Emerging Markets Are Crucial for Apple

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In yet another sign that Apple’s (NASDAQ: AAPL) glory days may be over, or at least on hold, reports this week state that the world’s most valuable company is considering a foray into the trade-in and refurbished smartphone market. The move is thought to be the company’s way to boost lagging sales, especially in emerging markets.

Reported by Bloomberg early Thursday, the news had little effect on the stock’s movement. I think investors took the news with a grain of salt like they’ve grown to do about so many other rumors about Apple’s plans that have yet to come to fruition. However, if this program comes to pass, it will mark a new way the company is trying to remain competitive.

Emerging markets' growing player

As more people are switching to smartphones from regular mobiles, the key area for growth is in emerging markets. The International Data Corporation (IDC) forecasts that emerging markets will account for 64.8% of all smartphones shipped during 2013, which is up from 43.1% in 2010. Furthermore, it estimates that smartphone sales will dominate 67% of total phone sales by 2017, so it behooves makers of the faster and more functional devices to tap them, including Apple.

Samsung leads in global market share for mobile devices, followed by Nokia (NYSE: NOK) and then Apple. Samsung leads largely due to the sheer number of devices at several price points it offers to meet consumer wants. Nokia’s second-place spot is partly due to it being able to still offer lower-priced phones. Its collaboration with Microsoft on the lower-priced Lumia Windows smartphone is helping.

Apple is reportedly considering launching the trade-in program for those who have older versions of the iPhone so they can more affordably upgrade to the iPhone 5. Its plans could entail taking the models that are traded in and selling them in emerging markets, which Apple has been a laggard in.

China is key

One of the markets Apple has not had great success penetrating is China, and this is where it stands to benefit hugely. In China the demand for less expensive smartphones is growing. By supplying this, the company could boost its sales, but the issue over how its margins could be negatively affected creates a dilemma.

The next hurdle relates to China Mobile. Regardless of the number of cheap devices Apple is able to sell in the country, the effort will only be as fruitful as its ability to sell to this carrier’s roughly 700 million customers. The parties are reportedly working on a deal. Until it’s inked, Apple’s growth there will continue to be hindered.

Catering to the less elite not all bad

If Apple does take in old iPhones and sells them in emerging markets, it would mark a fundamental shift in the company’s approach to selling its flagship smartphone. If this comes to fruition, the trade-in program would mark the first time Apple has offered such an option on the iPhone.

The rare pricing strategy move is noteworthy for the world’s most valuable company considering its roughly $412 billion market cap was partly driven by the high-priced devices it had traditionally had no problem peddling to consumers.

That strategy must change as consumers’ patience for the lags in between the introduction of new products is short, regardless of who makes them. Look no further than the put-upon stocks of Blackberry (NASDAQ: BBRY) and Nokia to see the importance of having a deep lineup of offerings, as well as the commitment to tap emerging markets.

IDC analyst Kevin Restivo told the Investors Business Journal last month that the success of smartphone makers is “increasingly hinged on the success they have in emerging markets." He citied Brazil, China and India as markets where smartphones powered by Google’s Android operating system have been very popular.

To its credit, BlackBerry has rolled out the Q5, which will be heavily marketed in developing countries. Complete with the well-sought-after qwerty keypad, the Middle East and Asia are target markets.

BlackBerry’s success has historically been rooted in it capturing a large segment of business users. However, that has been threatened as its operating system is being trumped by Apple’s iOS, Google’s Android and Microsoft’s Windows 8 systems. Its success in the consumer market is necessary to ensure long-term viability in business markets, notes Gartner.

As far as Nokia is concerned, Restivo told the Investors Business Journal that Nokia is “actively working to convert its feature-phone users in emerging markets to low-cost smartphones.” So, if Nokia is to regain some of its past glory, that’s where it needs to succeed, Restivo noted.

Troubling about Nokia is that it hasn’t even been able to maintain the number-one position as a smartphone maker in its own country, which is Finland. Samsung now holds that top spot globally.

In its last report on global smartphone sales, Gartner pointed out that although Nokia’s Windows Phone sales have "sequentially improved," reaching a volume of 5.1 million units. However, the once leader in mobile phone sales has yet to see high growth in the smartphone segment. Its position in the smartphone market dropped to No. 10 in the first quarter of 2013, from No. 8 in the fourth quarter of 2012, according to Gartner.

The move by it and Microsoft to power the newest Nokia with the Windows Phone operating system was somewhat of a saving grace. The so-called windows phone has passed Google’s Android and Apple’s iOS in terms of sales in Finland.

Why Apple’s losing the battle

This demand in the emerging markets, and the rest of the world for that matter, is partly driven by a deep selection of devices available at multiple price points, notes the IDC. In the dog-eat-dog world of mobile-device sales, manufacturers are finding that capitalizing on any of their competitors’ weaknesses can help propel them to the top.

In the case of Samsung, there seems to never be a month, let alone a quarter, in which it fails to roll out some new device. Not only that, but the company builds a variety of devices and sells them at several different price points, leading to it having a device to fit just about every person's needs and budget. Apple can’t boast this. It has traditionally released a new iPhone just once a year.

Apple is in the unique position of being a well-known household brand. If it sells lower-priced phones, demand may very well increase due to its reputation for innovating. Regardless, it needs drastic changes to keep up with not just Samsung, but also Nokia and BlackBerry. Again, this is especially the case with emerging markets, considering the smartphone market in the U.S. and other developed companies is saturated.

We may get a better idea of Apple’s plans soon. Its developers conference spans the week of June 10.

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