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Is the iPhone 5C the New Surface RT?

By Rick Munarriz - Sep 12, 2013 at 8:00PM

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It could be a flop.

Apple (AAPL 0.11%) shares have been reeling since introducing the iPhone 5C on Tuesday, but now it's time to see if consumers feel the same way.

Apple will begin taking preorders for the 5C -- not the more full-featured 5S -- at midnight.

It's an unusual move, but it's somewhat similar to what Microsoft (MSFT 1.12%) did last year by starting to sell the scaled-back Surface RT ahead of the Surface Pro tablet.

Sure, the gap was a couple of months between Surface releases. It's just a week on the new iPhones. We're also only talking about preorders here, since both devices will be available at retailers a week from Friday. However, Apple's plan in putting out a slightly cheaper and less robust mobile device that may miss its mark as an entry-level product seems eerily similar. 

Microsoft thought it would be able to penetrate the growing market share of Google's (GOOGL -0.16%) Android with the Surface RT, but it wasn't cheap enough at $500. Apple is also hoping to win back market share from Google's open-source platform, but its device -- starting at an unlocked price of $550 -- is also not cheap enough. A few analysts even downgraded Apple on Wednesday after digesting the price points and coming to the same conclusion.

Now, unlike the Surface RT, the 5C won't be a colossal flop. Apple has shown that there is a market for phones selling $100 less than the latest model, at least through wireless carriers willing to subsidize most of the cost. Verizon (VZ 1.10%) reported a few quarters ago that it was selling as many iPhone 4 and iPhone 4S handsets -- at $200 and $100 less, respectively, than the iPhone 5 -- so there's certainly something to be said for $199 vs. $99 under a two-year contract.

In fact, it could even be less, with reports that Wal-Mart (WMT -0.61%) is already gearing up to sell the iPhone 5C for as little as $79 with a two-year contract.

However, the 5C will be dead in the water with the overseas carriers and the domestic prepaid operators that were hoping for a cheaper way to get their customers into the iOS ecosystem.

Microsoft's gamble in overpricing the Surface RT didn't pay off. It eventually slashed the price to $349 this summer, but it was too late. The brand is toast, and it isn't a surprise to see that Microsoft will strip the RT from its moniker when the Surface 2 is rolled out later this month. By the same token, it won't be a surprise if lackluster sales of the 5C force Apple into more aggressive pricing in a few months, only if its iPhone 5S also fails to gain market share.

Microsoft and Apple think they have something to protect with the out-of-touch initial pricing for entry-level devices. Microsoft didn't want to burn other manufacturers that were embracing RT, but when they all but cleared the room, it was an easy call to go for broke. Apple's the only one making iOS gadgets, so it doesn't have to worry about that. Apple is merely protecting the integrity of the iPhone 5S. If the 5C is too cheap, it would cannibalize sales of the 5S. However, maybe something's wrong if Apple feels that a year of innovation isn't enough to command more than a $100 premium to last year's technology in a plastic shell. 

The 5C will sell millions and likely tens of millions, but that won't be enough to make it the success that many were envisioning as they bid up shares of Apple this summer. The 5C may be this year's Surface RT.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$140.52 (0.11%) $0.16
Microsoft Corporation Stock Quote
Microsoft Corporation
$262.52 (1.12%) $2.90
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$51.24 (1.10%) $0.56
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,116.10 (-0.16%) $-3.30
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$123.37 (-0.61%) $0.76

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