Is the iPhone too expensive? Should Apple (NASDAQ:AAPL) aggressively cut prices in order to gain market share? Many in Wall Street seem to believe so, but Wall Street analysts are hardly the voice of reason when it comes to a long-term business strategy.
When Apple announced the "not so cheap" pricing of the iPhone 5c on Sept. 10, many Wall Street analysts expressed their disappointment about the absence of a truly cheap phone. The stock fell by more than 5% the following day as the market reacted to the news.
The main line of thinking seems to be that the iPhone is not objectively much better than competing products, so the pricing difference is not justified by technological quality and Apple will get disrupted by lower cost Android products from the likes of Samsung, HTC, or Google (NASDAQ:GOOGL) itself.
However, this point of view is missing a couple of important things. It’s not only about aspects like processor speed and RAM memory, smartphones are consumer products, and factors like user experience and brand differentiation can make all the difference in the world.
The iPhone stands above the competition in areas like touch screen technology, Wall Street analysts can’t measure that quantitatively, but consumers can surely appreciate the difference.
The fingertip scanner included in the iPhone 5s is another good example to keep in mind. It may not sound like a game changer in terms of technological breakthroughs, but it can certainly make people’s lives easier, and superior user experience means a superior product.
The iOS vs. Android debate has many interesting angles to consider, but Apple has one big advantage in that competition: iOS offers all the popular apps developed by Google like Gmail, Maps, and YouTube among many others. On the other hand, consumers who want access to Apple’s apps like Siri or FaceTime can only find them in iOS products.
Apple gets this advantage because Google is playing a different game; the online search giant is not interested in selling software or hardware. Google simply wants to make sure it maintains a sound strategic position in mobile computing in order to capture traffic and the advertising opportunity that comes with it.
Google can’t afford to stay away from Apple’s affluent customer base, but Apple has no reason to make its apps available for Android. This provides another differentiating factor for the iPhone versus the competition.
Price and brand value
According to Interbrand, Apple is the most valuable brand in the world, and that says a lot about aspects like reputation and customer service. It also has important implications in terms of commercial strategy, price is not only about the cost of the product, it's also a marketing tool that communicates information about the product and the brand.
In developed countries, Apple is in a very comfortable position because carrier subsidies mean that the company can get both considerable market share and huge profit margins. In emerging markets, however, the iPhone is too expensive for many customers, and Android has become the leading platform by a wide margin.
But there is a reason why carriers heavily subsidize the iPhone in countries like the U.S., iPhone owners consume more data, and this makes them more valuable to carriers. As income levels continue to grow in emerging markets in the long term, the same dynamics could bring more carriers on board to the subsidy game as they compete for Apple’s affluent customers, and the company would have a lot to win under such scenario.
Even if the iPhone doesn’t make big inroads in emerging markets in the short term due to its pricing disadvantage versus Android smartphones, Apple is focusing in the long term by protecting the brand value and image differentiation.
Apple is an aspirational brand in emerging markets; this means lower market share versus the competition, but also huge potential for profits due to rising income levels and a growing middle class over years to come.
Apple is admittedly working on new product categories, so protecting the brand could be enormously valuable when it comes to pricing those new products.
Putting things into context, the iPhone is actually doing quite well for a business of its size. As a stand-alone product, the iPhone generates more revenue than companies like Google and Microsoft, yet Apple sold 31.2 million units during the last quarter, a 20% increase versus 26 million iPhones sold in the same quarter of 2012.
The new iPhone 5s and iPhone 5c are also off to an auspicious start: Apple has announced that it sold a record-breaking 9 million new iPhone 5s and iPhone 5c devices in the first three days following their launch. Not bad for a product which is "not cheap enough" according to Wall Street.
Apple’s pricing strategy is putting long-term brand value and product differentiation above short term market share. This has negative implications when it comes to growth in emerging markets over the next quarters, but it also protects the company’s pricing power for years to come. This strategy has worked wonders for Apple shareholders in the past, and there is no reason to believe the company should change its course now.
Andres Cardenal owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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.