Apple Can’t Survive as a Premium Brand

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Following Apple's (NASDAQ: AAPL  ) recent iPhone event, I criticized the company's unwillingness to offer a cheaper iPhone. Despite earlier reports of a budget device aimed at emerging markets, the iPhone 5C will retail for about $550 off contract -- far more expensive than most analysts had anticipated.

In response, some have argued that Apple is defining itself as a premium brand -- a BMW, a Louis Vuitton; a company that can thrive from selling premium products to (relatively) rich consumers.

Unfortunately, that just isn't the case. Unlike makers of luxury cars and expensive handbags, market share matters to Apple. Strictly offering the aspirational product just isn't going to cut it.

Smartphones that you shouldn't buy
When it comes to buying a new smartphone, there are really only two choices: Apple's iPhone, or a Google (NASDAQ: GOOGL  ) powered Android device. Microsoft's (NASDAQ: MSFT  ) Windows Phone and BB10 devices, despite offering interesting features and intuitive interfaces, are just not worth purchasing.

It's all about the apps: Windows Phone and BB10 lack them. A consumer buying a Windows Phone today would miss out on many key apps such as Amazon Instant Video, Citibank, Dropbox, and Flipboard, not to mention popular games like Candy Crush Saga. And should new apps spring up in the future, they would take months to make it to the Windows Phone platform -- if they ever do at all.

After purchasing Nokia, Microsoft is more committed than ever to the Windows Phone platform. Still, I think it's unlikely that the Redmond tech giant succeeds. Consider the fact that Nokia, despite making a big deal about its refusal to adopt Android, was secretly working on an Android-powered Lumia prior to Microsoft's purchase.

Despite the fact that Samsung dominates Android, and Microsoft had actually paid Nokia to make Windows Phones, the company was still at least considering jumping ship.

Why market share matters
The companies that develop mobile apps have to make a decision: Which operating system should I invest my time and money on?

In the US, that's iOS. Developers continue to stand by Apple's mobile operating system because it's easier to code for, its users are more willing to pay, and there's tons of them. But outside of the US, that's not the case.

In China, for example, Android is dominant and Android apps are big business -- in July, search giant Baidu paid $1.9 billion to acquire 91 Wireless, an Android app store. (As Google does not operate in China, its iTunes rival Google Play is not a major player.)

For now, these two markets stand largely independent of one another. Americans tend to use American-made (or at least Western) apps. The Chinese use Chinese-made apps. But what if that wasn't always the case?

Research firm Flurry noted that Chinese mobile developers are beginning to export, building apps for the Korean and Japanese market. In time, they could turn their focus toward the West, putting their apps up on Google Play, and giving Android the app advantage over Apple's mobile operating system.

The dynamics of platform businesses
For premium companies in other industries, market share does not matter. A Louis Vuitton handbag purchased by one consumer doesn't necessarily make the same bag owned by a different consumer more valuable (indeed, if the brand became too popular, it could actually become less valuable).

But with the iPhone, Apple is selling a platform. The more iPhone owners are out there, the more valuable each iPhone becomes -- more developers code for iOS, making better apps for the phone, in turn making the existing phones more valuable to their owners.

In order to survive, Apple needs to maintain a sizable market share. As Android has grown, iOS has dwindled, and now stands at just 14% of the worldwide market. A cheaper iPhone could've done much to change that, but unfortunately, Apple appears to be unwilling to release such a device.

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Read/Post Comments (20) | 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 September 16, 2013, at 11:16 AM, larryw101 wrote:

    This author needs to give it a break. He's written at least 4 Apple bashing articles in the past few weeks alone. He's known as Sam, Sam, the Apple Bashing Man.

    I swear he must short the stock and then use Motley Fool as a platform to enhance his personal position. No other author / writer does this many bashing stories in such a short amount of time.

    Attention Motley Fool: Your credibility is fast declining with this type of repeated bashing from the same author and biased journalism..

  • Report this Comment On September 16, 2013, at 11:33 AM, Justice007 wrote:

    " Windows Phone and BB10 devices, despite offering interesting features and intuitive interfaces, are just not worth purchasing."

    Who decided this? You? If so, who gave you that power? Windows phone has every App I currently use on my iPhone which is why I am seriously considering switching to one. That plus the fact that I do not want to be part of a larger group whose sense of self worth is defined more and more by what brand of phone they have in their pocketsor hands.

    I still remember when the iPhone was the new kid on the block. I also remember all the articles stating that Android will never amount to anything. The tech media was proven wrong then, but in a world of no accountability, the media is at it again.

  • Report this Comment On September 16, 2013, at 11:39 AM, Justice007 wrote:

    On the topic of the article itself, I do not see why Apple cannot survive as a luxury brand. It is not marketing itself as a luxury brand that is ailing Apple, it is the investment community that expect the unthinkable all the time. Then again, Apple is not without blame here, why you try to position yourself as the only one who invents stuff or do things right, people will come to expect that from you.

  • Report this Comment On September 16, 2013, at 11:55 AM, garysund wrote:

    Nobody really knows what the long term future will bring to apple or what products they will be selling in the high or low end markets. It really does not mean a hill of bean to me as a investor. But there is one thing I really do believe long term. They will continue to buy back shares and increase the dividend. It is most likely in 5 to 7 years there will be millions and millions of less shares of apple stock on the market to trade and their market cap will be sky high. They will probably have 400 or more billion in cash on hand and very well could end up being the highest cost in the market for a share of their stock.. It doesn't matter what they are going to make or sell as long as the billions of profits keeps coming in. That is good enough for this Long.

  • Report this Comment On September 16, 2013, at 11:56 AM, bfattori wrote:

    Apple IS a luxury brand, for all intents and purposes. To say otherwise is to misunderstand what they are trying to achieve. If they wanted to compete on quantity, they would have released a cheap phone ages ago. Instead, they stick to their guns and release a quality product each and every time. Despite the maps fiasco, they have always nailed it. Samsung has HOW MANY versions of Android phones? It's just like Sam's earlier comparison... Apple is trying to maintain their image as a BMW or a Benz. They release well thought out products which function well, don't confuse their users with garbage apps, and don't follow a leader.

    Apple continues to innovate, just not the way they used to. It'd be like expecting Tesla to continue to release car after car which continues to astound consumers. They've had their big innovation moment - the all-electric auto. What more can they do besides find a different type of high capacity battery? Release a three-wheeler? Come out with a spaceship? These are unrealistic expectations of an automotive company. Same thing with Apple.

    So there's no Apple TV (as in actual branded television) or iWatch. Big deal, they still have a phone (now phones) with a big following. They have other products which follow their line of products. They can't be expected to release innovative products every year, or even two years. Instead, they come up with small innovations which the market calls evolutionary rather than revolutionary. Yeah, HTC had a fingerprint scanner but it a) didn't work, and b) wasn't very secure. Apple decided to put the fingerprint in the CPU and make it write-only... THAT'S innovation.

    Traders need to stop looking to Apple to make them rich. Don't expect the company to pump out golden eggs every quarter. They are a strong market player and will be very relevant for years to come, regardless of not having Jobs at the helm. Samsung, HTC, et. al. will be playing catch up for a long time - but they will never be in a position like Apple... they don't dictate market direction. Remember how it was rumored Apple would have a Smart Watch? Next thing you know, Samsung "has been working on one for ages".

    Yeah, right... I'll believe that when pigs fly.

  • Report this Comment On September 16, 2013, at 12:03 PM, reluctantcritic wrote:

    iPhone is easier to code for? Is the author a software developer too? I don't agree at all. I've written for multiple platforms and not only does Apple consistently eliminate backward compatibility, but their Objective C environment is ONLY used for Apple. Thus I've specifically decided never to use it. Maybe the author means easier if you use a 3rd party tool (which of course can also be used for Android and Windows).

  • Report this Comment On September 16, 2013, at 12:24 PM, scottisinatl wrote:

    Why can't Apple survive as a premium brand? Haven't they done so for over 30+ years? The 5C is $200 more than the estimates on off-contract. The reason why they didn't price it at $350 was because it would cannibalize their bread-and-butter 5S. The problem with Apple isn't their premium brand business model, it is that they aren't innovating. They aren't keeping current. It is baffling to me how Apple refuses to put NFC on the phones. It is the biggest benefit to payments at stores--and a possible cash cow for them--and they passed. Their screen is a funny size and smaller than the S4. Android is innovating and once you use one you realize how antiquated the iPhone is to use, albeit well-built, solid, dependable, and very much last decade. That's the issue--being a premium is not a bad thing, but you had better be the newest, bluest, greatest, and latest thing or you will be in the sale bin and your brand forever tarnished.

  • Report this Comment On September 16, 2013, at 12:24 PM, butthead2u wrote:

    You are absolutely correct, Microsoft doesn’t have a chance! How they got to raking in billions of dollars every quarter is beyond me.

    They bought Nokia, what were they thinking! It’s like they intend to spread windows though the phone, tablet and computers! What then? Sell the hardware off after software takes over. Let the Dell’s, HP’s and whatever Nokia’s handset business will be after they get rid of it?!!?!?!

    Idiots! Making all that money! Where can they even keep it all?

  • Report this Comment On September 16, 2013, at 12:28 PM, ErneSleep wrote:

    I am not sure which part of the article is furthest from he truth. Apple would mean a lot less to me if they come up with a cheap iPhone (or a cheap anything). I buy apple because it is in line with the way I wish everything was. Aim for the perfection regardless of price, aim for a perfect experience. If you make something good enough, ppl will buy it even if expensive. Bottom line matters to us as investors but I could care less about its (awesome)financial health as a consumer. It is what consumers think that matters, and not all consumers, but those that think in the same lines as apple. Market share matters, but why would you invite people to the Waldorf if they can't pay for a room, market to those who can. If you sell a cheap iPhone and people cant afford the relatively expensive apple ecosystem, then that market share gain will turn into lower margins and a not so different bottom line. You get less of a halo effect and more dissatisfaction.

    I was relieved to see the price they set on the 5C and I am sure it's worth it. If people were willing to pay that for a 4S 2 months ago, this will certainly be a better deal. The idea of a "cheap" iPhone sickened me, and would have meant the true death of apple as we know it.

  • Report this Comment On September 16, 2013, at 12:43 PM, Haleos wrote:

    Apple is fully capable of operating with a premium branding strategy, and they are, but there is more than meets the eye in this market.

    First, the author does bring up an interesting dichotomy. It is true that as Apple reaches a saturation point the market for iPhones is going to necessitate a price drop sometime. Apple is also increasingly becoming more reliant on other revenue sources besides hardware sales (itunes media, apps, etc). Apple realizes this and this is why we saw their lame duck attempt at a cheaper model.

    What is driving their business model however is still a hardware sales premium (and why Apple is failing in other markets). One variable the author didn't mention is U.S. Cellular Providers who subsidize the cost of Apple's phone and in many respects absorb part of the initial cost of owning an Apple phone. Carriers are making Apple price competitive with phones they otherwise wouldn't be. Carriers benefit because they get contracts, but that mentality is beginning to shift in the U.S. as many consumers are tired of contracts.

    It'll be interesting to see how this plays out. Instead of having a phone fee hidden into a contract the major carriers are now allowing you to put money toward the phone each month. Seeing that $600 is going to hurt sales for some types of premium phones. I can pay 100 dollars for a cheaper phone and have the price of my bill each month go down in 5 months or I can pay $600 and pay on it for much longer.

  • Report this Comment On September 16, 2013, at 12:46 PM, PaulPhoenix wrote:

    Louis Vuitton makes clothing out of materials that are far better quality than what you buy at Macys.

    Therefore is is worth a higher price point.

    BMW makes cars that accelerate better , handle better and have more features than a Honda all the while being made with higher quality woods and leathers. Therefore it is worth a higher price point.

    Apple produces their phones in equal or worse working conditions than their competitors with less advanced processors, smaller and lower resolution screens, and much more limited customization options. Therefore, they deserve a lower price point, which they will never provide because people buy into the marketing that Apple products are "premium". This is the same with Tesla whereby a car with a few flashy gadgets that lacks many features that are standard on cars costing half or 2/3rd's as much, that takes 30-60 minutes to charge, and for long drives needs to be driven at a middling 50 mph with the A/C off to have any meaningful range is considered better than a BMW or Mercedes.

  • Report this Comment On September 16, 2013, at 12:47 PM, zippero wrote:

    Android phone and Windows PC makers have 80-90% market share but no profits to show for it. So much for the importance of market share. Getting a 80-90% market share means catering to the price-sensitive masses, which means price wars between OEMs like Xiaomi and Samsung and rapid unprofitable commoditization faster than even for the hapless Windows PC industry. In contrast, Apple focuses on the top 20% in every country where the discretionary income exists to actually utilize an ecosystem and buy significant apps. Follow the money, as they say. There's your real ecosystem based on people actually spending significant money on apps.

  • Report this Comment On September 16, 2013, at 12:54 PM, marv08 wrote:

    There are two main problems with the logic in this article.

    1. There simply is not one Android (there are several forks by Chinese and Indian ODMs), and they do not all use Google's store. Add the platform fragmentation (majority of users on outdated versions, some 50 different screen sizes and ratios) to the mix, and you will see that one Android app will not necessarily address more devices than one iOS app, despite the huge difference in market share. It also takes longer to develop and test against multiple devices (some larger Android developers reported that they have to test their code against over a hundred pieces of hardware).

    2. Android has a higher market share than iOS since quite a while now. Still, pretty much all new titles are released on iOS first, Android versions much later and mostly lower quality, and, in a few cases, not at all. Why? Because a significant amount of low-end Android phones are not even used as smartphones, people call, text and take pictures with them. This is confirmed by pretty much every Web usage and ad statistic.

  • Report this Comment On September 16, 2013, at 12:58 PM, butthead2u wrote:

    Microsoft is the Toyota of software. Adequate quality yet affordable. Same things that won the desktop revolution will win the mobile revolution.

    It's far from over folks, Microsoft will do just fine, don't lose sleep worrying about them!

    When the masses realize what's coming together they'll be coming back in droves, that's when it'll be difficult for Apple to keep with their "luxury" brand.

    Is a little brick with a little screen really still a luxury brand?

  • Report this Comment On September 16, 2013, at 1:04 PM, H3D wrote:

    Apple isn't BMW

    Apple is BMW + Mercedes + VW + Jaguar + Porsche + Aston Martin ...

    Android is Chrysler + GM + Ford

    I know which I'd rather drive, and invest in.

  • Report this Comment On September 16, 2013, at 1:07 PM, Apple1969 wrote:

    Apple Can’t Survive as a Premium Brand??

    Quite a contradiction comparing to BMW...

    Is there a cheap low quality BMW out there that I'm not aware of??

    Apple has been a Premium Brand for decades because of it's quality and price for the quality. Why would Apple make the mistake that Sony made throughout the last few decades by throwing garbage products in their line? Sony was once a Premium Brand... Not anymore. I disagree with the article.

    I do have some criticism of Apple though-

    The iPhone event was lack luster. Obviously, missing the late Steve Jobs pitch. I also think Apple needs to go back to work on it's Mac Pro and other lines instead of pouring all it's attention into JUST the IOS and devices.

  • Report this Comment On September 16, 2013, at 1:08 PM, zippero wrote:

    Android phone owners usually have much less discretionary income, and that's what attracted them to their low-priced Android phones in the first place. You can't expect such low-income people to actually spend more money on apps, music, movies, etc. beyond what they already paid for their phones, which already took up most of their budgets. An app ecosystem doesn't even make sense for most Android users who don't have the financial means to actually utilize an ecosystem. All Android phone makers are also profitless from catering to price-sensitive customers despite Android's 80% global market share, just like Windows PC makers are all profitless despite Windows' 90% market share on the desktop. Market share is meaningless unless it's profitable. Apple focuses not on the bottom 80% price-sensitive masses but sticks to the top 20% of consumers where the money is. The top 20% actually do have the discretionary income to actually make use of an ecosystem, buy significant apps/movies/music, and otherwise engage in e-commerce. Follow the money, as they say.

  • Report this Comment On September 16, 2013, at 1:37 PM, techy46 wrote:

    Apple can't survive as a commodity vendor either.

  • Report this Comment On September 16, 2013, at 3:53 PM, hawkhell wrote:

    Most phone sales are contract sales and why choose a budget phone over the top of the line phone to save 50-100 bucks when you will use that phone for 2 years?

    Apple is losing ground because it made on innovation and then used its market dominance to keep selling slightly better models instead of trying to break ground.

  • Report this Comment On September 16, 2013, at 6:36 PM, lakerlvr24 wrote:

    I have read countless articles on Apple and Microsoft, and can accurately say that this is the ONLY articles where the readers (Apple, Microsoft, Droid fans) agree collectively. This author is TERRIBLE.

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