Apple – Three Reasons To Break Into A Big Smile

Subhadeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With some shareholders of tech giant Apple (NASDAQ: AAPL) feeling a little jittery about the future of the stock, now is probably the best time for CEO Tim Cook to prove that he is a true multitasker. Three factors  should help him in this regard: a cheaper iPhone altogether, a possible collaboration with China Mobile (NYSE: CHL) through an upgraded version of the current iPhone model, and an innovative iWatch.

For Apple, these three things will mean:

  • A turnaround in the face of increased competition from cheaper smartphones powered by Google’s (NASDAQ: GOOG) Android system.
  • Access to the world’s biggest mobile subscriber base, in what is slated to become the biggest smartphone market of the world.
  • Unlocking the potential of another iconic product that can change everything, again.

And the best part is, all three events will almost inevitably happen (albeit with some variations), since the company will try and retain its premium positioning at any cost.  

What makes a cheaper iPhone a necessity

Let’s start with the bad news first. As per research firm IDC, Apple’s smartphone supremacy has been on the downslide, with its share of global smartphone shipments falling from a high of 23% in Q1 2012 to a considerably low 14.6% in Q3 of the same year. And the two main factors responsible have been its premium pricing, coupled with the onslaught of low-cost Android smartphones.

What’s important is that both these factors, along with the absence of carrier subsidies, have impeded its success in the emerging nations – the markets of the future. This makes it inevitable for Apple to have a rethink on the pricing strategy of its iPhones – its steady revenue cash cow. Merely selling older models at a discount or breaking down the cost of existing models into affordable installments is just not proving to be enough.

The obvious solution at this juncture would be to sell different types of the same phone at a range of price points, which is what a cheaper iPhone is really all about. Apple has already played around with this strategy with the iPad Mini, and the whopping sales figures are proof of its success.

And here’s the real potential

Having a cheaper iPhone would bring it within range of a massive untapped cost-conscious consumer segment in emerging countries such as India and China. For some of you who may be thinking that a cheaper iPhone would have a negative impact on Apple’s profit margins, I’d like to remind you that most of these potential customers will be the ones who have never used an Apple product before due to their prohibitive prices in such regions.

And the few who can actually afford an $800+ iPhone 5 (for China and India) would never settle for a cheaper option. I’m saying the word ‘few’ because once you stop gushing over the 2 million unit sales of iPhone 5 in China over just 3 days following its launch, you realize that’s not even 1% of its humongous population of 1.3 billion.

What makes China so important

The Chinese story doesn’t end there. The country’s potential to surpass the US as the planet’s biggest smartphone market by the end of this year itself, according to IDC, is also another broad reason to launch the next generation iPhone – dubbed the iPhone 5s. On a more specific aspect, the reason lies in the dominance of China Mobile and the fact that the iPhone does not figure among its offerings.

As I mentioned earlier, China Mobile, with roughly 65% share of the country’s subscriber market (or around 704 million subscribers which also makes it the world’s largest carrier), has around double the number of customers registered with China Unicom and China Telecom, two of its rival carriers that offer the iPhone. However, the sad part is that apart from subsidy-related and revenue sharing issues, China Mobile’s proprietary TD-SCDMA network technology is not compatible with the current generation of iPhones.

Enter the iPhone 5s, which is supposed to be a TD-SCDMA compatible variant, thanks to an updated chipset, if recent speculative reports are to be believed. That’ll also open up the doors to 700 million+ subscribers - a big reason to celebrate.

What’s that blinking on your wrist?

A cheaper iPhone or an upgraded version of the existing model may be part of strategic marketing, but it’s the rumored iWatch that’s going to be the innovative aspect. If recent reports are to be believed, Apple is working to develop a wearable computing device similar to a wristwatch that can function like a phone or tablet, but in a limited manner. Some of its functions may include viewing emails, calendar appointments and text messages. After the iPod, iPhone and the iPad, this could be Apple’s next big technology gamble, in its bid to create a whole new wave of ‘fanboys’.

That aside, wearable computing is an area where both Apple and arch rival Google are envisioning big prospects. Google has already come out with the ‘Google Glass’, a spectacle-like computing device that performs smartphone-based functions such as taking photos and recording videos. However, although the Android-powered device is no doubt innovative, it’s still basically a spectacle which some people may have reservations about putting on in public. A watch, on the other hand, is much more wearable and is, in some cases, a fashion accessory, things that might work in favor of Apple’s so-called ‘iWatch’.

It’s all about doing the right things

Having said that, Apple still needs to take care of a few things. For starters, it has to be careful about the pricing of a cheaper iPhone, if such a product does come out. Cannibalization of current iPhone models is also another possibility, particularly in the US and other developed regions. At the same time, subsidy and revenue sharing arrangements need to be worked out with China Mobile for the success of the upgraded iPhone version.

As for the iWatch, it’s too early to speculate whether Tim Cook can successfully mix innovation with marketing the way Steve Jobs did. But, on the whole, I think it’s time to believe him when he says, “We’ve got some great stuff coming.”

This is one stock that has more pleasant surprises in store than you think. Time to permit yourself a smile!


subhadeeptech has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, China Mobile, and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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