Apple, Inc.'s Lower-Cost Smartphone Strategy is Just Beginning

Apple may not cater to the lower-cost smartphone market with new iPhone models. But with older iPhone models, the company may soon dominate the fast-growing segment.

May 19, 2014 at 4:11PM

Headed into Apple's (NASDAQ:AAPL) 2013 iPhone launch, investors hoped the iPhone 5c would fulfill the media's blind love for lower-cost smartphones. The argument was simple: Apple was losing market share globally to cheap smartphones, and a lower-priced iPhone would help the company's competitive position in the fast-growing market.

But Apple didn't deliver. The iPhone 5c cost just $100 less than the 5s, leaving it among the priciest phones on the market. Since then, the argument for Apple to launch a cheaper iPhone has largely disappeared -- and for good reason: the argument was based on facile assumptions.

Images

iPhone 5c.

Beyond the fact that leading the premium smartphone market has effectively positioned Apple to reap the lion's share of the industry's profit, another benefit to dominating at the high end is less documented: Apple's unyielding pricing power means the company can focus on customer experience to the point that even its older models are among the best options in the market.

The beginnings of Apple's new growth market
The benefit Apple derives from its older models is only now just beginning to be realized. With smartphone technology reaching performance levels in which big leaps in processing power are more difficult to decipher, iPhone models that are just a few years old give emerging markets a way to more easily afford the iPhone while also gaining access to the company's robust and "sticky" ecosystem.

Consider, for instance, how well the iPhone 4s is still selling. Even though the phone is more than two and a half years old, about 11 million units were sold during Apple's most recent quarter, according to Needham analyst Charlie Wolf (via AppleInsider). Eleven million iPhone 4s sales translates to 25% of Apple's total iPhone sales during the quarter. The 4s even significantly outsold the 5c, which Wolf estimates made up just 4% of the quarter's iPhone sales.

Iphone

The Apple iPhone 4s. The differentiating factor for the 4s over the 4 was a much faster processor and Siri. Image source: Apple.

Apple benefits from this development in multiple ways.

First, Apple is slowly but surely bolstering its competitive presence in the fast-growing emerging markets segment. Even more, since the 4s is several years old it has given the company time to work it significantly down the cost curve. In other words, it's likely Apple still makes significant profit on 4s sales despite a lower price point.

Second, the 4s is bringing a large number of new customers into Apple's ecosystem. Wolf believes that about 10 million of the 11 million 4s sales in Apple's second fiscal quarter of 2014 went to customers who were new to the iPhone platform. And given Apple's impressive retention rates thanks to a comprehensive and customer-focused ecosystem of complementary products, software, and services, every customer who joins Apple's ecosystem is worth far more than the initial profit margin attributed to the sale.

The 4s' success is an early sign of Apple's potential at lower price points, and the potential is looking sweet.

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Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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