Is Apple’s push into lower prices working?
By Chantal Tode
October 29, 2013
The iPhone 5C
While Apple is selling more iPhones, the average selling price is on the decline, raising the question of how well its strategy to extend reach into lower-priced segments is working.
While Apple is still the most profitable mobile hardware manufacturer, the company’s shares dropped yesterday after Apple reported net income totaled $7.5 billion during its recent fourth quarter compared with net profits of $8.2 billion during the same period a year ago. At the same time, the average wholesale price for the iPhone is at its lowest level ever, coming in at $577.27.
“I cannot find another number that low,” said Michael Morgan, senior analyst at ABI Research, New York. “It is not an entirely unexpected thing – they are trying to deal with lower cost segments.
“This is them trying to push their success into places like India and other emerging markets like Latin American, which happen to have sharp growth,” he said. If they are having growth there, it is not entirely odd that the prices dropped a bit.”
Controlled price drop
Apple has expanded its offerings at the lower end of its premium positioning over the past couple of years. In the iPhone category, the 5C is available for $99 with a two-year contract from the major carriers while the 4S is free with a contract.
Also, the company introduced the iPad mini last year, which at $329 was less expensive than the full-size iPad, which starts at $499.
With reports that the premium mobile market is reaching saturation and sales are slowing, offering devices at a lower price point makes some sense for Apple as it tries to take advantage of growth in emerging markets.
The new iPad mini with Retina display.
However, the downside is that this strategy appears to be lowering the average wholesale prices for the iPhone.
“They are taking a measured and controlled way, trying to sneak in discounts here and there to see if they can up their volume in emerging markets,” Mr. Morgan said. “It is not like it has plummeted off a cliff and they are dropping the price to get rid of overstock.
“To a certain amount, it is a successful effort at this point.”
For the fourth quarter ended Sept. 30, Apple reported revenues totaling $37.5 billion, up from $36 billion in the same quarter a year ago.
Helping to drive sales up for the quarter was record sales of 33.8 million units for the iPhone, up from 26.9 million in the same period a year ago.
Analysts had expected Apple’s sales would be up slightly following the release of the new iPhone 5S and 5C in the United States and other key markets on Sept. 20, in time for the sales numbers to be included in the company’s financial results.
The 5S is the company’s new flagship iPhone while the 5C carries a slightly lower price.
Initial sales for both devices were strong.
“The first weekend numbers for 5S and 5C sales were better than almost everybody expected,” said Carl Howe, vice president of research at Yankee Group, Boston . “All of Wall Street was saying 5 million, 6 million, 6 and a half, and they came in at 9.”
However, despite the initial burst in sales, reports have suggested that Apple has reduced production on the 5C more recently. This suggests that sales for the device may not be as strong as Apple had hoped and raising questions about how well the device is being received by consumers.
Still, there is still time for sales of the 5C to pick up.
“I would expect that the sales of that device are actually growing compared to the 5S which is probably tailing off a little bit after the launch,” Mr. Howe said.
“The argument is that the 5S is a device that you stand in line for,” he said. “The 5C is the device where you say, I’m thinking about getting a new phone, I want to think about it for a bit, then you come back later and say, I’m going to buy the 5C.”
IPad sales are flat
Another area of concern for Apple is the iPad, with sales basically flat. The company sa id it sold 14.1 million iPads during the quarter, compared to 14 million in the year-ago quarter.
IPad sales had been expected to be disappointing as the tablet market overall continues to grow quickly thanks to multiple new entries while Apple’s growth rate slows.
Apple introduced its new iPad Air and iPad mini with Retina display just last week, so initial sales are not included in the company’s fourth quarter results. However, these devices could give Apple’s tablet sales a significant boost during the current quarter if they are well received by consumers, which is still up in the air.
“While Apple’s goal to raise its average selling price and gross margin for iPad is obvious with the launch of new products at this point in the calendar year, it is unclear how compelling the new iPad Air and iPad mini 2 will be for consumers,” said Jeff Orr, senior mobile practice director at ABI Research.
“New buyers will likely appreciate the pricing of the iPad Air being consistent with previous iPad generations,” he said. “Current iPad and iPad mini owners may not find the new models much of an improvement and we’re hearing it’s tough for them to justify an upgrade.
“Over the holidays, I expect Apple’s iPad products to be the best-selling in the United States. Outside Apple’s home market, there is a greater chance for Samsung and local brands to see great success.
At the same time that Apple is trying to extend its reach into lower-priced segments, it is also doubling down on the premium market.
For example, Apple recently hired the CEO of luxury fashion retailer Burberry to lead its retail business.
Also, with its recent iPad introductions, the price for the base model of the iPad mini line is now $399, up from $329.
With no one else able to touch Apple at the high end of the market right now, this could be a good move.
Of course, until someone else figures out how to target this market in mobile.
“The premium market is slowing for everybody except Apple,” said Yankee Group’s Mr. Howe. “They have basically staked their claim there and they are being very successful at it.
“If somebody else is able to achieve similar brand recognition and similar customer service and support and retail reach, they could certainly face challenges,” he said. “The trouble is that those take a long time to build.
Chantal Tode is associate editor on Mobile Marketer, New York
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