The True Objective Of The iPhone 5C

Sep.10.13 | About: Apple Inc. (AAPL)

When I wrote my article "Apple's Main Catalyst And Main Risk", the thinking regarding the upcoming iPhone 5C was that it was to be a cheaper iPhone. At the time it was already well known that it would replace the outgoing iPhone 5 in the iPhone ranks, but there was no information on price (or cost, for that matter). Still, the common sense was that it was going to be a significantly cheaper phone whose main target would be emerging markets or a lower market segment in developed markets, where it was supposed to be fighting the onslaught of bargain Androids.

Given this common sense, the main worry regarding the iPhone 5C was that it might cannibalize the more expensive iPhone 5S, leading to lower overall margins for Apple (NASDAQ:AAPL). This was a legitimate worry - over the last year that kind of cannibalization was already present with the iPhone 4S and iPhone 4 versus the iPhone 5.

That was then and this is now

Today, Apple finally announced the specifics regarding its new products. It was all pretty much as expected, with the iPhone 5C slotting between the new iPhone 5S and the iPhone 4S. What was new, was that these specifics included the price. And therein lies the great surprise.

The iPhone 5C is being proposed at $99/$199 (16Gb/32Gb) on contract, but most importantly, it will carry a price of $549/$649 (16Gb/32Gb) off contract. And what this means, is simply that the 5C is not a "cheaper iPhone". It will actually cost the same as what one would expect the iPhone 5 to cost with the introduction of the iPhone 5S. But while the iPhone 5C shares most of the iPhone 5's specs, it's decidedly a much more downmarket device! And it's also certainly much cheaper to make than an iPhone 5.

This has considerable consequences

This means that the notion that we could see substantial cannibalization from the iPhone 5C is basically dead. Instead, it will actually avoid cannibalization of the iPhone 5S, after all it's a much more downmarket device than an iPhone 5 would otherwise be. And with the retirement of the iPhone 5, it becomes impossible to have a similar (in appearance) device to the iPhone 5S at a discounted price.

On top of avoiding this cannibalization, the iPhone 5C should be cheaper to make than the iPhone 5. This means that this year's rotation into the older models will actually increase margins for Apple (though some might be negated by the iPhone 5S id sensor, camera and CPU which look to be more expensive). But either way, this move towards the 5C will produce a situation that's higher margin than simply continuing with the iPhone 5. And as we've seen, it will also produce a situation where cannibalization should be lower than during 2012/2013.

This is not so insignificant. According to AppleInsider, as much as 50% of Apple's sales were iPhone 4s and iPhone 4Ss, and just barely above 50% was the iPhone 5. With the iPhone 5C, I'd expect this ratio to again skew towards the iPhone 5S, benefiting revenues, margins and earnings. I believe this because it makes little sense to buy a so obviously downmarket iPhone 5C at such a small discount to the full-fledged iPhone 5S.

Not all is roses

While the lower cannibalization fears are a positive for Apple stock, there is also a negative in this development: It's highly unlikely for Apple to gain much market share with the iPhone 5C. It's not cheap enough for that. Except for the impact from penetrating China Mobile and NTT DoCoMo, I'd thus expect Android's march towards higher smartphone market share to continue.

What this means is that the 5C is a short-term positive for Apple in leading to less cannibalization and higher margins, but a long-term negative in enabling further growth of the competing Android ecosystem.


The iPhone 5C is more expensive than expected. This has significant implications. It means that it won't cannibalize the iPhone 5S as much as feared. Indeed, it might even reduce the already-existing cannibalization from the previous iPhone models. This will be helpful for Apple's margins.

However, on the other hand it will also mean that Apple will continue not to have a cheaper iPhone in the market, able to do battle with the legions of cheap Android and Windows Phone smartphones.

In short, the true objective of the iPhone 5C turned out not to be expanding Apple's presence in the market -- instead, due to its high price and weak image it's looking like the objective is simply to contain the already existing cannibalization between iPhone models while improving margins on older/cheaper models.

P.S. The market did mostly as expected on Apple stock, buying it up into the presentation and "selling the news" afterwards.

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.