Up until 2012, Apple Inc. (NASDAQ:AAPL) seemed to be on a path to smartphone dominance, at least in the high end of the market. However, growth has slowed dramatically in the past year. While growth rates have always been “lumpy” because of timing issues, there has been a clear downward trend in iPhone sales growth recently.
Source: Apple Earnings Releases, http://investor.apple.com/results.cfm.
There has been much talk in the market that Apple Inc. (NASDAQ:AAPL) will offer a cheaper iPhone to appeal to customers who can’t afford a $450 product like the iPhone 4. However, this potential move raises a legitimate concern about cannibalization of higher-priced, high margin iPhones. To solve this dilemma, Apple Inc. (NASDAQ:AAPL) should (surprisingly enough!) consider following Research In Motion Ltd (NASDAQ:BBRY)’s lead by releasing a mid-range smartphone, but only in selected markets.
Apple’s problem
Apple’s problem is fairly simple. The iPhone 5 has a starting price of $649 (in the U.S.), and even the three-year-old iPhone 4 retails for $449 if you aren’t getting a carrier subsidy. This premium pricing has allowed Apple to maintain stellar margins for the iPhone. Horace Dediu of Asymco estimates the iPhone’s gross margin at 48% as of last quarter. That’s less than the peak of nearly 60% last year — before the introduction of a new form factor with the iPhone 5 — but still well above the gross margins of Apple Inc. (NASDAQ:AAPL)’s other product lines.
Ideally, Apple would like to expand the market for the iPhone by offering a cheaper version that could compete in the “mid-range” smartphone segment. Apple will never be able to deliver a high quality product that can compete on price with the $99 Android phones that are common in developing countries. However, a price point as low as $300 seems feasible.
That said, if Apple Inc. (NASDAQ:AAPL) delivers a high-quality smartphone for $300 unsubsidized, it risks cannibalizing sales of its high-end phones. Even in the U.S., many people would consider trading down to a cheaper iPhone, as evidenced by the continued strong sales of the iPhone 4 and iPhone 4S.
If this cheaper phone had a gross margin of just 20% (implying a profit per device $200 to $250 lower than the average iPhone sold today), cannibalization of high-end iPhones could more than offset the benefit of restarting unit sales growth. Apple therefore needs to find a formula that would allow it to introduce a cheaper iPhone and grow its global market share while minimizing cannibalization of high-end iPhone sales.
BlackBerry’s plan
That’s where following Research In Motion Ltd (NASDAQ:BBRY)’s lead could prove useful. BlackBerry recently unveiled its first lower-priced smartphone running the new BB10 OS. The Q5, announced at this week’s BlackBerry Live conference, will be very similar to BlackBerry’s Q10 high-end smartphone, but it will use some cheaper components.
However, BlackBerry isn’t planning a global rollout for the Q5 (at least not yet). According to the company’s press release, “The new BlackBerry Q5 smartphone will be available in selected markets in Europe, the Middle East, Africa, Asia (including the Asia-Pacific region), and Latin America.”
