A Little Brother for iPhone 5: Why Apple Might Do It

 

Rumors about the next iPhone have been circulating ever since the last one came out. There have been a lot, but besides the many supposed features it'll have, there's been some debate about whether it will be called iPhone 5 or iPhone 4S. Now the word on the street is that both are correct—that Apple will actually release two new iPhones in the fall, one being a completely redesigned model that will remain the flagship phone, and the other a cheaper, lower-end model that would be more like a cousin of the current iPhone 4.
The rumor is actually not much more than educated speculation from an industry analyst, Chris Whitmore of Deutsche Bank. That alone is enough to put the plan in the "questionable" bin. On top of that, though, such a move just seems out of character for Apple. Since its inception, the iPhone has always been "The iPhone." Apple's mobile product philosophy is pretty clearly a "one size fits all" strategy, releasing just one phone per year. Much like the tagline for the Highlander movies, for the iPhone, there can be only one.
iPhone Fragmentation
A split iPhone 5/4S launch shatters that apparent strategy. But, looking at the whole picture of Apple's recent actions, it does make some sense. While the standard case for a cheaper iPhone—that it would open the company up to new markets—has been true since the iPhone first debuted, it now matches with what Apple's been doing: getting serious about going global.
"It makes sense from the perspective of the iPhone trying to grab more market share in developing countries," says Harry Wang, a mobile analyst with Parks Associates. "So the price point becomes the focal point of differentiation."
Before the iPhone, Apple's global strategy wasn't as ambitious. If you look at world market share of OS X vs. Windows for the past 10 years, Apple's numbers are, and have always been, pathetically low. But it's the "post-PC" world of smartphones and tablets that turned Apple into a $65 billion company with greater market capitalization than Microsoft. Apple currently commands 18.2% of the world smartphone market, and it has successfully expanded its retail operation worldwide (the most successful Apple Stores in the world are said to be the ones in China).
"When the very first iPhone was introduced, I wrote that Apple would follow a similar product road map strategy with the Mac and iPod," says Charles Golvin, a mobile analyst at Forrester Research. "Where they maintained their pricing of their flagship device, and they would introduce new devices that allow them to expand their market share."
Owning the High End, but Little Else
It may not be as apparent to U.S. users whose handsets are massively subsidized, but the iPhone is an expensive phone. Earlier this year Nokia CEO Stephen Elop said, "Apple owns the high-end range" worldwide. He wasn't exaggerating; the price overseas for an unlocked 16GB iPhone 4 is in the neighborhood of $800. If you want an iPhone overseas, be prepared to spend.
But the mobile market is much more than just the high end. Cheaper phones on prepaid plans make up a good chunk of phone sales worldwide, and the iPhone, in its current form, isn't made for those markets. With the Apple vacuum, Google's Android has swept in with more affordable models all over the world. The price of the iPhone 4 in India if $765. Price of LG Optimus One: about $230. Even the higher-end LG Optimus 2X, the first dual-core phone on the market, costs less than the iPhone, at $600. Now you know why that used iPhone you sold on eBay went for so much.
"A midrange phone in the $300 to $500 range becomes a little bit affordable to middle-class people in developing countries," says Wang. "That would broaden the iPhone's market to a much bigger one and be more effective to fend of competition from Android phones."
Golvin agrees: "If you look at where smartphones have the most growth opportunity today, it's not in the well-heeled tech-enthusiast early-adopter market that led to the initial growth of smartphones. It's in a much more mainstream segment. To really appeal to that audience, they need a lower-priced device."
If Apple wants to stop Android from eating up an every-increasing slice of the global market, it needs to offer something to people who aren't able to spend almost $1,000 on a phone. "Hold on," you say. It already does—last year's model, the iPhone 3GS is a cheaper alternative (or as Wang calls it, the "default low-end phone for the Apple franchise"). Absolutely true, but there are two problems with having the previous generation fill the cheap-phone gap in Apple's product line: 1) It's not new. Convincing people to get excited about buying something that came out a year ago is nigh-impossible from a marketing perspective. Last year's model isn't something you want, it's something you settle for. And, 2) It's actually not that cheap, at least not internationally. Although U.S. users can pick a 3GS up for $49 (with a contract), if you live in Belgium, it's 529 euros, or $759 (unlocked). In China, $617. Prices in most other countries where it's available are comparable.
iPhone 4S: a Downgrade?
Which brings us to what exactly the "iPhone 4S" probably is. As some have speculated, it probably won't actually be a speeded-up version of the iPhone 4, the same way that the "S" in iPhone 3GS designated a faster iPhone 3G. If anything, it'll probably be a significant downgrade to the iPhone 4, closer to the speculation around the so-called "iPhone Nano." Apple would almost certainly need the new cheapo iPhone 4S to cost less to build than the iPhone 4 in order to get the margins it needs for the whole project to be worth it.
If "fragmenting" the iPhone line still sounds out of character for Apple, consider that there used to be only one model of iPod. It took Apple three years to offer a lower-end model (the iPod Mini), and now there's a whole iPod family, each model satisfying a different part of the market, right down to the borderline disposable iPod Shuffle. Given the heat iOS is feeling from Android, a strategy shift isn't out of the question for Apple. The iPhone 5 will surely get the company a spike in market share when it debuts, but if it's still just satisfying one part of the market, that'll be short-lived. To counter the astronomical growth of Android, which IDC predicts will constitute 43% of all smartphones by 2015, Apple's going to have to look at new markets.
Finally, for observers of Apple events, there's one more reason that Apple might announce two iPhones instead of one this fall. It gives Steve Jobs possibly the most dramatic "One More Thing..." in the history of his keynotes. It's a stupid reason, and has nothing to do with business, but it's the one aspect to this whole strategy that would be very much in character for the company. 

Posted in: Informative