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5S Strategy All Wrong
The price, $735 in China, did not seem to fulfill the analysts' models and forecasts and therefore to them, Apple's complex strategy appears fundamentally wrong. The question I will address below is as follows: What was Apple thinking setting such a price point for the 5C, and are these analysts right?
Here's why the analysts are concerned. Their bottomup models assume they are correctly projecting the rampup of future demand at various price inflections. By using product and geographic segmentation, the analysts project the average price of the product sold in any given quarter and ipad 3 leather cases multiply their average price estimates by the projected volume to get their revenue estimates over certain future periods. The fear is that an expensive iPhone 5C in a huge geographic market like China will forego much of that expected volume in a heavily contested market during those next few periods.
Others don't even bother doing any analysis. They simply use the now popular argument that goes something like this: Apple is losing the designer ipad leather cases operating system battle and therefore Apple is losing the smartphone war!
First, are these analysts right about China?I will start by saying that Apple does not need to duke it out with the discount smartphone makers just like Mercedes does not need to create a competitive strategy to fend off Hyundai (OTC:HYMLF). Yes, Hyundai will likely take an extremely marginal market share from Mercedes with its top end models, but not enough for the German luxury automaker to lose tens of thousands of dollars per vehicle in order to price lower and compete head on with the Korean automakers.
What many of the analysts fail to understand is the demographic structures of different segments, http://www.cellphonecasesa.com/ especially the Chinese market, and how brand perception plays into Apple's and the population's decisionmaking.
First of all, the Chinese market is extremely fragmented and with 1.15 billion subscribers (out of a 1.35 billion population), the Chinese market is also quite enormous. According to mobile research, only about 22% of those subscribers were on 3G/4G networks by April 2013. That means that the Chinese smartphone market is still in its early stages of development and there is room in that market for many players and in different Tory Burch iPad Cases product tiers (I will define them as lowend, middlerange, and premium tiers).
When Apple http://www.cellphonecasesa.com/ipad-cases-c-125/ launched two phones with different price points, its strategic decisions were focused on the following four major themes, in my opinion:
1. Brand preservation
2. Margins4. CompetitionBrand PreservationDuring its launch of the iPhone 5C/5S, Apple, as the number one global brand according to Forbes magazine, had to be extremely careful not to damage its premium brand. The damage could have come through a creation of a price point for the 5C that would have been on the extreme opposite end of its traditional premium iPhone price point, or on the lowerend of the smartphone market. It made a strategic decision to avoid that. In other words, it does not want to compete on price with the discount phone makers, just like CocaCola (NYSE:KO) does not want to compete on price with coladrink made by your local grocer. Sure, coladrink might almost have the same taste, but that has not put Coke out of business just yet. There are plenty of BMWs still parked outside my house alongside many Toyotas (NYSE:TM). And of course, even if cheap Chinamade Nike (NYSE:NKE) knockoffs look identical to the real Nikes, that will not stop the mainstream from buying authentic Nike products. These topbrand companies spend billions of dollars protecting and growing their premium brands for which they charge a premium, and the brand appeal plays a critical role in the purchasing decisions of emerging market consumers. And although some believe that Google's (NASDAQ:GOOG) Android ecosystem is quite robust, Chinese consumers, of course, do not get the same Android ecosystem as Americans, so the decision to turn to Apple becomes just a little bit easier. As the Economist explains, "the Chinese government requires handsets to run a neutered version of the Android operating system, without Google's app store, mail service, maps, and other features."
In terms of the 5S and the 5C offerings, my view is that the correct way to consider the twin iPhones would be to see the 5S as a premium phone and the 5C as a middlerange phone that directly competes with Samsung's (OTC:SSNLF) top phones at the moment (the Galaxy S4, for example).
MarginsA more obvious reason why Apple created a higherthanexpected 5C price point is to preserve its profit margins. So for analysts to simply lower volume estimates and the pricetarget and call it a day, as many sellside analysts seemed to have done, is extremely irresponsible and thoughtless in my opinion. Surely, they have given consideration to China's extremely dynamic and evolving smartphone market. Just adjusting volume down given a certain higherthanexpected price point is quite useless. Surely they understand that the China smartphone market is still developing and Apple is still commanding the premium end of the China market, and by now injecting the 5C into the middlerange market they're competing in a different range head on. Surely they understand that several strategic China Mobile (NYSE:CHL) decisions could transform the Apple volume in entirely different ways. Those premium prices would then contribute to extremely fruitful operating margins that would be entirely foregone with a lowerpriced 5C. Of course, rational analysts should also adjust for risks, in case these forecasts don't bear fruit, but to just make assumptions on average price and lineargrowth is absolutely the wrong way to look at the China market. It's exactly why many Apple analysts have consistently gotten Apple's price target wrong.
CannibalizationSure, if I am a millionaire living in China, the decision between buying a higherpriced 5S and a plastic 5C is simple. I will go with the 5S. But if I am a middleclass citizen living in China, as many of the Chinese are, deciding between the two phones becomes slightly more challenging with a price range that is strategically supported by Apple. Now imagine if Apple priced the 5C at lower margins in the $300$500s as some of the analysts wanted. That would have priced its phones in the range of many discount lowend and middle range phones in China. Yes, that middle class citizen now has a slightly less difficult decision to make. He or she will surely take the 5C, because it's the same premium brand at giveaway prices, but then Apple is leaving a lot of money on the table.
While it's true that a lowerpriced phone would have produced a higher topline number in the near term, it would not have been the best longerterm strategy for Apple. Here is why. Lowering the price and margins would cater to a much larger portion of the Chinese population from an affordability perspective, but injecting a lowpriced phone without much precision and consideration for Apple's ipad 4 leather cases margins would have destroyed the premium brand appeal Apple has worked so hard to create. In the longer term, Apple would not have been able to hang on to its premium pricing strategy for the 5S and margin erosion would have been more severe over time. So while a lower priced phone would have been great if Tim Cook was in the business of making sellside analysts happy with aggressive revenue pricing in the near term, it would have been a terrible strategic longerterm decision for Apple and its longterm investors.
Competition"But Apple is losing to competitors," some say. No, it is not. At least not in its "premium" smartphone range. Sure, Samsung, Hermes iPad Cases which operates in the middlerange tier, grew its total smartphone market share with its successful Galaxy S3 distribution, but the company does not appear to have had the same level of success with its Galaxy S4 phone and that spells trouble for the middlerange phone maker. It's also excellent news for Apple, a company that could easily reach into Samsung's market share with its 5C middlerange offering.
Now about that operating system argument. This, of course, is an extremely warped and incorrect argument and anyone trying to Michael Kors iPad Leather Cases make a decision about Apple should surely steer clear of it. Here's why.
Let me present my view with an example (and this is only an example, not actual) using 7 phone makers that started off LV iPad Cases using their own operating systems.
(click to enlarge)
After a certain point, Apple continued using its own operating system while the six others converted to Android over time. Prada iPad Cases For Sale During the first year, Apple dominated with a 45% OS market share. After year 2, however, it appears as if Apple is quickly losing market share, but in reality, its hardware shipment growth actually appears extremely healthy at +20%. Notice Phone maker E, which actually had heavy (+42%) shipment growth in year 2, looks like it's getting beaten up because of this warped Android OS market share view. I would love to buy a stock of a company that is increasing demand in its product by +42%, but the "Android is winning market share" people would tell you to steer clear of that stock using their argument.
This has now become a popular argument among pundits and Apple haters but it's obviously a view that has very little to do with a smartphone maker's top line, bottom line, or its profitability. It's just a very easy and silly way to attack Apple that actually means nothing for its sales or profits.
ConclusionAt the end of the day, Apple is here to stay and with its piles of cash, cheap debt, proven products+additional products in its pipeline and healthy dividends, it is priced attractively at this point. Apple's smartphone strategy is one of the most robust and impressive strategies I have ever seen. Sure, its stock price has been volatile, but that has more to do with the analysts' and pundits' volatile projections than with Apple's actual business model. Chanel iPad Sheepskin Leather Cases
I've mentioned in a previous article that I truly do believe that this is only the beginning. Apple could use its ecosystem to transform the way we do so many things.
That also means that as the smartphone market begins to plateau, Apple will roll out new products to create additional growth for its ecosystem. That view is well supported by Tim Cook's discussions with analysts.
Because Apple controls its iOS and its hardware, one way in which Apple could roll out additional products is to strategically attack Google's Android relationship with Samsung in such a way that a copycat product would be impossible to produce. That's a topic for next time, but if anyone has any such ideas, I would be happy to hear them in the comments below.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article represents my views only and not the views of any company that I am affiliated with. This article is intended for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein Coach iPad PU Leather Cases shall constitute a solicitation, recommendation, or endorsement to buy or sell any security or private fund.