Apple’s iPhone 5c Did Its Job Well

It's pretty amazing just how poorly Apple's (NASDAQ: AAPL  ) iPhone 5c did in the market place. When the phone first launched, it seemed that Apple was doing its best to push this device. Why? Well, the problem with Apple's high-end, expensive-to-make phones is that these same devices end up being sold as cheaper, lower-end devices at some point in their lives. Unfortunately, while the prices drop, the manufacturing costs don't go down anywhere nearly as much – adding a significant headwind to gross margins. So, how exactly did Apple propose to fix this? Simple – the iPhone 5c.

The "cheap" iPhone's real job
Instead of discounting its excellent iPhone 5 and risking potentially cannibalizing sales of its higher-end iPhone 5s (since the 5 looks very similar to the 5s – the differences are internal and maybe not important to everybody), Apple took the iPhone 5's guts and put them into much cheaper plastic cases. This meant that smartphone buyers who wanted the gorgeous "real" iPhone had no choice but to buy the latest-and-greatest iPhone 5s.

What a brilliant risk/reward
This was actually a pretty great move on Apple's part as the risk/reward was actually quite good. In the best case (and what actually happened), consumers would simply buy up the stack. This means more revenue per unit sold and probably higher gross margins to boot. In the worst case, Apple would sell a lot of the iPhone 5c models in which case, Apple would see lower revenue per unit but more favorable gross margin dollars per unit than if Apple had, say, continued to sell the iPhone 5.

The only case in which Apple could have "lost" is if people looking to buy a cheaper iPhone were so repulsed by the iPhone 5c and were unable to afford the extra $100 to buy the 5s that the sale went to a player in the Android or Windows Phone ecosystem. While that was certainly a possibility, it's not as though the Android players are offering anything particularly "better" than the 5c for somebody who is familiar with Apple and wants a well-made phone. The iPhone 5c is plastic? So are all of Samsung's similarly priced phones, as well as more flagship devices from the likes of Google and LG.

The implications
While Samsung (NASDAQOTH: SSNLF  ) , Google (NASDAQ: GOOGL  ) (by way of Motorola), HTC, LG, and many others attempt to get a slice of Apple's high-end pie, it's clear that Apple's high-end moat is wider and deeper than what many bears (including yours truly in a former life) would have expected. While Apple still hasn't made a real push into the really low end, it's clear that Apple is probably correct to focus on keeping the cash-cow high end secure since this really is where the majority of the profits are.

More importantly, though, this speaks to the strength of Apple's management team from a more strategic perspective. Instead of getting in the margin race to the bottom, it instead devised a strategy to lure more of its customers to the high end. It was a stroke of brilliance from a risk/reward standpoint and, frankly, it's tough to see why some shareholders are so "angry" with Tim Cook.

Foolish bottom line
Apple is a great company and it's not particularly expensive by any real valuation metric. If the company can further eat into the high-end smartphone/phablet space with a larger iPhone (or an expanded family of higher end iPhones), then the company should actually return to robust profit growth over the next couple of years. However, one thing that is likely to keep Apple's multiple compressed is the ever-present fear that Apple's new products will eventually run out of steam and that smartphone do ultimately degenerate into a commodity, price-sensitive market.

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  • Report this Comment On December 19, 2013, at 3:43 PM, johnestromjr wrote:

    Ashraf, you're clueless. You really believe that nonsense? The iPhone 5C was mostly built for China Mobile and has a dual chip that will allow it to work on China Mobile's unusual platform and still work on their NEW 4G TD LTE platform when it's deployed [occuring now] Until Apple and China Mobile ink a deal it's not going to play a huge part in Apple's sales. That said the Japanese [who are WAY ahead of America in "cool"] like the iPhone 5C and many are being sold to younger trend setters and - interestingly - to seniors. So don't announce some "grand" conspiracy or plan by Apple to build a moderately priced iPhone other than for the reason it was produced. You're something else.

  • Report this Comment On December 19, 2013, at 4:31 PM, greenb2csh wrote:

    Don't listen to clueless posters. While the whole world thought the 5c was going to be a low end phone, it's clear that Ashraf and others (including me!) realize that Apples strategy is much more nuanced and forward thinking. In a word, innovative.

    What surprised me was I just assumed my wife would want the 5c (she was up for an upgrade) but instead got the 5s gold. She's not a techie at all, but she basically said, "I don't want the cheap phone, get me the good one, and pointed at a gold 5s" Another proof that Apple knows it's customers, techie and non-techie, male AND female, alike.

    And for the Foolish (pun intended) posteur (sp!) above, the gold 5s was for China, not the plastic one. You know nothing about China. In a country where the super-rich have the same population as the entire US, you don't need to go in low, you go in high. Just ask Gucci, LV, Mercedes, etc. These companies sell luxury items in China at a rate that would be impossible in the US.

  • Report this Comment On December 19, 2013, at 4:40 PM, zippero wrote:

    The iPhone 5C's price being just $100 less than that of the 5S may have bumped up some iPhone buyers to purchase the 5S instead, but the pricing strategy of the iPhone 5C was intended to just grab the next lower slice of the more profitable high-end consumer segment. It played the role of the Mercedes E-Class to the 5S's Mercedes S-Class (and the iPhone 4S is the entry-level Mercedes C-Class). An analyst the other day confirmed the iPhone 5C buyer had on average a little less income than the iPhone 5S buyer, so Apple is really going after a slightly lower income bracket.

  • Report this Comment On December 19, 2013, at 4:47 PM, zippero wrote:

    Also, iPhones still are an affordable luxury in the scheme of things (costing about one monthly car payment for me), so it's easier for most middle-class people to move up from a 5C to a 5S than from an E-Class to an S-Class.

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