This week, The Wall Street Journal reported that Apple (AAPL 2.21%) has cut this quarter's orders for the iPhone 5c -- leaving some wondering whether the iPhones 5c is a failure. But before you make up your mind, let's take a step back and see exactly what's going on with Apple's new phone.
iPhone 5c. Source: Apple.
Just the facts
According to WSJ, this is what we know:
- Apple has reduced orders of the 5c for this quarter.
- Apple's iPhone 5c assemblers, Pegatron and Hon Hai, were told to cut back orders by less than 20% and by one-third, respectively.
- Component suppliers for the 5c were told to cut back parts by 50%.
- Some retailers have cut prices for the 5c.
But here are few things we also know:
- Only 11 markets currently sell the 5c and 5s.
- Apple will launch both iPhones in total of 50 markets by next month and 60 by the end of the year.
- The 5s sells for $100 more than the 5c, so it's not necessarily bad thing the 5s is outpacing the 5c.
Aside from that, Apple is expected to launch the iPhones on China Mobile some time in 2014, which could add a substantial amount of new iPhone customers to the mix. Whether they will be 5c customers or not is still unknown.
But let's just assume that all of that doesn't matter, and that the 5c is actually doing really poorly and no one wants it. What then?
The 5c still wouldn't be doomed.
If the company priced the 5c incorrectly, then Apple may be able to make price adjustments and move on. With the iPhone's 36% to 37% gross margin, Apple has a little wiggle room to make that happen.
Deutsche Bank analyst Chris Whitmore said in a research note, "We believe that iPhone 5S demand is outstripping 5c demand by a significant amount. As a result, both ASPs and margins should benefit from the strong mix within the iPhone product lineup."
When it comes to selling phones, it's logical to assume that one device will outsell the other. It would be difficult for the 5s and the 5c to both be selling out equal amounts considering they're different models with different specifications and pricing.
A Cantor Fitzgerald analyst, Brian White, wrote in a research note this month, "We also do not subscribe to the notion that demand for the iPhone 5C has been a huge disappointment ... rather [it's] not at the level of the iPhone 5S."
Investors should note that despite despite the reduction of 5c orders and the 5s outpacing the cheaper device, the 5c isn't dead. Apple by all accounts has a very successful iPhone 5s and a solid 5c device. We may learn more about both device sales when Apple releases its quarterly earnings report on Oct. 28, but for now, investors should be comfortable with Apple's new two-phone strategy and know that early reports of low 5c demand don't paint the full picture.
