Does Apple Really Need The Aluminum Cover For Its iPhones?

Aug.23.13 | About: Apple Inc. (AAPL)

The media is bombarded with news/rumors that Apple's (NASDAQ:AAPL) cheaper iPhone, dubbed the iPhone 5C, will not have a metallic cover. This seems to suggest that the aluminum cover on the sides and back of iPhones contributes to a greater deal on the device's manufacturing cost. Is this why the iPhone is always priced at a premium compared to the other smartphones? Even considering the iPhone's unique design as a major cost driver would not be enough to justify the pricing of iPhone 5.

iPhone 5 features do not justify pricing

For instance, consider a sim-free iPhone 5, which goes for about $529 for the 16GB version compared to a Galaxy S3 sim-free smartphone, which costs between $390-$400. This equates to a premium of more than 30% on the iPhone 5.

The impact of that premium becomes more real when you try to compare the features. The iPhone 5 lags behind in terms of features when compared to some competitors like Samsung's (OTC:SSNLF) Galaxy S3 and S4, or HTC One. The iPhone 5 has 4" screen compared to Galaxy S3's and S4's 4.8", and 5" screens respectively. On the other hand, HTC One has a 4.7" screen. Additionally, the iPhone 5 has a RAM of 1GB compared to Galaxy S3's 2GB and HTC One's 2GB as well.

Those are just but a few comparisons since I am not here to give a review. In fact, the only notable upside for the iPhone in comparison to the mentioned rivals is weight, as it is the lightest of them all. Then of course the aluminum cover, which personally I believe is no longer necessary.

Why do I feel that the aluminum cover is no longer necessary?

Even as more companies begin to use metallic covers on their phones, I believe that, that is no longer necessary and it does not offer any competitive advantage.

Why do I say this? Well first, people are now buying cover cases for the smartphones they have. Notably, the market is able to offer different types of cases, and most importantly colors. The argument here is simple, people have different tastes for colors, some people look for flowered covers, something Apple cannot customize for every iPhone. So why struggle with the aluminum cover if a majority of the users will only cover it up with their own covers?

Second, companies are refreshing their smartphone products almost twice every year. Apple is doing it once every year, but could soon join the rest soon. My point? Durability is implicitly no longer a priority. And if you asked me what about scratching? Then I believe that the complaints noted after the launch of the iPhone 5 last year, mean that even the aluminum cover does not protect the device from such wear and tear.

Would people abandon the device if Apple was to do away with the aluminum cover?

I cannot personally imagine of a plastic cover iPhone; how it would look, or how much it would weigh, but I believe it is coming in September. This will lay a good platform for the company to judge what kind of response it might get if it were to limit the number of aluminum cover iPhones it produces.

Samsung has achieved success selling plastic cover smartphones, and its devices are not just common with the middle class. Even the very rich own Samsung smartphones. Therefore, I believe plastic cover iPhones would sell incredibly across the board.

Additionally, one of Apple's biggest advantages is the loyalty of its customers. I do not think they would switch to another brand if it stopped producing aluminum cover smartphones. In fact, one of the major reasons Apple's market share in the smartphones industry has dropped is because new device owners have opted to buy a Samsung smartphone, or some other Android platform smartphone, like HTC One. Very few if any, have switched from Apple to Samsung. This is justified by the company's dominance of the U.S market, where it accounts for 40% market share compared to Samsung's Android devices at 24%.

What would cheaper plastic cover iPhones do to Apple's revenues?

Apple's iPhones have struggled to penetrate the emerging markets mainly due to the premium pricing of the devices. The developed markets are able to sell the devices to consumers at subsidized prices with contract subscription plans.

However, this option is not available in most countries in the emerging markets meaning that, the buyer has to meet the whole price of the device.

This is where manufacturers such as Samsung, HTC and Nokia beat Apple. A good example is the more than 30% premium noted above, which can translate to a lot of savings for many people in the emerging markets.

Therefore, cheaper iPhones are likely to result in increased sales for the iPhone maker, as more people will be able to buy without putting a strain on their budgets. This would increase the company's market share in the smartphones industry. However, it is also good to note that Apple's gross margins on iPhones lead the charts in the smartphones market, and are likely to be hurt by selling cheaper smartphones.

Nonetheless, I believe increased sales could easily cover this risk, for improved earnings, and growth potential. Right now, iPhone sales units growth seems to be limited to a few countries, like the U.S, China and some parts of Europe while it continues to lose market share overall.

The bottom line

Apple may keep on launching products year-after-year. However, if it does not cater for the emerging markets, it might find it difficult to mount any challenge on Android-based smartphones. It recently reported a drop in market share in China for its iPads, due to encroachment of cheaper iPads in the country.

The company's brand will always remain strong and die-hard users will stick to it, no matter what. However, it is the new population that increases market share, thereby driving growth. For now, the company is still a short-term buy. But in the long-term, it will depend on its strategy for the emerging markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.