Apple’s decision to focus more on upmarket iPhones has looked inevitable for some time and should not be a surprise to many in the industry. There has been a creaking sound between operating systems across the industry as Apple has maintained its top level prices, and now with its latest XS models, gone ‘upwardly mobile’ higher above the thousand dollar threshold, all the while as what you get for your money with Android has increased.
In the last couple of years Apple has not only kept some older models in production but has sought to increase its reach into selected emerging markets through encouraging the sale of refurbishment of models in its CPO – certified pre-owned — scheme. This made sense to begin with, for one simple reason in the evolution of the modern smartphone, screen size. The latest models at that moment had bigger screens, giving an obvious logic why a CPO small screen phone should cost a lot less than the latest model. But in the more recent iterations of the bigger 4.7 inch display, it has become less obvious why a consumer would want to pay the extra for the latest iPhone version when the first big screen phones, the 6 and 6S, were already a big jump forward over the smaller formats, and Apple has been faced with a clear potential cannibalization of sales of new models by offering refurbished older ones. Now against the latest Android models the entry level smaller screen SE looks old and inadequate, and Apple is not in the business of selling things that look old and inadequate.
According to IDC’s Worldwide Quarterly Mobile Phone Tracker, the average price paid for an Android phone in Western Europe and the US is not much less than half that of a median iPhone XR, now the company’s most popular model, but the multiple is more than five times in India and more than three times in China.
The Chinese figure still amounted to nearly $32 billion at retail prices before sales tax, a figure which made it Apple’s second biggest market for the iPhone and worth more than Apple’s total sales across Western Europe.
While it may also not be so obvious in the predominantly middle class environment of developed markets, and with their prevalence of postpaid packages, but the choice of Apple in emerging markets is less about taste and more about prestige. Though the amount of bling inherent in the smartphone has gone down a lot overall, it still is important in poorer countries. And by definition to have status a product can’t be in too many hands.
Services are a growing part of Apple’s revenues, if not really a major motor of growth. A retrenchment to the top end of the market will crimp the potential reach of the iOS ecosystem, and leave it heavily orientated towards richer countries. But then again, the middle class is limited in much of the poorer parts of the world, many of whose countries have a small but very wealthy elite and then a long gap to the masses below. Even with smaller sales in these countries, Apple will still maintain a link to much of the wealthiest strata of society around the world.
Apple’s decision not to lean further to bring its products down across that yawning gap looks very logical, perhaps even a bit slow to take place. There are no official figures on what proportion of the profitability of the smartphone industry accrues to Apple, but most estimates are astounding and stand at above 90% of total profitability (according to the IDC Tracker, the iPhone in 2017 accounted for 36% ($165 billion) of the retail value revenue of smartphone globally on less than 15% of the unit sales). No wonder the iPhone is among the most successful consumer products in history.
Yet the financial community punished Apple shares on the news that it would no longer publish totals for the iPhone, by far the company’s most important product. After rising fast in the early part of the year, the Apple share price has fallen by a quarter since Apple announced it would no longer give out volume figures on iPhone sales.
But in concentrating on volume the financial community was focusing on the wrong metric, perhaps because the developed country based financial community did not take in to what extent Apple could not maintain unit growth in other parts of the world without compromising the premium nature of its products.
The retreat from the lower part of the market makes Apple even more dependent on its existing customer base, and on its willingness to buy every new iteration of the Apple product line. As the smartphone market matures, and innovation slows, that is becoming more and more of a challenge, and one on which Apple will have to more and more concentrate.
If you would like Simon Baker to help with your understanding of the dynamics of phone markets in emerging countries against those in the developed world, head over to https://uk.idc.com/ and drop your details in the form on the top right.