 iOS devices every day last quarter.

    And for some reason, this is considered a "fail". I just don't get it.

  • Report this Comment On January 27, 2013, at 11:43 AM, dj555 wrote:

    AAPL is NOT NASA. And thats why the market is crushing AAPLs arrogance. Cook said We dont focus(care) on revenue, just the best product on the ConfCall and AAPL dropped 490 to 450 in 1minute. LOL.Wake up Man, youre a greedy maniacal megacap. Further AAPL now gives Growth drop MINUS 17to25% guidance. The nonthinking snob advanced smart markets are near staurated. Buying NOK now THAT would be innovation for AAPL but they wont. 420 440 Gap now being filled. AAPL Keep on the same course and my trade short will love you more. I Thank You.

  • Report this Comment On January 27, 2013, at 12:25 PM, TimKnows wrote:

    Apple has nothing new in the wings, they can't innovate, they can't invest capital wisely, and shareholders are begging them to buy back shares, such is the sad state of Apple right now.

  • Report this Comment On January 27, 2013, at 1:57 PM, bobbyk1 wrote:

    Ive een an AAPL holder for 3 years.I really would like AAPL to address the constant supply constraints.While I have no idea what this entails it does seem to be an ongoing problem.

  • Report this Comment On January 28, 2013, at 10:50 AM, GhostdogWarrior wrote:

    Jobs was as much an innovator as he was the Jim Jones of the marketing world. Create a cult and they will buy anything you put out there. Jobs would never have gotten into a price war for two reasons. 1.) The markup margin gets destroyed which is massive on their products and 2.) it kills their brand, thus malking it "not cool" to the kids who are their biggest market. Lets face it once, suburban Mom's have one, its not cool any more.

    I've never been a fan of Apple, because its always just been a cult. (An Ipod is a digital walkman, and an ipad is a more expensive and less productive notebook) But I give the man credit as he is one of the best salesman in the Tom Sawyer Vein.

    But, eventually, the cult dies because the they dont understand they have to feed the cult. Market share is not what they want, exclusivity is what they need. In other words, High Markup and a sustainable but select herd

  • Report this Comment On January 28, 2013, at 11:09 AM, xuinkrbin wrote:

    I am thinking Whoever wrote this article is not paying attention. Apple already has a phone People can get for free. It's called "iPhone 4". The only part for which One has to pay for the iPhone 4 is the service contract which One was going to have to buy anyway, regardless of the type of iPhone purchased. To Anyone coming along, please ignore the above article. Thank You.

  • Report this Comment On January 28, 2013, at 11:18 AM, xuinkrbin wrote:

    @GhostdogWarrior: I am wondering how much You have actually used Apple products or if You really do have such a contemptible view of Others as to call Them part of a "herd". I have tried both Android and iOS devices, as well as Windows and Linux PCs and Macs. The experiences are TOTALLY different. Apple products, in My experience, have far less "hiccups", problems, and/or failings. When I install software, I don't have to reboot My Mac over and over. If I plug in a peripheral device, it just works, the Mac recognizes it and automatically AND SILENTLY installs drivers, if any are even needed in the first place. With no known successful Mac or iOS virus (which is different than, say, a trojan), I don't need to worry about anti-virus software. I can leave My Mac/iPhone running for almost a year at a time without needing to restart it. All of this gives Me more time to do what I need/want with far less headache and with far more ease and enjoyment.

    In short, if Apple is "just a cult", as You say, it is a "cult" based on the idea technology should just work and give Users like Me an enjoyable experience.

  • Report this Comment On January 28, 2013, at 9:26 PM, timbrugger wrote:

    xuinkrbin,

    As it happens, I am paying attention.

    iPhone 4 free? Really? For you, maybe, but not for Verizon, AT&T, or every other provider that 'gives' it to you; along with a 2-year contract, and that's the point.

    Many countries, which are the areas of tremendous growth opportunities going forward (again, the point of the article), WON'T subsidize iPHone 4's, 5's, or 19's, when they come, and they will. Guess who pays there? Users. Will the guy in Africa drop $400 for an 'old' iPhone 4? Not likely, and again, that's the point.

    Love the passion, but don't let it get in the way of your investment decisions.

    Thanks for the post! Tim.

  • Report this Comment On April 17, 2013, at 2:24 PM, GhostdogWarrior wrote:

    @xuinkrbin: I used to have a 30K recording studio on a MAC. It was hideous. MIDI would crash all the time and of course the answer was invariably... Well that is because you are on 9.x you need to get on 10.x.. and when I did, the answer was you need to get on 10.2. I dumped it for XP back then and never had an issue. Of course if you have a 100% markup on a product you certainly can try to beat relaibility.. Check a BMW versus a GM. I will take the germans every day but you are going to pay for it. I dont think Apple is as good as the Germans.

    I do have an Ipod and think it does the job it was designed to do. The phone... I have an HTC. Its a phone. They all do the same thing and think Andriods OS is superior to anything else out there.

    I used to own a 250 seat IT firm and can tell you that hackers do not spend time hacking something that reaces the smallest amount of people. It would behoove them to do so. That is why MS has more viruses. Because they have most of the market. If Mac were ever to have the share they would have the same problems.

    Again everything you said, has no basis on reality as you are comparing apples... and oranges. Try putting together an arugment that has some merit. Not just opinion. btw... Apple below 400 today.. Is it the kiddies dont think its cool or is it the "enjoyable experience that keeps crushing the stock?

  • Report this Comment On April 17, 2013, at 2:28 PM, GhostdogWarrior wrote:

    @Tim. You are very correct. Apples Post Jobs strategy appears to be that of a hysterical passenger pushing random buttons in the cockpit of a plunging airplane.

    Next on the docket: Your George Foreman watch grill. I can see the infomercial now: Ever walk down the street and wish you had a Pizza bite or bagel bite? Too lazy and cheap to go into a restaurant? Simply whip out your bag of frozen pizza bites and put as many at two whole bites on your George Foreman wrist grill. The patented latch system keeps the grill together even if you swing your arm! And in just 15 minutes, your two piping hot pizza bites will be ready to enjoy! The George Foreman wrist grill will grill for up to 15 minutes before being ready to recharge in a convenient 9 hours! So enjoy those snacks up to once per day! Only 499.99 plus 15.00 shipping and "handling"!

    What an enjoyable taste experience" :)

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