Apple (NASDAQ:AAPL) delighted fans and investors alike by reporting impressive first-weekend sales of its new iPhone line: 9 million units sold was a record for the Cupertino-based giant. However, after the initial euphoria subsided, Apple was left with an uncomfortable fact. The iPhone 5c hasn't been selling as well as its more expensive counterpart—the iPhone 5s.
In fact, some of my colleagues have actually compared the iPhone 5c to the initial rollout of Microsoft's (NASDAQ:MSFT) Surface RT. Yes, the $900 million writedown Surface RT that many say sealed Steve Ballmer's fate. While I am not in that camp, I think the 5c's slow rollout does tell a powerful story to Apple, and Angela Ahrendts should take notice.
Aspirational brands should be, well, aspirational
Apple has always relayed a certain status symbol to both the user and in the greater tech community. Apple has made a fortune from its iPhone, combining sleek hardware with integrated software and a deep, rich ecosystem of apps. However, the hardware—the actual phone itself—has always been one of distinction. In short, you know an Apple phone when you see it.
And never before has an iPhone had color, although the "unapologetically plastic" cases have already been done. The Nokia Lumia line already has a plastic casing, so it appears the soon-to-be Microsoft line of phones beat Apple to the punch.
Why should Angela Ahrendts take notice?
Burberry CEO and brand-repair specialist Angela Ahrendts won't even resume duties at Apple until mid-2014 according to reports. Why should she worry about a lack of demand for the 5c?
First, a brand, like a reputation, is hard to repair once damaged. Ms. Ahrendts did a wonderful job repairing Burberry's image, basically rebranding the stodgy and stuffy clothing line into one that millennials were excited about. With Apple, however, she faces a different challenge: How to keep millennials excited about the brand. If customers aren't excited about the product, it is hard to grow your retail distribution network.
Second, Tim Cook has high hopes for the Apple store and iPhone sales. At Apple's annual retail leadership meeting, he said:
The iPhone is Apple's central "gateway product" to other devices like iPads and Macs, so it is critical that the Apple smartphone is sold via an Apple Store so new customers are immediately exposed to iPads, Macs and other devices on the showroom floor. Even though 80% of iPhones are not sold at Apple Stores, 50% of all serviced iPhones are troubleshooted, repaired, or replaced at Apple Store Genius Bars.
According to 9to5Mac, Cook would like for the retail sales percentage number to rival the serviced number.
Why Apple shouldn't fear Surface RT's fate
Although it appears Apple should be concerned about this rollout, it shouldn't fear the 5c becoming the Surface RT. Yes, there are similarities: Both Apple and Microsoft released two versions of their products. But, that's where the similarities end.
Apple released both products at the same time, and early adopters have elected to go with the more expensive unit. Microsoft released the Surface RT before the Pro and overestimated demand for a new product. Microsoft was able to learn from that and modify production of Surface Pro accordingly. So the Pro wasn't a high-volume sales item, Microsoft just planned better. Tim Cook is a supply chain wizard, and shouldn't allow this to happen. Matter of fact, Wells Fargo analyst Maynard Um noted that last year's mid-range smartphone, the 4S, saw sales ramp up during the holiday season. Look for the 5c to have that same sales trajectory.
Final Foolish thoughts
Investors should continue to monitor the 5c for signs of continued weakness; a particularly rough holiday season may be a sign of "mid-range" weakness. However, the 5s is selling well and should aid Apple's margins. In closing, the greatest risk to Apple is brand degradation--not a writedown threat.
Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. 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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