If the 5C retailed for $450, it would sit at the $0 subsidized price point given its current subsidy level with nothing at the $99 subsidized price point. That could also hurt the 5C’s brand perception if Apple released a new product that’s given away for free on contract. The alternative would be to retail for $450 but accept a dramatically lower subsidy from carriers in the ballpark of $325 (after volume discounts), which could potentially undermine the roughly $425 subsidy it earns on other models. Decisions, decisions.
| Model | Unsubsidized Price Points | Storage Configurations |
|---|---|---|
| iPhone 4S | $450 | 8 GB |
| iPhone 5C | $549 / $649 | 16 GB / 32 GB |
| iPhone 5S | $649 / $749 / $849 | 16 GB / 32 GB / 64 GB |
Source: Apple.
Instead, Apple stuck with the same pricing strategy. The 5C will retail for $549 unsubsidized. All of the cost savings associated with using a plastic casing will go straight toward padding gross margins, instead of being passed along to consumers and spurring greater unit sales. Apple may need to rely on other affordability initiatives such as financing for the 5C to perform well internationally.
A tale of two carriers
In line with a report last week, Apple has finally inked a deal with Japan’s No. 1 carrier, NTT Docomo Inc (ADR) (NYSE:DCM), to offer the iPhone. This is a first for the Japanese carrier, while smaller rivals KDDI and Softbank have long leveraged the device to steal customers. With nearly 62 million mobile subscribers, Apple just expanded its addressable subscriber market by a fair amount.
Investors will still have to wait for news on the China Mobile Ltd. (ADR) (NYSE:CHL) front though. Schiller did note that China is on the list of launch countries for the first time ever, without elaborating on specific carriers. There have been reports that China Mobile Ltd. (ADR) (NYSE:CHL) is postponing its iPhone launch until November in order to put the finishing touches on its new TDD-LTE network, so all’s not lost. At 745 million subscribers strong, China Mobile Ltd. (ADR) (NYSE:CHL) is a much bigger opportunity. Investors have been waiting years for this partnership, and they’ll just have to wait another couple months.
Has Apple made a huge mistake?
The iPhone 5C pricing was the biggest unknown, and quite frankly it’s a bit disappointing considering what investors are hoping for the device to accomplish. Apple Inc. (NASDAQ:AAPL) should have discontinued the older iPhone 4S and priced the iPhone 5C at $0 on contract (despite any possible risk to its brand image), while moving the iPhone 5 to the mid-range $99 on contract price.
That would have eliminated the subsidy dilemma, while accelerating the transition away from 3.5-inch displays and unifying the platform with 4-inch screens. There would probably also have been some cost savings, since Apple could have then retired its iPhone 4S infrastructure while the iPhone 5 and iPhone 5S likely share many manufacturing resources due to their similar design.
More importantly, it would have given the iPhone 5C the maximum odds of success exactly where it matters: emerging markets.
The article Meet Apple’s New iPhone Family originally appeared on Fool.com and is written by Evan Niu, CFA.
Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile.
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