Apple looks to build market share with the cheaper iPhone 5C
Early in September, Tim Cook will step on to a blacked-out stage and begin Apple's annual tradition: unveiling its latest iPhone.
It has become a familiar routine. Take one glowing rectangle with rounded corners; add a faster chip and some new features; leave hype to simmer; sell to adoring customers.
The iPhone created the smartphone market and became Apple's flagship product, making $18 billion in revenue in the past quarter.
Yet despite tens of millions of iPhones sold, Apple continues to lose market share to Google's Android. Many have questioned whether that matters, when Apple retains the bulk of the industry's profits.
Apple seems to have decided that it does. This year, it is thinking differently.
Cook will unveil two new phones: the iPhone 5S, an upgraded iPhone 5, and another, which the rumor mill has dubbed the iPhone 5C.
"It's the biggest iPhone product-line shake-up in a long time," says Wayne Lam, analyst at IHS.
What might the C stand for? There is no single answer, but the device will be cheaper, more colourful and designed for success in the Chinese market. It also raises questions about whether Apple can keep its cool as it moves the iPhone downmarket and gives us an insight into how Cook is running Apple. Here then are the five C's of what, for want of a better name, we'll call the iPhone 5C:
The iPhone has always been a premium product, costing about $200 with a long-term contract or $650 without. Despite the rise of Samsung and other, cheaper competitors, its average selling price has remained steady for the past six years, a remarkable achievement.
But as Apple's revenue growth slows and smartphone penetration in developed markets rises above 50 percent, Cook has recognized that a cheaper device is necessary to unlock the next wave of customers around the world. That is especially important in emerging markets where monthly subscriptions that allow operators to subsidize the upfront cost of the device are less common.
(Read more: Is this Apple's rumored gold iPhone?)
Just as Apple broadened the iPod range to include the mini, nano and shuffle, the latest iPhones will soon be available at two price points. Apple has been surprised by the continuing popularity of the iPhones 4 and 4S, which are cheaper or free with a contract. The 5C is expected to replace them, standardizing on the latest generation's 4-inch screen and smaller "lightning" cable socket. Sacrifices may be made to the quality of the casing—plastic instead of glass and aluminium—but few expect it to lack key software and services, such as Siri voice control.
Apple watchers are divided on how much cheaper a "cheap" iPhone will be. Benedict Evans of Enders Analysis says a $200 to $300 price is required to be truly mass market, selling more than 10 million units and fending off the competitive threat from Android.
But others expect a much higher price, with UBS and Morgan Stanley suggesting $399 and Citi as much as $450.
That prospect has cheered Wall Street. Having feared a blow to profitability, analysts now believe the 5C's gross margin could be at least 38 percent, above Apple's corporate average 36.9 percent in the latest quarter.
Evans says that this higher price would enable more up-to-date technology in the 5C but would be an "evolutionary rather than revolutionary shift".
From its striped logo of the 1970s to the candy-store iMacs of the late 1990s, Apple has always been a colorful brand. Yet thus far, the iPhone has been a monochrome affair, first in black, with white added in 2011. Leaks from the supply chain suggest that the iPhone 5C will be its technicolor moment, with red, yellow or blue plastic casings. For a hint of the likely spectrum, look to last year's update of the iPod Touch.
Launching at the same time as the new devices will be the latest version of the iPhone's software, iOS 7, a radical redesign led by Sir Jonathan Ive. Alongside new animations and gestures, the most striking thing about iOS 7 is its color scheme of bright icons and clean white backgrounds.
(Read more: Apple's new iPhone may have fingerprint sensor)
"Color has always been very important" in the mobile market, says Carolina Milanesi of Gartner. "At the end of the day, the phone is an accessory."
Milanesi says consumers are tiring of dull colors but notes that when mobile phones last took on rainbow hues—such as the pink Motorola Razr—in the mid-2000s, it was a time of relatively little technical innovation. "You might think, are we going back to color because there is nothing else?" she says.
Despite selling a cheaper iPhone, analysts say Apple will be reluctant to compromise its cool image. The iPhone 5C is expected to compete with mid-range devices such as Samsung's Galaxy S4 Mini or HTC's One Mini, not truly cheap handsets.
"It's not in Apple's interest to race to the bottom," says Lam at IHS. "Lowering the price but keeping the premium feel of the brand is essential to its marketing strategy globally."
Cook has often said that Apple will not chase market share for its own sake, instead preferring to keep exciting its customers, and ensuring it can charge a decent profit for doing so.
But app developers do pay attention to market share when they are deciding where to sell their products. Most users of Android's 800 million active devices download fewer apps than the 250 million iPhone customers, says Enders' Evans, but sheer scale is making Google's devices a higher priority.
"This is a major strategic threat for Apple," Evans says. "A key selling point for the iPhone is that the best apps are on iPhone and are on iPhone first."
That presents a tough balance for Apple: charge enough to remain aspirational, while making the iPhone 5C affordable enough to increase market share.
Striking that balance is the biggest test yet of Cook's leadership. "It speaks to how Apple is adapting to the market," says Lam. "They were the tastemaker for a long time. Now the market has matured, Apple has to adapt."
Whether the launch of the 5C is pragmatism or compromise remains to be seen, but Cook is adamant about a focus on quality. "The North Star for us is always great products, not 'how do we hit a price point?' That has served us well. I think it will continue to serve us well," he said at a Goldman Sachs conference in San Francisco this year.
Already under pressure from activist shareholders and facing questions about the pace of innovation, some investors want Cook to turn Apple into a boring but predictable cash machine. With an iWatch in the works and expectations of a television set rising, Apple seems unlikely to play it safe.
Cook's strategy in launching the iPhone 5C might be as much about preparing the ground for those new products—which may only work via another Apple device—as defending its current position in the smartphone sector. "Through the years, we've found a very clear correlation between people getting in and being introduced to Apple and buying their first Apple product, and some percentage of them buying other Apple products," Cook said.
Pricing will be key in China. The world's largest smartphone market is also one of the most competitive, as it is flooded with cheap Android devices that sell for as little as Rmb1,000 ($160).
Cook has said China may become Apple's largest market, but in the last quarter sales fell 14 percent compared with the year before. Despite iPhone sales rising 40 percent in the year to date, it has lost share to local competition from Xiaomi, Coolpad andLenovo.
The iPhone 5C could reverse Apple's fortunes by bringing its latest gadgetry within reach of more Chinese consumers who, despite Apple-bashing in the state media, still adore the brand. A survey by Morgan Stanley and AlphaWise found that Chinese consumers would be prepared to pay as much as RMB 4,000 ($486) for an iPhone 5C, before they have even seen the device.
Growth, however, has been held back by the lack of a partnership with China Mobile, with its 740 million subscribers. Cook visited the country's (and world's) largest mobile operator in Beijing last month, and China Mobile's chairman Xi Guohua has said since that "both sides are keen" to partner, despite some "commercial and technology issues."
UBS estimates that Apple could sell 17 million iPhones through China Mobile next year, with more than two-thirds expected to be the 5C. That would be 10 percent of UBS's projected total iPhone sales.
—By the Financial Times' Tim Bradshaw.