Low-cost iPhone predicted to boost both Apple's margins & international sales
Despite potentially offering a lower entry price, Apple's anticipated low-cost iPhone may actually boost the company's gross margins in the smartphone space while also increasing international market share, a new prediction suggests.
From the June quarter of 2012 until the same period in 2013, Apple's gross margins declined from 42.8 percent to 36.9 percent. Analyst Brian Marshall of ISI Group believes this was largely caused by Apple's "forced" limited production of the iPhone 4 and iPhone 4S, as the market has gravitated toward lower end devices.
But he sees a new low-cost iPhone, rumored by some to be dubbed the "iPhone 5C," potentially carrying gross margins of about 40 percent, higher than the company's current average. This implies a hardware bill of materials at around $160, and a wholesale price of about $340, thanks to parts and construction costs potentially lower than the iPhone 4S or iPhone 4.
In this way, Marshall believes the new low-cost iPhone could prove "crucial" to Apple going forward. He sees the device actually improving Apple's overall margins, and also driving market share gains in international, emerging markets where cheaper smartphones are preferred.
Currently, the penetration rate of the iPhone is much higher in developed regions where smartphone subsidies with two-year contracts are the norm. Marshall estimates that Apple's penetration rate was about two times greater in the U.S. versus international markets in the June quarter.
In addition, the analyst noted that Apple has "glaring holes" in its global carrier partner base, most notably China Mobile, which is the largest wireless provider in the world with about 740 million subscribers. Another key missing partner is Japan's NTT DoCoMo, which has about 62 million subscribers.
Marshall is hopeful that Apple will be able to ink deals with those major carrier in the near future, allowing the company to access a large number of new potential customers. ISI Group remains bullish on AAPL stock, reiterating its "strong buy" recommendation with a price target of $600.
From the June quarter of 2012 until the same period in 2013, Apple's gross margins declined from 42.8 percent to 36.9 percent. Analyst Brian Marshall of ISI Group believes this was largely caused by Apple's "forced" limited production of the iPhone 4 and iPhone 4S, as the market has gravitated toward lower end devices.
But he sees a new low-cost iPhone, rumored by some to be dubbed the "iPhone 5C," potentially carrying gross margins of about 40 percent, higher than the company's current average. This implies a hardware bill of materials at around $160, and a wholesale price of about $340, thanks to parts and construction costs potentially lower than the iPhone 4S or iPhone 4.
In this way, Marshall believes the new low-cost iPhone could prove "crucial" to Apple going forward. He sees the device actually improving Apple's overall margins, and also driving market share gains in international, emerging markets where cheaper smartphones are preferred.
Currently, the penetration rate of the iPhone is much higher in developed regions where smartphone subsidies with two-year contracts are the norm. Marshall estimates that Apple's penetration rate was about two times greater in the U.S. versus international markets in the June quarter.
In addition, the analyst noted that Apple has "glaring holes" in its global carrier partner base, most notably China Mobile, which is the largest wireless provider in the world with about 740 million subscribers. Another key missing partner is Japan's NTT DoCoMo, which has about 62 million subscribers.
Marshall is hopeful that Apple will be able to ink deals with those major carrier in the near future, allowing the company to access a large number of new potential customers. ISI Group remains bullish on AAPL stock, reiterating its "strong buy" recommendation with a price target of $600.
Comments
I don't expect Apple to offer a low end product as such, but a new iPhone model with plastic case and the electronics package skewed toward the cost effective end of the spectrum could offer much better margins than the 4/4S, all while opening up a previously underserved market segment.
Where I live the standard alternative to buying an iPhone for $200 (along with a heavy, expensive, three year contract with many limits on data and services) on one of the "big three" carriers, is buying an $300 off contract Android phone with a totally cheap, and completely unlimited month to month service.
A $300 off-contract, buy it in the Apple store phone, would be absolutely huge here.
Quote:
Originally Posted by NeilM
It's more effective to design a lower cost iPhone than to sell a previous full-featured product at a reduced price point as Apple has been doing with the 4 and 4S models. Their glass and stainless steel construction isn't cheap (or easy) and doesn't get much better with volume, since they were high volume products to start with.
I don't expect Apple to offer a low end product as such, but a new iPhone model with plastic case and the electronics package skewed toward the cost effective end of the spectrum could offer much better margins than the 4/4S, all while opening up a previously underserved market segment.
I agree but I kind of don't believe the "larger margins" part of this story without something to back it up. Conventional wisdom to this point has been that they can't even offer the phone below $450, now everyone seems to be switching to $350, and saying that at that price point it has even larger margins? If it has even larger margins and it's high volume product, then why not offer it at $300 or $250. The cheap iPhone is a volume product and a market share play, and their margins overall are better than the rest of the industry by far. Why worry about margins when you are flooding the world with volume?
iPhone 5C is made for Apple stores and sales channel. It is a phone which should make Apple less dependent of carriers terms and moods thus bringing more flexibility with introduction and bigger margins.
On the other hand, customers will get 0 EUR/USD/XYZ contract iPhone without making carriers nervous about profitability.
I really wouldn't want to be Samslung or anal-lyst now...
10% margin on a $300 device = $30 profit
5% margin on $900 device = $45 profit
So I hope there's not too much cannibalization of the 5S...
Well, not market share. It would not, however, be impossible for margins to drop. In fact, I'd be surprised if the margins DON'T drop. Sure, the plastic case will be a bit less expensive, but none of the likely changes would save enough in manufacturing cost to make up for a several hundred dollar drop in selling price. That means margins would drop rather than increase - but you do make it up in volume in this case.
Quote:
Originally Posted by jragosta
Well, not market share. It would not, however, be impossible for margins to drop. In fact, I'd be surprised if the margins DON'T drop. Sure, the plastic case will be a bit less expensive, but none of the likely changes would save enough in manufacturing cost to make up for a several hundred dollar drop in selling price. That means margins would drop rather than increase - but you do make it up in volume in this case.
I agree with you mostly. However, I do not see the iPhone ever going below 400-450 new. Maybe that price will drop off slightly with newer models. So if they sell the iPhone 5C for the same price as the 4S would be after the iPhone 5S. I believe they will get same or better margins from the iPhone 5C vs iPhone 4S and it will have better internal specs.
Who knows, we can only guess.
Quote:
Originally Posted by Gazoobee
Why worry about margins when you are flooding the world with volume?
Because Apple isn't a "sell it at a loss and make it up on the volume" kind of company. They're a premium brand and sell their products at a premium price reflective of the market's valuation. Compare Apple to BMW and Mercedes, who have product offerings at the low end of their own ranges, but not low end products as such. Apple didn't virtually wipe out the MP3 music player competition by flooding the market with low margin iPods, but by offering a better designed, easier to use player system (including the iTunes Music Store) at an affordable premium. And although it has one of the world's more efficient manufacturing systems, Apple doesn't sell $500 laptops. Look where doing that got Dell...
That's why iPhone margins could improve. A purpose designed low cost iPhone is a more cost effective solution than slashing the price of yesterday's high end product. It's easy to understand why Apple did that, as a matter of short term expediency, but the company certainly has the volume to branch the product line.
This argument reminds me of the arguments last year concerning Apple pricing the iPad Mini at $329 instead of $299.
It probably made sense to them to get an extra $30 per device rather than price it below $300.
It could be the same with the iPhone 5C. They may be able to price it lower than $350 but that doesn't mean that would be advantageous for them.
Quote:
Originally Posted by blackbook
This argument reminds me of the arguments last year concerning Apple pricing the iPad Mini at $329 instead of $299.
It probably made sense to them to get an extra $30 per device rather than price it below $300.
It could be the same with the iPhone 5C. They may be able to price it lower than $350 but that doesn't mean that would be advantageous for them.
But the iPad Mini margin is still lower as a %. Just like the 5C margin will be lower. That is unavoidable. Simple arithmetic.
Wow! Raise margins and international sales! This Brian Marshall must be a genius! And here we all thought the plastic iPhone was designed to lower margins and international sales. What wisdom!
Quote:
Originally Posted by NeilM
Compare Apple to BMW and Mercedes, who have product offerings at the low end of their own ranges, but not low end products as such.
Exactly! I see Apple going after the mid-range market and not the very low end, with their iPhone 5C, much the same way they did with the iPad Mini.
Anybody who wants a sub $200 phone can go with Android and then spend accordingly in that eco-system, which is very close to nothing.
The 32GB iPod Touch is $299. Replacing the aluminum case with a less expensive plastic one, and reducing the storage to 8GB or 16GB, would allow the addition of 4G and GPS, and maintain the $299 selling price with the same margin.
"iPhone Nano."
White and black polycarb MacBooks.
iPod Nano.
All lower-cost siblings of their headliner products.
I'm not sure what all the fuss is about. Apple is simply applying their "iPod family" strategy to the iPhone.
Originally Posted by NeilM
It's more effective to design a lower cost iPhone than to sell a previous full-featured product at a reduced price point as Apple has been doing with the 4 and 4S models. Their glass and stainless steel construction isn't cheap (or easy) and doesn't get much better with volume, since they were high volume products to start with. ...
Agree. The labor costs of manufacturing the 4 and 4S are still exactly the same because their design hasn't changed. I think the extremely tight tolerances on the iPhone 5 (especially the rear glass inlays) make it hard to assemble quickly. And time is money on the assembly line.
A slightly larger "5C" plastic enclosure would increase the tolerances and reduce the number of assembly steps. Eliminating the need to scan each aluminum enclosure to fit just the right inlays out of 725 different variants would save quite a lot of time and complexity. And I think Apple might put last year's iPhone 5 components into the "5C" enclosure, so the total engineering effort and component cost will be lower than for the yearly high-end model.
Looking forward, Apple could put most of the components from the previous year's high-end model into the "C" model. Except the (rumored) fingerprint sensor, which would be for the high-end model only. (And yes, Siri should probably be enabled on all iPhone models.)
Quote:
Originally Posted by Gazoobee
Conventional wisdom to this point has been that they can't even offer the phone below $450, now everyone seems to be switching to $350
$360 WHOLESALE, not retail.
We don't even know that he's right about THAT figure.