Reaction to Apple’s Latest iPhone Event – Part 1

On September 10th Apple announced, to no one’s surprise, 2 new iPhones along with a release date for iOS 7, the latest refresh of the iPhone’s operating system. The event followed a familiar script; a script perfected by the late Steve Jobs. Predictably a whole lot of people were underwhelmed. In fact reaction to the event was negative enough that Apple’s stock price dropped 6% in overnight trading following the event. (The stock drop is largely being attributed to analysts cutting their sales projections for Apple over disappointment about the price of the new iPhone 5c, a “budget” phone Apple added to their product lineup.) Just as predictably, when the dust settles and Apple actually starts shipping phones to stores they will no doubt sell boat load after boat load of the 2 new iPhones and people will start to focus on the next Apple announcement.

The cycle continues to repeat itself, over and over again. Last year when Apple introduced the iPhone 5 Apple was slammed for introducing such a boring design refresh of their flagship product. Despite reams of negative press Apple went on to sell more iPhone 5’s than any previous iPhone model, making the iPhone 5 the single most popular phone on the market. Not bad for such a negatively received product. The iPad Mini is another good example. When Apple announced the iPad Mini many analysts expected Apple to price the Mini at the $200 mark in order to compete with the comparatively spec’d Google Nexus 7 tablet and Amazon’s Kindle Fire HD. Reaction was extremely negative when Apple brought the Mini out at a starting price of $350, which was considered too high to lure consumers away from the Kindle Fire or Nexus 7. But Apple rightly recognized that consumers are willing to pay a premium for Apple’s products and that for many consumers the choice was never between an iPad Mini or Kindle Fire or a Nexus 7. The choice was between an iPad or an iPad Mini. And sales proved Apple correct, with the iPad Mini going on to be the most successful tablet Apple ever released – making it the most successful tablet ever sold by anyone.

A lot of people believe that Apple has lost their mojo since Jobs left. Android is on the rise, Microsoft continues to push to gain relevance in the mobile world and Apple’s dominance is seen to be in it’s twilight. However when you step back and look at how Apple is doing since the loss of Jobs, you’ll see a company that continues to outperform all competitors in almost every product category. And each Apple product release continues to build on the sales momentum that Apple has generated. By introducing 2 new models, the 5S and 5C Apple is clearly going to sell more iPhones this year than in any pervious year. Analysts who say the 5C is too expensive haven’t learned the lesson of the iPad Mini. Apple is indeed a premium brand and the 5C, while cheaper than the 5S, is still a premium brand phone. Luxury car makers like Mercedes have a range of cars that vary in price, but no one expects the lower priced models to actually be considered budget cars and priced accordingly, because Mercedes is not a budget brand. Neither is Apple. Just as Mercedes can broaden their market by offering more reasonably prices models, Apple has chosen to expand their market with the introduction of the more reasonably priced 5C, but people shouldn’t mistake that as an attempt by Apple to compete in the budget phone market. Apple is not a budget brand and it would be a huge mistake for them to become a budget brand. One of the reason’s Apple is so profitable is because they have better margins on their products than any of their competitors and the only way for Apple to protect those margins is to continue to position themselves as a luxury brand. (If Apple had priced the 5C at the much cheaper price analysts were looking for there’s every chance that when Apple next reported earnings they would be slammed by those same analysts¬†for letting their margins slip.)

In fact Apple has done something remarkable, and it’s allowed them to make billions of dollars. They have managed to create a mass appeal and sell huge volumes of their luxury products. Luxury brands usually have to accept smaller volume of sales in exchange for higher margins, but Apple has the best margins in the industry and still outsells all their competitors. A big reason for that is the power Apple has asserted over carriers. Apple’s top iPhone will sell for $299 on a 2 year contract, the same price as many of the top Android phones, but this price parity is offset by the carriers. It costs the phone carriers more to sell an iPhone than to sell an Android phone, but they can’t afford to drop the iPhone because time and time again the iPhone has shown an ability to lure subscribers away from carriers who don’t offer the iPhone. Sprint learned this lesson and eventually capitulated to Apple’s demands and gave Apple a pre-payment of $1 Billion dollars so they too could offer the iPhone and stop the subscriber losses they were having as a result of not offering the iPhone.)

 

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