Apple's (AAPL -1.07%) plan to establish its own brick-and-mortar presence in India next year is a bigger deal than most investors may recognize. Just to head off any confusion, plenty of Apple products are already available for purchase in India -- they're just sold through partners.
Not only is the iPhone maker just starting to hit its full stride in the increasingly important market, but the market itself is also ripe for penetration. A physical store presence could provide the last nudge that the company needs.
The good news: Apple dominates India's premium smartphone market, with IDC calculating that the iPhone accounts for more than 75% of the country's premium device sales. The bad news: That premium sliver of India's mobile-phone market isn't very big. Numbers from industry analyst firm Canalys indicate that despite a 200% year-over-year increase in iPhone deliveries during the fourth quarter, the iPhone still achieved a mere 2.3% share of the country's total smartphone market. The disparity reflects the unattainably high cost of the iPhone for most of India's consumers, who on average earn just a little more than $2,000 per year.
A couple of different trends are on course to intercept one another, however, which could leave Apple in the right place at the right time.
One of those trends is India's economic growth, which is driving its average wages upward. During the country's fiscal 2019, per-capita income grew 10%. That improvement follows a period of several years of growth in GDP (gross domestic product) that never slipped below 4%.
The other trend isn't quite as well-established, but it's started nonetheless: The iPhone is getting cheaper. The lowest-cost iPhone 11 was priced at an un-Apple-like $699 and is largely credited for catapulting iPhone sales in India during the last quarter of 2019. Apple has also hinted that even more affordable iPhones are on the way this year, with TF Securities analyst Ming-Chi Kuo suggesting one could be priced as low as $399.
That price drop should set the stage for considerable growth. And as is the case in the United States, in-store sales and support people will bridge the gap for India's consumers who aren't quite sure about making the leap to a more affordable but still somewhat pricey iPhone.
App revenue has nowhere to go but up
Just like the iPhone's market share in India, Apple's digital app business in India is so modest that it barely registers. As more iPhones make their ways into the hands of India's consumers, though, that will change accordingly. In fact, Apple may find relatively more success with apps and services in India than it does with its hardware. Consider the strangely oversized success of the Google Play Store in that country.
To be fair, it's an apples-to-oranges comparison. Apple makes hardware and software (like iOS) meant to work together. While Alphabet (GOOGL -1.38%) (GOOG -1.48%) does make smartphones, its priority has been reaching consumers through its Android operating system. It's willing to give Android away to phone manufacturers so it can monetize those phone owners in other ways, like selling them apps or digital entertainment.
What's interesting is how head over heels India has fallen for Google Play's offerings.
It's a fast-growing smartphone market, to be sure, but India is still only a fraction of Android's total addressable market. While about 94% of mobile-device owners there are using the Google-developed operating system, India still only has about 400 million of the 2.5 billion Android devices Alphabet said were in use around the middle of last year. That's roughly 16% of Android devices.
That minor share of devices, however, is downloading the daylights out of apps. Market-intelligence company Sensor Tower reports that during the final quarter of 2019, India's Android users made 4.8 billion downloads through Google Play.
That's huge. The next-nearest country was Brazil, but its Android fans downloaded only around two billion Google Play apps last quarter. The United States came in third, with 1.3 billion downloads.
India's consumers love their apps. They're currently relying on Google to supply them, but perhaps because they have little choice. Wider adoption of the iPhone in India could poach some of Google Play's enthusiastic users. And again, in-store assistance could get those consumers just comfortable enough with the Apple ecosystem to win over Android users.
Bolstering the long-term bullish thesis
While a smart move, Apple's ramped-up interest in India alone isn't a reason to step into the stock. It certainly doesn't hurt the bull case, but penetrating a new market takes time and money. The first Apple store in the country won't open until 2021, and if others come, they won't necessarily be built shortly thereafter. In the meantime, Apple has the rest of the world to contend with, while it becomes more service-oriented and less dependent on hardware.
There's certainly an upside to the matter, though, and arguably more than the average investor realizes. India's iPhone sales have the potential to become quite significant, prompting growth in service revenue that could be even stronger than the hardware sales.