In an interview on August, 4, 1995, Steve Jobs, who had been forced out of Apple Inc. almost a decade earlier, lashed out at the company he founded.
“What ruined Apple was not growth… they got very greedy. Instead of following the original vision…they went for profits. What this cost them was their future. What they should have been doing is making rational profits and going for market share,” he said acidly, in a monologue that recently found its way into the public domain. It is perhaps to this quote that analysts and investors alike were looking to this week, and left deeply disappointed, when the Cupertino tech giant took the wraps off its latest gambit: the iPhone 5C .
The running joke among Apple naysayers, and even around the water coolers on Wall Street, is that the new device is not 5C(cheap), but rather 5C(olour) — a snarky quip that is indicative of the grave misreading of Apple’s long-term strategy.
Indo-China Conundrum
The insatiable stock market, in a move that is now becoming characteristically predictable of it, sent the company’s shares down by over 5 per cent on fears that the latest models may not help it increase its share in emerging markets.
After all, the gossip mill had weaved stories of Apple releasing a cheaper iPhone aimed at China and India, and with the iPhone 5C coming with a $550 price tag, the rumours appear to have fallen flat. Cloaked in the colours that the iPhone 5C has brought with it, however, is the beginning of Apple’s emerging market strategy. This tricky endgame that the company has embarked upon involves the birth of a two-product line, an implicit admission of market segmentation and a marketing strategy that links the economic cycle of its products to early and late adopters of technology.
The obstacles that confronted Tim Cook and Co.’s China and India strategy were essentially two-fold: the first was the difficulty in creating a cheaper product without it being dismissed as old wine in a new bottle. After all, the company is no Tata Motors, and has neither the engineering inclination nor the risk appetite to churn out a product like the Nano.
The second was that even if such a product could be conceived and rolled out, it was essential that it not be seen as a phone meant for poor Asians; nothing would rankle the pride of the Chinese and Indian consumer more. The eventual solution to this was to introduce the iPhone 5C, price it high, and segment the overall product line in a classic case of Apple skating to where the puck will be in perhaps two years.
To understand why the iPhone 5C has nothing to do with price and everything to do with product positioning, take a look at Apple’s iPhone line-up. Since the first iPhone was launched, the line-up has essentially been ‘good/better/best’ or in mathematical parlance: i-2, i-1 and i. If the iPhone 5C had not been introduced, the line-up would have been iPhone 4S, iPhone 5 and iPhone 5S; with the 4S being i-2, the 5 being i-1 and the 5S being i. This is keeping in line with the company’s tradition of betting on the sale of older and somewhat cheaper models to bolster its growth in China and India.
With the introduction of the iPhone 5C, the i-1 variant has now been ‘refreshed’ with a new product that clearly segments the line-up. The iPhone 5C is not an older version of the latest iPhone, it is the first of a separate line of iPhones! This move also has the added advantage of ditching the iPhone 5, which, out of all the previous iterations, arguably had the smallest life cycle.
Why was it essential that the 5C come with a high price tag and not be the budget phone that it was prophesied to be? The answer lies in the phone’s target audience, which are essentially the late adopters in developed markets and the early adopters in emerging markets .
Grab the stragglers
The 5C is remarkably suited to attracting these target audiences — it has a ‘new, colourful’ look which will seduce the not-so-technologically-savvy older and younger generations that make up the late smartphone adopters in Western countries.
But, more importantly, Apple also needs the early adopters of India and China to take to the iPhone 5C in order to avoid the ‘poor Asian man’ phone syndrome; after the iPhone 5C is accepted as a legitimate Apple device, its price can then be dropped accordingly.
And make no mistake; this is what will happen over the course of the next two years. Next year’s line-up will have the iPhone 5C flow down to the i-2 variant slot with the overall line-up looking something like this: 5C/5S/6. It is at this point that Apple will make its price play, and when the company will finally pass on the manufacturing costs it has saved in the production of the plastic 5C, with the price shooting down to perhaps roughly $400. This is indefinitely more effective than selling older models at cheaper prices.
In retrospect, it is glaringly apparent. After all, Apple reportedly has landed deals with a few highly-sought after telecom operators in the East, which will boost its sales in China. Why should the company take a hit on its margins right away for an iPhone 5C that hasn’t been accepted by the early adopters yet?
The iPhone 5C is also set to become a bigger contributor in terms of volume than the iPhone 5S — if the iPhone 5C is ‘good enough’ for most people, the iPhone 5S is now being marketed as the most ‘forward looking phone’ and thus only for the cream of the crop — providing Apple with a buffer when the time finally comes to drop margins.
Investors have little ground to worry, and should rather rejoice in anticipation of the massive profits that Apple is set to reap, for the pricing of the 5C is a symbolic acceptance by Tim Cook to the economics of the company’s supply chain.
The company’s problem for the last five years has been to pump out enough iPhones for customers to get their hands on during the first few months after release. On the other hand, once the company ramps up production, it has old parts from the previous generation left over in the ppeline. The iPhone 5C is essentially the iPhone 5 in a plastic case — indicating that Apple has found a use for i-2 generation components without having to sell them as old wine. Expect this tactic to deliver glorious profits in the years to come. This year’s releases are the first products of the post-Jobs Apple. The biggest question confronting the company was whether it could survive without the man whose shadow now looms larger than Apple itself. The company’s new strategy, however, has the unmistakable touch of marketing and supply chain mastermind Tim Cook.
The events of the last year combined with the groundwork that is presently being laid show that with Cook at the helm, Apple after Jobs is just as strong. And in some ways, even stronger.
anuj.s@thehindu.co.in
