On Tuesday, many people woke up to the news that Apple (NASDAQ:AAPL) is planning to come up with a new iPhone, which will be cheaper than the regular iPhone model. Can Apple actually kill Nokia (NYSE:NOK) with this phone?
Apple's New Phone
Apple's new phone is said to be named iPhone 5C. Here, the letter C stands for "color" but many people will simply call it "cheap" because it is a cheaper version of the regular iPhone. The phone will have a plastic body and it will come in multiple colors. The phone will enjoy the benefits of Apple's unmatched ecosystem; however, its hardware specifications will be lower than the original iPhone.
Smartphones are getting commoditized
As I mentioned before, the smartphone market is getting highly commoditized where there are few differences between different models and the consumers mostly base their buying decisions on price. Samsung was the first company to notice this trend; in fact, Samsung (OTC:SSNLF) might have actually started the trend. Apple kept denying the existence of this trend for a long time, but it seems to be getting used to the idea. Nokia also acknowledged the trend and took some steps to put itself in a good position. The company released a bunch of different Lumia phones that ranged widely in price, quality and specifications in order to attract people from different tastes and budgets. Actually, selling cheaper phones is not new for Apple either. Currently, Apple sells iPhone 4 and iPhone 4S models along with its flagship phone iPhone 5.
Currently, iPhone 5's sales price without a contract is $649 for the 16 GB model, $749 for the 32 GB model and $849 for the 64 GB model. In comparison, iPhone 4S is priced at $549, $649 and $749 for the three models. Furthermore, iPhone 4 is priced at $450 (for the 8 GB model), $550 (for the $16 GB model) and $650 (for the $32 GB model). Basically, both of the $32 GB models, iPhone 4 and iPhone 4S are priced the same, which is interesting to note. In comparison, Nokia's smartphones range from $125 to $650 with multiple entry points. By the way, when I went to AT&T's store to check the prices of these models, I noticed that the website was advertising Nokia's Lumia 1020 in the front page. Usually, one would have to dig through the website to see Lumia models, but it's good that AT&T came to its senses to give more visibility to Nokia models. Check AT&T's page for yourselves.
Back to the question: Can iPhone 5C kill Nokia?
If one of the strongest selling points of Nokia is its cheaper price points (same goes for Samsung), can Apple deeply hurt Nokia (and Samsung) by presenting a cheaper phone? After all, some people argue that only those that can't afford an iPhone end up buying phones from the competition. If iPhone becomes more affordable, won't it cut into sales of Nokia and Samsung? When it comes to high-end phones where most margins are, Apple is pretty dominant. While Samsung comes second, Nokia's high-end phones never sold enough copies to claim a significant market share. In a way, this strengthens the thesis that Nokia is more likely to attract those who can't afford to buy Apple's phones. Then what happens when some of them can actually afford Apple's phones because Apple's phones became cheaper?
Well it would depend on how cheaper Apple's phones get. If Apple can come up with smartphones that have price points below $200, it can hurt Nokia and Samsung badly. If the company's "cheaper" models price tags above $300, then they would be still expensive compared to competition's lower-end phones.
Now, a lot of people will argue that I'm making it sound like Nokia and Samsung's only strength stems from their cheaper phones. Of course, this is not true. For example, Nokia's flagship phones Lumia 920, Lumia 928 and Lumia 925 are pretty comparable to Apple's iPhone 5. Same goes with Samsung's Galaxy IV. The problem with Nokia is the consumer perception though. Even though Nokia's high-end phones are as good as Apple's high-end phones, many consumers fail to realize that. Furthermore, Apple's ecosystem is unmatched and iPhones come with the best quality applications ever. Even when iPhone and Lumia might have the very same application, iPhone's application proves to be better. For example, iPhone's version of PayPal application allows users to take a photo of their paycheck and deposit it to their account; whereas the Windows Phone version of the same application doesn't offer that service.
A cheaper iPhone would definitely hurt sales of Lumia but the damage would be limited. If Apple could lure all Nokia users by simply offering a cheaper model, the second-hand phone market would have accomplished that already. I'm sure there are a lot of people who would rather buy a second-hand iPhone than a brand new Lumia, but Lumia's growth continues on at double-digit rates.
I believe that a cheaper iPhone would hurt Samsung way more than it would hurt Nokia. First, Nokia doesn't have much presence in the US anyway, but Samsung has a lot to lose in the country. Second, outside of the US, Nokia has a very strong brand name as the manufacturer of high-quality phones, whereas Samsung became a phone brand only in the last few years. Samsung sells more phones than Apple but Apple sells more high-end phones than Samsung. I can see a bunch of people switching from Samsung to Apple after Apple releases its cheaper iPhones.
At the end of the day, I'm just speculating. We will have to wait and see how it all plays out. I'm cautiously optimistic about the future of Nokia. Did you notice how we have two camps at Seeking Alpha where one camp says: "Nokia is dying as we speak, the company's days are numbered!" while the other camp says: "Nokia will be the top smartphone company in the world!" I'm positive about Nokia's future but I am also very cautious about what the company can accomplish. I think Stephen Elop feels the same way as me, because he's been very conservative with everything (for example, he intended to limit Nokia's risk by releasing a small number of Lumia 920s in the initial launch; also he didn't jump in the board of building tablets which I praised him for) since the beginning even though he never lost his optimism.
I expect Nokia to trade within a range between $3.85 and $4.15 until October or so. I'm fine with this because I create myself "dividends" by selling monthly covered calls. If there is a jump outside of the range, it is likely to happen during the holiday season when most phone sales occur.
Disclosure: I am long AAPL, NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.