The Exchange

Apple’s iPhone 5C Price Disappoints Investors Hoping for Something Lower

The Exchange

Apple (AAPL) CEO Tim Cook a few months ago dismissed the notion that the high end of the smartphone market had peaked, and today he put his money where his mouth was.

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Apple unveiled its new and much-leaked iPhone 5C, a plastic-encased phone in five bright colors with technology not quite up to the leading edge. But instead of pricing the 5C at the bottom of Apple’s current lineup, replacing the $450 iPhone 4, or going even lower, Cook went decidedly mid-tier. The 5C will start at $549 without a contract, or $99 with a two-year deal. That matches the current mid-range iPhone 4S pricing.

In doing so, Cook clearly set aside concerns that the market for premium smartphones is becoming saturated, at least for Apple. The company still doesn’t have deals with some major carriers, such as China Mobile, leaving big pockets of untapped growth. And last quarter’s bountiful sales of older models showed there was growing demand for a mid-priced offering.

Apple also introduced a new flagship phone, the iPhone 5S, on Tuesday. It includes an improved camera, new fingerprint sensor and faster processor.

The 5C's new bright colors should increase interest in mid-tier phones from when Apple offered only year-old devices, according to Tony Cripps, principal device analyst at Ovum.

“Consumers in the upper reaches of the smartphone mid-market are increasingly looking to distinctive devices of their own, and are not happy to accept castoffs or dumbed-down versions of former flagships,” Cripps wrote after Apple’s unveiling. “Color variations and a clear design of its own is a good way to do this.”

The phone could also help Apple in another way. Brian Marshall, who heads the technology analyst team at ISI, expects the 5C will have a gross profit margin of 40%, higher than Apple’s overall 35.6% rate last quarter and likely better than the iPhone 4S. So growing mid-tier sales will help profits start growing again – a top concern of investors.

Wall Street was expecting Cook to think different. Once the unsubsidized 5C price of $549 was posted on Apple’s website, the stock sold off. After holding around $500 during the presentation, the stock dropped as low as $489.50 before recovering a bit to close at $494.64. Still, Apple shares have been gaining lately, up 25% since the beginning of July on rumors of the new iPhones and improving quarterly results.

Despite Cook’s denials, growth in sales of high-end smartphones has been slowing. In the U.S., smartphone sales rose just 14% last year and smartphones made up 70% of all phones sold.

By contrast, sales are growing more quickly in less wealthy regions of Asia, Latin America and Eastern Europe. Globally, smartphone sales increased 46% last year, and smartphones made up about 40% of all phone sales.

But the best-selling phones in emerging markets typically cost $300 or less and run Google’s (GOOG) Android operating system. The 5C isn’t the answer in those markets, at a $549 price.

“While that might not matter in North America and Europe, it matters in emerging markets, which is what everybody, including me, thought they were really going to be targeting aggressively,” Brian Blair, an analyst at Wedge Partners, said. “It just feels like they should have been more aggressive.”

The announced pricing was just for the United States, however. Cook could reduce the price of the 5C in some markets. In the most recent quarter, Apple tripled its iPhone 4 sales in India with a combination of discounts, trade-ins and installment purchase plans, though the growth came off a tiny base.

The CEO could also wait until next year, when the 5C will likely be cheaper to build, to slash the price of the new model.

The risk is that Apple tries to maintain its profit margins for too long, allowing less-expensive phones to catch up. That was exactly what happened to Apple in the personal computer market, according to the late Steve Jobs. “At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits,” he said.

Cook is betting that critical juncture hasn’t been reached yet in smartphones. Apple shareholders aren’t so sure.

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