As I write this, campaigns are popping out everywhere offering Apple's (AAPL) iPhone 5 at significant and widespread discounts from its regular $199 price on contract. Quickly, one can find:
- AT&T offering the iPhone 5 at $99 (or $75 refurbished) on contract;
- Wal-Mart offering the iPhone 5 for $129 on contract;
- Best Buy offering the iPhone 5 for $149 on contract but then making it free if one exchanges a working iPhone 4 or 4S.
- Finally, Virgin Mobile is offering the unsubsidized iPhone 5 for $549, $100 off the customary retail price.
These are significant reductions, which up until a while ago were not all that common with Apple products, though Wal-Mart has recently been pushing for the practice, reputedly in concert with Apple itself.
Enter the iPhone 5S
The significant discounting that's taking place is supposedly geared towards clearing some inventory as the iPhone 5S readies for launch. There are already several leaks online (I, II) showing a few characteristics of the iPhone 5S. I'll get to that later.
The small problem here is that the iPhone 5S is apparently slated to start retailing around September. Now, having these discounts all coming up in June means that there's still 3 months of selling between now and releasing the iPhone 5S.
Such a long interval thus seems to scream that these moves are a way to temporarily increase demand, and not as much a move to clear inventory for the new iPhone 5S. That is, so much discounting has negative implications for the present iPhone demand.
On the iPhone 5S
Although it's not unexpected, the iPhone 5S has problems of its own. The main problem is that going by the leaks, it's going to be nearly the same as the iPhone 5, at least in design. This is not surprising, as Apple traditionally does exactly like that, going for an overhaul every 2 years, and just upgrading internals in the intervening year.
The 5S is one such instance where only the internals will change. Right now from the leaks we know that it will have a double-LED flash and a 8.6% larger battery. It's also likely that it will have a better camera to go with the improved flash.
So why is it a problem? Apple's stock has been sliding for nearly one year, and some of that slide is due to it not providing anything new and exciting to the market. It's in that context that the iPhone 5S is a problem - because it, too, doesn't seem to be particularly exciting. It will be an improvement for sure, but for now it seems just a gradual improvement, not the kind which would lead to massive upgrades and market share gains.
Timing of discounts
With the 5S introduction still 3 months away, it makes little sense to believe that Apple is already discounting the product to clear inventory - for the simple fact that Apple does not keep a 3 month inventory of iPhones.
Typical inventory levels run at 4-6 weeks, and even now according to Jefferies analyst Peter Misek they're running at 10 weeks, still well below 3 months. This rules out a liquidation of inventory to make way for the new model (while at the same time telling us that there is, indeed, excess inventory which would happen due to weak demand).
The iPhone 5 is seeing significant and widespread discounting well ahead of the expected release of the iPhone 5S. While some might put it down to clearing inventory, it would seem that the time between this discounting and the iPhone 5S release would rule that out. This means that the discounting is meant to drive near-term demand, which would speak of lack of demand right now. This is a negative for Apple.
Additionally, the leaks on the iPhone 5S show a devices that's entirely similar to the iPhone 5. This is not unexpected, but it's also slightly negative in the sense that the new model doesn't seem likely to be incredibly exciting. At this point there are no other leaks pointing to other devices which could bring the excitement back.
Apple is so inexpensive that these negative developments won't necessarily mean much, but they also mean sustained upside will continue to be hard to come by.