Apple's Next Game-Changer Could Be a Product No One Expects

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: GOOGL  ) 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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Read/Post Comments (4) | Recommend This Article (1)

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 October 07, 2013, at 9:46 PM, FoolSolo wrote:

    Ironically, quantity and quality seem to go their own way. Apple may be losing to Android in market share, but who has the lion's share of profit?

    It seems to me Apple's qualitative approach produces a more desirable product people are willing to pay a premium for, whereas the masses of Android phones seem to be laden with cutthroat razor thin margins.

    As of this moment I think Apple has a better strategy, which is making them the richest company in the world.

  • Report this Comment On October 07, 2013, at 11:27 PM, zippero wrote:

    Sam, you've earned the dunce cap again. 90% of the smartphone industry's profits are at the high-end. Android OEMs that cater to the low- and mid-income masses are drowning not in profits as you seem to believe, but red ink. Market share never guarantees profits or success and never will. Apple makes $42 bil. a year selling to the top 20% consumer segment around the world, while all the Android players that cater to the bottom 80% make zilch. If you want to make a case for Apple should go after the low-to-mid end, you need to give at least some examples of how wonderfully profitable it is selling phones to the price-sensitive masses, who can't even afford data plans or buy apps. But unfortunately you'll find one low-to-mid range Android OEM after another drowning in red ink, including Google's own Motorola.

  • Report this Comment On October 07, 2013, at 11:52 PM, zippero wrote:

    As for the iPhone not being subsidized in China, you're completely wrong there too:

    "China Telecom, for example, offers three different plans in which the iPhone 5S, which starts at $199 in the U.S., is free to Chinese buyers -- as long as they are willing to lock themselves into a long and relatively expensive contract.

    China Unicom has eight plans that offer the $99 iPhone 5C for "free"...

    Zero dollars upfront, its turns out, is also an option in Japan and the U.K., as indicated by the chart below, posted Monday by ISI's Brian Marshall."

    See http://tech.fortune.cnn.com/2013/09/17/apple-iphone-china-pr...

  • Report this Comment On October 08, 2013, at 7:32 AM, jdmeck wrote:

    People worry to much about new. Apple does not need to have something new to continue to make gobs of money. Some time people and investors confuse what they want and what they need.

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