There has been a lot of talk about Apple (NASDAQ: AAPL ) failing to address the sub-$300 segment of the smartphone market. Indeed, while an iPhone 4s is available today with a two-year contract for free, it still sells for a whopping $450 off-contract (which gives you a hint as to what kinds of carrier subsidies Apple is able to command). While some folks believe that Apple needs to extend the range of its product offerings, this, in my view, would be a mistake. Apple needs to sew up as much of the high end as possible for financial and strategic reasons.
Apple doesn't have the cost structure to play in the low-end pigpen
If you look at what Apple's corporate culture has traditionally been, it has been to stay as far away from the nitty-gritty manufacturing as possible. Apple's strengths lie in design and marketing. The company is able to design superb products, and it is able to quite literally create markets where nothing (or very anemic offerings) had existed before.
It also has placed a very strong emphasis on the quality and user-friendliness of the underlying software. Remember, while hardware is technically (and in some cases aesthetically) interesting, the real value in any sort of computing device is what runs on the platform. This includes the operating system, the various first-party software, and the quality of the apps that come from the third-party developers (Apple puts a lot of work into its tools). This is how Apple locks both users and developers into its ecosystem and, ultimately where Apple's "real" value is.
Apple should be paid for its work
While some will criticize Apple for offering "fewer" features on its phones compared to competitors (this is done to keep costs manageable and margins reasonable), Apple should ultimately be paid for the experience that it delivers. Yes, having a fast 802.11ac Wi-Fi is fantastic, but this raises costs for a benefit that, frankly, most users probably won't notice on most Wi-Fi networks.
A user will notice something like the convenience of Touch ID, or the improved usefulness of iOS 7, far more than a slightly more expensive Wi-Fi chip or a faster cellular modem on networks that hardly deliver a tenth of the maximum theoretical capabilities of the current generation modems. Of course, Apple does need to advance its hardware, but it needs to do so while keeping its cost structure in check (i.e. not being on the bleeding edge of the adoption curve).
Capturing the high end -- a matter of size?
Apple's iPhones sell phenomenally well despite the slowdown in the growth rate, and it is clear that Apple's brand cachet is as strong as ever. The problem, however, is that many users simply want larger phones and -- by implication -- larger iPhones. A lack of a larger offering has likely cost Apple a non-trivial portion of the high-end market.
The good news is that, when Apple finally introduces an expanded lineup, this should serve as a catalyst for more robust growth/share gains. In turn, this could lead to a nice profitability spike if it can keep cost structure in check, and perhaps command a bit more on the pricing side of things.
Foolish bottom line
Apple is on the cusp of what could be a very exciting second half of the year, but investors need to make it past the remainder of the first half. It won't be easy, but it's not all that long now. Hang in there!
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