Meet Apple's New iPhone Family

iPhone 5c. Source: Apple.

Two and a half years after unveiling the original iPod in 2001, Apple (NASDAQ: AAPL  ) would aggressively move downmarket and launch the iPod Mini in order to target lower price points, opening up an entire new addressable market segment. Nearly the same time frame played out with the iPad; the Mac maker launched the iPad Mini approximately two and a half years after the first version debuted in 2010.

Yet, here we are over six years after the original iPhone was launched in 2007 and up until now the company has kept the iPhone product strategy limited to one new model per year. The only way that Apple has addressed lower price points has been to progressively move models down the pricing spectrum as new ones are released. Relative to how long Apple took to move downmarket in its other major product categories, this expansion seems long overdue.

At long last, Apple has made the iPhone into a bona fide family affair. Say hello to the iPhone 5c and iPhone 5s.

A tale of two iPhones
Apple's rumor mill is as active as ever, and there weren't any major surprises for investors paying close attention. All of the leaks heading into today's event regarding both the iPhone 5c and iPhone 5s have proven spot on. The iPhone 5c will sport a plastic unibody in five different colors, while the iPhone 5s design remains largely unchanged save for the addition of a new gold color option.

Marketing chief Phil Schiller spent a lot of time discussing the iPhone 5s camera improvements. The iPhone is one of the most commonly used cameras in the world, and Apple knows it. Instead of furthering the megapixel war, Apple has decided to take cues from one of its rivals: HTC. The Taiwanese OEM took a dramatic strategic departure earlier this year with the HTC One by using a 4-megapixel sensor while emphasizing the better low-light performance and other benefits. Apple is now sending the same message and has likewise increased the pixel size in its sensor. HTC's strategy just got an implicit vote of confidence from one of its biggest rivals.

iPhone 5s. Source: Apple.

The integrated fingerprint sensor was also a shoo-in heading into today's event. As if it wasn't immediately obvious that this is what Apple had in mind when it acquired AuthenTec last year for $356 million, the company just made it official. The home button on the flagship model will now come with a "Touch ID" fingerprint sensor for a layer of biometric security, which can then be used to unlock the device, authenticate for purchase, and more. Apple isn't sharing any of this fingerprint data with anyone, even itself.

According to Tim Cook, Apple is now "replacing" the iPhone 5, since the iPhone 5c is built out of the same internals and will now occupy the $99 subsidized price point. The new iPhone 5s will naturally take the $199 subsidized price point common for flagship smartphones, with the expected $100 incremental bumps for additional storage. The iPhone 4S is sticking around to occupy the $0 subsidized price point. Here is Apple's new iPhone lineup on contract.

Model

Subsidized Price Points

Storage Configurations

iPhone 4S

$0

8 GB

iPhone 5c

$99 / $199

16 GB / 32 GB

iPhone 5s

$199 / $299 / $399

16 GB / 32 GB / 64 GB

Source: Apple.

However, it's when we get to unsubsidized pricing that the story gets interesting... and potentially disappointing.

A tale of two choices
Investors were initially quite excited about the iPhone 5c's prospects -- the stock jumped immediately after Apple made the mid-range device official.

The iPhone 5c has been heralded as Apple's key to tapping emerging markets, particularly those where the subsidy model is not utilized. Most investors were hoping for the 5c to price between $350 and $450, which would give it better odds of succeeding in China and India, among other key geographies. In order to meet those expectations though, Apple would face a dilemma.

If the 5c retailed for $450, it would sit at the $0 subsidized price point given its current subsidy level with nothing at the $99 subsidized price point. That could also hurt the 5c's brand perception if Apple released a new product that's given away for free on contract. The alternative would be to retail for $450 but accept a dramatically lower subsidy from carriers in the ballpark of $325 (after volume discounts), which could potentially undermine the roughly $425 subsidy it earns on other models. Decisions, decisions.

Model

Unsubsidized Price Points

Storage Configurations

iPhone 4S

$450

8 GB

iPhone 5c

$549 / $649

16 GB / 32 GB

iPhone 5s

$649 / $749 / $849

16 GB / 32 GB / 64 GB

Source: Apple.

Instead, Apple stuck with the same pricing strategy. The 5c will retail for $549 unsubsidized. All of the cost savings associated with using a plastic casing will go straight toward padding gross margins, instead of being passed along to consumers and spurring greater unit sales. Apple may need to rely on other affordability initiatives such as financing for the 5c to perform well internationally.

A tale of two carriers
In line with a report last week, Apple has finally inked a deal with Japan's No. 1 carrier, NTT DoCoMo (NYSE: DCM  ) , to offer the iPhone. This is a first for the Japanese carrier, while smaller rivals KDDI and Softbank have long leveraged the device to steal customers. With nearly 62 million mobile subscribers, Apple just expanded its addressable subscriber market by a fair amount.

Investors will still have to wait for news on the China Mobile (NYSE: CHL  ) front though. Schiller did note that China is on the list of launch countries for the first time ever, without elaborating on specific carriers. There have been reports that China Mobile is postponing its iPhone launch until November in order to put the finishing touches on its new TDD-LTE network, so all's not lost. At 745 million subscribers strong, China Mobile is a much bigger opportunity. Investors have been waiting years for this partnership, and they'll just have to wait another couple months.

Has Apple made a huge mistake?
The iPhone 5c pricing was the biggest unknown, and quite frankly it's a bit disappointing considering what investors are hoping for the device to accomplish. Apple should have discontinued the older iPhone 4S and priced the iPhone 5c at $0 on contract (despite any possible risk to its brand image), while moving the iPhone 5 to the mid-range $99 on contract price.

That would have eliminated the subsidy dilemma, while accelerating the transition away from 3.5-inch displays and unifying the platform with 4-inch screens. There would probably also have been some cost savings, since Apple could have then retired its iPhone 4S infrastructure while the iPhone 5 and iPhone 5s likely share many manufacturing resources due to their similar design.

More importantly, it would have given the iPhone 5c the maximum odds of success exactly where it matters: emerging markets.

There is a massive war brewing on the horizon, and Apple is one of the key players. Strategic pricing missteps could hurt the Mac maker's odds in this battle of titans, especially since mobile computing is one of the primary battlegrounds. To find out which of these giants is set to dominate the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!


Read/Post Comments (33) | Recommend This Article (60)

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 September 10, 2013, at 4:09 PM, sssteverrr wrote:

    This is a misguided article. Apple must offer desirable products while maintaing margins and its reputation for premium products. Being "cheap" is not an option.

    You can not base the likelyhood of success on the price point announced at inception.There are numerous ways to make the phone more affordable if and when it becomes benificial to do so.

    The Ipad mini was also purported to be over priced, but has proven to be desirable enough to justify its price.

    It's amazing what will be written to full space and earn a paycheck.

  • Report this Comment On September 10, 2013, at 4:56 PM, HyunchaC wrote:

    The grammar is definitely off in the article. It doesn't flow at all, and reads like molasses. Don't throw this kind of junk onto the feeds, and waste the readers time, thank you.

    For example:

    "Two and a half years after unveiling the original iPod in 2001, Apple (NASDAQ: AAPL ) would aggressively move downmarket and launch the iPod Mini in order to target lower price points, opening up an entire new addressable market segment."

    Should be rewritten as such:

    It has been two and a half years after Apple had released the original iPod in 2001. The subject was omitted in the independent clause, and was only include in the dependent clause (following the comma). CFA means nothing, if the person writing can't write while taking into consideration issues like, faulty parallelism, incomplete thoughts, then they probably should not be writing. Junk, go back and get it redone.

  • Report this Comment On September 10, 2013, at 5:32 PM, robinhaha wrote:

    Apple is stupid. It make Chinese market as a spotlight, but offers a really high price in RMB in Chinese market. Who do they think would buy those toys in such high prices? Bearish.

  • Report this Comment On September 10, 2013, at 5:43 PM, djtetsu wrote:

    No need to get harsh on his grammer, let's keep it nice. I do see a flaw in the logic though, I don't think the 5 and the 5C are that far apart to warrant a $100 difference, one comes in metal and the other one in plastic colors. Who would really fork out that $100?

    What they've built here is pretty much the same as the 5, and after thinking about it, they are pricing it right given that.

    Trying to garner more customers by cutting prices on what the current 5 goes for, is.. playing the price war and it's not the one Apple should play.

    Instead they made older piece of hardware attractive and this definitely works in places like the US, a young girl signing up, "o, $0 down for a colorful iphone" ,and because they are known for simplicity."

    India and China will probably purchase many of these.. but the bottom line, if they are really looking for a cheap phone they can still buy the 4S.

  • Report this Comment On September 10, 2013, at 5:55 PM, Mliaom wrote:

    Evan, Thank you for your thoughts. You did a great job.

  • Report this Comment On September 10, 2013, at 5:55 PM, mobilemaker wrote:

    HyunchaC. Relax. It has been more than 2.5 yrs since the original ipod was launched ie. 2001 + 2.5 yrs = 2004 at best. We're in 2013 i think.

    Writer was saying that 2.5 yrs after the launch of ipod, they decided to launch a lower end ipod. He's trying to draw the attention to the timespan that Apple uses between the original product release and the lower end generation.

    Evan Niu has been covering AAPL for a long time. His articles have provided some helpful insights for me from time to time. Although I'm not sure there's a lot to agree or disagree on with this one. It's too soon to tell.

  • Report this Comment On September 10, 2013, at 6:29 PM, AlwaysKnowBetter wrote:

    The biggest problem is that apple is not innovative anymore. They have created an overpriced gaming, filming, photo phone. For Kids? Many "new" features like burst mode have been implemented into 2 year old phones from different brands. Apple is back to $300.

  • Report this Comment On September 10, 2013, at 7:19 PM, BarryInLA wrote:

    Apple will likely be supply constrained for a while. Waiting to lower the price will earn additional billions for Apple. I think they got the pricing right. I will order the 5S on Friday. The dealmaker for me is the fingerprint security. I should be using a passcode but I don't. The effortless security alone is worth a big premium.

    $100 won't stop anyone from getting the 5C who wants one. When the initial fervor subsides, watch for "trade-ins" and other gimmicks to reduce the entry price.

  • Report this Comment On September 10, 2013, at 8:46 PM, LVoss1 wrote:

    From a manufacturing perspective, easing out of the 4S manufacturing supply chain is much more cost effective then dumping all of the setups/suppliers and older components to jump into the 5 phones.

    I'd say Apple has made a logical choice--as soon as the iPhone 4 isn't cost effective to build, it will fade away with discounts on the 5C's.

  • Report this Comment On September 10, 2013, at 8:54 PM, Shedidit wrote:

    What were they thinking? I thought the reason for the 5C was to offer a phone for a significantly reduced price to better compete with droids in foreign markets. I don't get it. That said I cannot wait for the 5S to be made available.

  • Report this Comment On September 10, 2013, at 9:45 PM, chadl97 wrote:

    what so many that compare Apple to Android (or any other comparable product) fail to recognize is that you often can't merely compare these products on physical specs.

    I mean, you need to actually *try* using these two competing products (Android vs iOS).

    I'm absolutely serious here. I'm a big traveller and a software developer as well. Why does this matter? Let me tell you why...

    1) I use my phone interchangeably with my actual "camera" (Canon G1X). My main point here is, the iPhone camera blows most (if not all) point and shoots out of the water for most photos. One of the only places my G1X is better is in low light. More importantly, the video and panoramic features are so damn easy on the iPhone, and the quality of these features is not matched by a real camera, nor any P.O.S Android phone I have ever tried; and I have tried quite a few now, especially when other tourists come up to you and ask you to take a photo with their Android phone. No really, the photo capability is total crap on every Android phone I have tried. Don't believe me? Try and compare for yourself.

    2) Android for the web sucks. Again, I am a software developer and I build for iOS, Android, and desktop. Android always has problems. And perhaps that's why mobile browsing statistics still pegs iOS at over 60% (most stats lead more to 70%) of mobile traffic. I can't believe it really, Android always seems to be leading the "race" between the two, yet, nobody seems to be using their Android devices on the web.

    Sorry, but photo and web is likely the most common two uses for a mobile phone. And when you compare *ANY* Apple mobile device to *ANY* Android mobile device... Apple wins hands down.

    Go ahead... compare clockspeeds, screen sizes, or how many pennies this device will cost you... all those things are irrelevant.

    At the end of the day... you can spend an extra $50-$100 for a device that you will own for roughly 3years, which works out to roughly 10cents a day... and be far happier being able to ACTUALLY use the device.

    Don't get me started on the segmentation problem with Android. It's vendor lockin and SymbianOS problems all over again.

  • Report this Comment On September 10, 2013, at 11:07 PM, waelm wrote:

    Shocked it took this long just to create a replica of Nokia Phones. Iphones now come in Nokia Colors. Hope nokia sues them for this one.

  • Report this Comment On September 10, 2013, at 11:10 PM, waelm wrote:
  • Report this Comment On September 10, 2013, at 11:54 PM, jlclayton wrote:

    I was hoping that Apple's pricing of the new 5C and upgrades in the 5S would set them up for big international sales and renewed interest from segments of the US market that have embraced the Android. I have been hoping to start a position in Apple for some time now, but just haven't pulled the trigger because the competition appears to be coming on strong.

    I owned a iPhone 4S and Samsung Galaxy at the same time, the iPhone was my work phone and Samsung was my personal phone. Say what you want about Android mobile devices, but I found I preferred my Galaxy over the 4S and had no problems with it. I also have a 22 year old daughter who switched from the iPhone to the Galaxy and many of her friends have switched to Android devices as well and love them.

    Nothing that Apple came out with has changed my opinion that there's less risky places to put my money for now.

  • Report this Comment On September 11, 2013, at 12:27 AM, bcellars wrote:

    @ Chdl97, thanks for the insights, and I wonder what you think of the Nokia (MSFT) phones? I've heard that their camera is the 'best out there'.

    @ HyunchaC, like others have said, give it a rest with the grammar complaints, but since you brought it up, have you read what you wrote?!!?!?!!! Now THAT's bad grammar!!! Thanks for a fantastic example to use with students learning English!! It's a classic example, full of mistakes, where the writer thinks he/she knows English well, but absolutely doesn't.

  • Report this Comment On September 11, 2013, at 8:40 AM, ellenla wrote:

    I was hoping for more wow features than a fingerprint sensor and camera. I am slightly disappointed that the screen size wasn't bigger. My feeling is that the stock price will flatten out for the next few months unless something new comes out with a good wow factor. I don't see that happening and I have been waiting for a year. I am going to wait for another year before I sell the stock. I have owned a IPhone for 5 years a 3GS and the 4 , decided to switch to the galaxy note 2 after the IPhone 5 release as it just didn't wow me. Than my Note 2 stopped working after 6 months and I got a replacement . The replacement also stopped working one month later. I started to appreciate the IPhone quality. It was easier to backup and no software issues. Decided to go back to the IPhone will never go back to the Android system

  • Report this Comment On September 11, 2013, at 8:51 AM, KombatKarl wrote:

    I love it when people call Android phones P.O.S. Why do think iPhone users are so obsessed with putting their "beautiful" phones in a case? Because if it drops it'll shatter. Sounds really well built to me. My brother-in-law's cat knocked his 4S off the couch and the screen cracked. I don't know how many times I've dropped my "POS" Android phones on the driveway and never had the screen crack once.

    The only thing I'll give the iPhone over the competition is the camera. I think Android wins in almost every other way. But it's all personal preference. There is no right or wrong. Get the phone you think best meets your needs.

  • Report this Comment On September 11, 2013, at 9:08 AM, daveandrae wrote:

    blah, blah, blah.

    No reasonably intelligent investor in his right mind is going to pay a whopping 450 Billion dollars for a business whose earnings have peaked, whose margins are in decline, and whose primary source of revenue is an over-hyped, over owned, commoditized, cell phone.

    Clearly, the risk is being in the stock, not out of it.

    Sad and simple.

  • Report this Comment On September 11, 2013, at 9:13 AM, rianjones1983 wrote:

    Have a look at this iphone 5s keynote transcript @ http://www.earningsimpact.com/Transcript/83555/AAPL/Apple-In...

  • Report this Comment On September 11, 2013, at 9:16 AM, TMFLomax wrote:

    Good article, Evan. I am really stuck on the feeling that the 5C pricing is a really terrible mistake. Why bother? It's not that much more for the better model made of better materials. You're right -- this is good for Apple's margins without passing along anything compelling for consumers who can't fork up as much -- that was definitely the most interesting part of the Apple news yesterday (from what I've seen, it wasn't really all that interesting overall), and unfortunately what makes this piece fascinating is that it sounds like a fail. Disappointing.

    Alyce

  • Report this Comment On September 11, 2013, at 9:33 AM, randallw wrote:

    iPhone vs. Android = Porsche vs. Mazda. Quality, Quality, Quality. I have a 4.5 year-old iPhone 3S that still holds a charge for 24 hours and runs like a top. Have dropped it numerous times with no issues. I highly doubt Samsung/HTC phones can/will provide the same mileage....

  • Report this Comment On September 11, 2013, at 9:40 AM, Baikinman2 wrote:

    Living in Japan and just saw on the news how many Japanese people interviewed on the streets are happy Docomo will offer the iPhone. Most people have contracts with Docomo so they couldn't buy the iPhone before and seems like that cannot wait to get their hands on one now. Lot's more to be bought here!

    Please don't comment on my grammar! LOL.

  • Report this Comment On September 11, 2013, at 10:14 AM, drax7 wrote:

    Samsung would like to make you think Steve jobs never existed.

    A mobile device is now essential to our existence. People are glued to it . Paying a fraction more over two yeas is worth it.

    Fingerprint apps will open the financial convenience making the device even more necessary.

  • Report this Comment On September 11, 2013, at 10:29 AM, jvgfool wrote:

    Hey Foxconn! We need more 21st century slaves.

  • Report this Comment On September 11, 2013, at 11:05 AM, mikecart1 wrote:

    Apple stock really made today stink!

  • Report this Comment On September 11, 2013, at 11:38 AM, OceanJackson wrote:

    Just watched the event from yesterday on Apple.com.

    Tom Gardner of the Fool has expressed his concern that the main problem at Apple is that it is no longer run by a visionary...but an Operations guy. That Apple needed to hand the reins over to some Silicon Valley 30 year-old tech visionary genius. I agree.

    Watching the event, Tim Cook presents himself as a man who is under severe pressure, who probably sets that tone within the entire company. He's not strutting around the stage, challenging and attacking the world and the audience, with something to prove - as Steve Jobs did. Tim Cook has one of the hardest jobs on the planet, and he's great at what he does. But he's the wrong guy to take Apple to the next level, and he's the wrong guy to be unveiling new Apple products to the world.

    Apple iMaps was a disaster. I wondered if it would be a harbinger of things to come. It seems that it has set the tone for this transitory post-Jobs era. Apple's focus on minute detail improvements on the iPhone - is the problem.

    They needed to make all of these incremental improvements - and, give us 1 new feature unseen on a phone, that blows us away.

    But apart from the iPhone, we need to see an entire new product category that changes our lives, out of Apple. In my opinion, it's not an iWatch. What can a Watch do that a phone can't? People don't wear watches any more. Why in the world would I want that inconvenience now? Can you imagine everyone walking around with the same exact Watch? Like the same T-Shirt?

    A television set has some potential. But I think Apple should expand into the Home, keeping it's Mac/iPhone/iPad line...but evolving into a Smart-Home company, replete with The Jetson's-like wonders inside our own homes.

    Their mobile devices should do all they do now, and become controls for all of the functions in our houses we can only imagine. I'm buying the Smart-Home. I'm selling the iWatch, and more than likely - I'm selling the iTelevision Set.

  • Report this Comment On September 11, 2013, at 1:25 PM, tempest669 wrote:

    I will summarize my comments from another article, and I preface this as an Iphone owner and AAPL owner.

    This yearly upgrade is disingenous. The 5C isn't a low enough price to impact emerging markets, and Apple boosted their profit margin at customer expense by taking the Iphone 5 and putting it into plastic polycarbonate. The Iphone 5 would have already fallen by $100 as part of their normal cycle, but now they're squeezing more profit out of it, but not really providing any customer benefit in doing so.

    The Iphone 5S is gimmicky. 30FPS of 1080p recording that cannot even run natively on the existing Iphone screen. Why not? Probably because it eats margin.

    A7 64-bit chip? No current phone even supports the 4GB memory requirements for a 64-bit app. No developer is going to develop a 64-bit app because it's additional expense and isn't even usable yet. Windows OS has had 64-bit support for almost 10 years and only graphically intensive programs benefit from it. By the time 64-bit is even a benefit on phones, users will have already upgraded to the Iphone 7+.

    8MP camera? 15% more light into the sensors sounds nice, but does not really mean anything to real life performance. Windows and Android have closed the gap on the camera hardware. Contrary to what chadl97, most Androids perform comparably but have problems with software optimization, not the camera hardware itself.

    I like the Iphone, and I like Apple, but this years refresh is not a customer upgrade, it's an Apple self-image upgrade.

  • Report this Comment On September 11, 2013, at 4:41 PM, HyunchaC wrote:

    I know how to write, thank you for very much. I was scribbling that while in between breaks. In certain instances the touchpad on my laptop gets in the way, and as a result I just hash out whatever I can, with whatever limited time I have.

    So before you go about criticizing the grammar, understand, that I have been around the whole entire writing sphere for quite a while. No one sticks up for the writer, when they write like that. Whoever is commenting, pointing out the good in the rife of mistakes I saw while reading, clearly isn't a reader of the Motley Fool, but rather just an employee posting up some positive things in order to defend the ego of whoever wrote the junk-piece.

    That being the case, I found going to the actual iPhone 5C and 5S website from Apple to be far more informative about the products, and plus, it had proper grammar, and offered a better explanation.

    Again, good English has a way of showing itself. It's easy to read, and there's a consistency in the style that doesn't ruin the voice of the writer. Plus, it helps to note, that the true skill of a writer lies in their ability to have proper cadence in the way they organize thoughts.

    Let's also add in the fact, that there were almost a bazillion squinting modifiers throughout the whole article. If the writer wants to articulate something, they should do it in a way without adding too many unnecessary predicates, adverbs, and pronouns to a independent or dependent clause.

    It's not that I don't know how to write. This took about 3 minutes of my life to write. Grammatically, this comment might as well be superior to the article.

  • Report this Comment On September 12, 2013, at 12:44 AM, kermode73 wrote:

    As usual, Apple misses a major point. Apple tries to come with a single product for all people. That is why Samsung is overtaking them.

    In addition to the standard size phone, they offer the Galaxy Note, which is what I use. Since I use the device for a ton of things other than phone, the larger screen is fantastic for many of the apps that just work lousy on the smaller Apple screen.

    Though Apple is finally selling through many service providers, it took years for them to get past one. While the competition usually offers their devices through many service providers right off the bat.

    A good example is the mouse (which BTW Apple did not invent). When Apple came out with it, it was a single click. Took Apple many years to finally adopt the right-click. And still no wheel. Both items that made the mouse much more efficient and effective.

    Apple's arrogance that the product they brought to market is the best, period, and cannot be improved, has been and will continue to be their Aquila's heel.

  • Report this Comment On September 16, 2013, at 9:27 AM, rianjones1983 wrote:
  • Report this Comment On September 19, 2013, at 5:03 PM, Fabin81 wrote:

    I want one, but my s3 does the job just fine.

  • Report this Comment On September 23, 2013, at 2:13 PM, JCoeur wrote:

    Still THE quality product for those for whom this matters more than saving a few bucks.

  • Report this Comment On November 07, 2013, at 2:30 AM, thidmark wrote:

    "iPhone vs. Android = Porsche vs. Mazda"

    You're right for the wrong reason. Most people don't want to spend Porsche money when a Mazda suits their needs just fine.

    I'd love to drive a Porsche, but it ain't worth the expense.

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