Seeking Alpha
Long/short equity, deep value, special situations, contrarian
Profile| Send Message|
( followers)  

Reuters reported that Samsung (OTC:SSNLF) is expected to widen its lead over Apple (NASDAQ:AAPL) in global smartphone sales this year with 35 percent growth, helped by a broad product lineup. The key word here is "broad product lineup".

Samsung is able to capture such a big chunk of the market because it offers a broad array of phones at many different prices. As such it can sell phones in markets that Apple can't even imagine.

Just the other day I walked into a big electronics store here in Athens inquiring about a particular Samsung model and the salesperson told me they have no phones left! "What do you mean you have no phones left" I asked. He said they were all sold out and they are waiting for newer models. The only Samsung phones they had in stock were the high-end expensive models.

The same goes for Nokia (NYSE:NOK). Nokia has three different phones that cater to a very broad cost pallet. The Lumia 920 is for the high-end crowd, the Lumia 820 for the average user and the Lumia 620 for markets such as Africa that don't have high purchasing power. And that's one of the reasons why I am bullish on Nokia.

Apple does not have such smartphone product diversification. It only has one model and not all people can afford it (I count the iPhone4 as an older model, not a different model).

As such I think Apple will be forced to enter the lower priced smartphone market with at least two additional product offerings. On the one hand it needs to capture market share in the lower priced segment of the market and on the other hand, it needs to stop Samsung from almost becoming a monopoly.

Remember Samsung is poised to sell 290 million phones this year compared to 180 million smartphone devices for Apple. And while Apple will continue to sell more phones in the future, in terms of sales percentage increase and world market share, Samsung is speeding fast ahead.

So for arguments sake, let's suppose Apple introduces 2 lower-priced iPhone handsets in the future. Lets call the first handset the iPhone5 mini and the second one the iPhone5S (S for small). The iPhone5 that we know today remains, irrespective if it is upgraded with a newer model in the future. Also please note that all phones are class 5 generation.

The iPhone5 mini will be in the $200 - $250 range and the iPhone5S in the $400 - $500 range. The iPhone5 (premium edition) remains as is today.

The question is, will an Apple iPhone mini (the equivalent to the Lumia 620) and a iPhoneS (the equivalent to the Lumia 820) gain market share in markets that today are almost exclusive to Nokia and Samsung? The answer is most defiantly. Who wouldn't pay a little extra for a low-end Apple iPhone over a similar Google (NASDAQ:GOOG) Android device or a similar Nokia phone if they had a choice?

See, the android platform has gained in popularity because phone makers have many different priced models. Most people can't afford an iPhone. If they could buy an iPhone they would. The iPhone is like a Maserati. You could buy a car that has similar performance to a Maserati at a much lower price, but if you could buy a Maserati -- if you had the money -- you would.

The same applies to the iPhone. If people could afford to buy one -- even a lower priced model -- they would if one existed, even it was a bit more expensive over a similar equipped Android phone.

For example, I think people would pay $250 for an iPhone mini as opposed to similar equipped $180 Android phone. But since nothing from Apple exists in that price range, people will go for the $180 Android device.

I have 3 kids and two are teenagers. I have not bought them a iPhone because they lose and break their phones from time to time. But if a $200 iPhone existed, I wouldn't mind buying them one so they could bee cool in school.

As such, one ace that Apple has up its sleeves is this:

While everyone else (mostly Samsung and Nokia) already have a broad line up of phones and have already penetrated these lower priced markets and do not have much room to grow (they mostly try to compete with Apple in the premium space), Apple has zero market share in the lower priced smartphone space and has plenty of room to grow.

In fact I think Apple can probably grow total handset sales by 50% in a 2-3 year period if it pursues such a strategy.

Officially we don't have any evidence that Apple in indeed thinking about such a strategy, but I am speculating they are and that they are designing lower-end models at this moment.

For the same reason Apple was forced to offer a 7 inch tablet to compete in the 7 inch Android tablet space, for the same reasons it will have to offer a lower priced iPhone5 alternative.

Bottom line

If I were Apple, I would follow Nokia's strategy and offer 3 different phones for three different budgets.

Yes there might be some cannibalization of its high-end iPhone5 model, but the benefit of higher sales and greater market share out-weight such concerns.

If Apple does indeed pursue such a strategy, I think it will be a tremendous boost to the stock and Apple has a good chance of becoming the number one phone maker in the world in 1-2 years.

Some speculate that such a move will happen in the beginning of 2014. If this turns out to be the case, then by mid 2013 we will probably see the market start to discount such a strategy.

So while today the market does not have much to discount about Apple (just about everything is known), if this scenario plays out, then there will plenty of action in the stock by the middle of this year. Stay tuned for timing is everything.

Source: Apple Needs Product Diversification