When Apple (NASDAQ: AAPL ) announced the iPhone 5c last month, shares tumbled -- investors were disappointed. Although the plastic phone may help support Apple's margins, the $550 price tag was higher than many analysts had anticipated.
Nevertheless, Apple's unwillingness to release a budget iPhone is hardly surprising. Back in February, CEO Tim Cook explained how Apple thinks about price, and hinted at an upcoming mystery product, one that could serve as an alternative to a budget iPhone.
Tim Cook at the Goldman conference
At Goldman Sachs' technology conference in February, Cook was asked about market share, and about how his company thinks about the iPhone's price. To most Americans, the cost of the latest iPhone is just $200 -- what they pay after carrier subsidiaries.
But not every country is like the U.S., particularly not emerging economies such as China and India. There, consumers must pay most or all of the phone's cost up front, unable to take advantage of generous contract-supported discounts.
Without a cheaper iPhone, Apple will forever be hamstrung in these markets. Yet, Cook is unwilling to compromise:
To understand Apple, our North Star is great products. When everyone comes to work every day ... they're thinking about that ... we wouldn't do anything that we consider not a great product. ...There are other companies that do that; that's just not who we are. For years, people said "Why don't you have a Mac that's less than $500?"... And frankly, we worked on this. We concluded we couldn't do [it] ... for us [it's] always great product, not "How do we hit a price point?" And that has served us well. I think it will continue to serve us well.
Apple needs a budget device to compete in emerging markets
Although that strategy may have served Apple well in the U.S., it hasn't worked in emerging markets. Despite taking more than 40% of the smartphone sales in this country, Apple's market share worldwide is far less -- about 13%. In nations such as China and India, Google's (NASDAQ: GOOG ) Android rules the roost, with the Chinese government going so far as to characterize Android's dominance as a cause for national concern.
That's somewhat ironic, considering that Google shut down its Chinese search operations back in 2010. Nevertheless, owing to the fact that it's free, major Chinese smartphone makers like Lenovo and Xiaomi have embraced Android, using Google's mobile operating system to power their popular handsets.
In time, Android's Chinese dominance could benefit Google in the U.S. Both Xiaomi and Lenovo are expected to bring their phones to Western markets, while Chinese mobile developers are prioritizing Android app development. Analytics group Flurry warned that this could be a problem for Apple, as Chinese mobile developers have begun to export their Android apps to Korea and Japan -- should they begin to target the U.S., it could give Android the app edge over iOS.
Apple's next mystery product?
But Apple might have something planned for emerging markets. Instead of a cheap iPhone, Cook hinted that his company could go in a different direction altogether. Rather than release a stripped-down, budget version of the same product, Apple has consistently solved problems by offering new gadgets that fulfill similar needs.
Take something like an iPod. When we came out with iPod, it was $399. Where's iPod today?...You can go out and buy an iPod Shuffle for $49. And so instead of saying, "How can we cheapen this iPod to get it lower?", we said "How can we do a great product?" and we were able to do that at a cost that enabled us to sell it at a very low price. ... [Instead of a releasing a cheap Mac] we invented iPad. And now all of a sudden we have an incredible experience, and it starts at $329.
I don't pretend to know Apple's product road map but based on Cook's comments, investors might anticipate a new device aimed at emerging markets. One that could take the place of an iPhone, but a device that is fundamentally different.
Investing in Apple requires waiting for the next great product
From an investing standpoint, the problem with Apple's business model is its reliance on product innovation. Those lucky investors who bought Apple stock in 2004 on the strength of the iPod probably had no clue that, one day, the majority of the tech giant's revenue would come from its smartphone.
Investing in Apple requires a bit of faith. Investors have to believe that Apple's management is sitting on the next great idea -- and perhaps that's true. If company leaders are going to beat back Android in emerging markets, they're definitely going to need it.
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