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Apple (AAPL) To Sacrifice Market Share For Higher Margins- A Gamble

|Includes:Apple Inc. (AAPL), CHL, GOOG

On 9/10/13, Tim Cook and Co. announced the next generation of iPhones (5C and 5S). Much of the announcement had been leaked through various sources (mostly asian blogs) and there was hardly an element of surprise. Investors were mostly disappointed as they felt the price of iPhone 5C was much higher than anticipated ($549 versus 300-400).

This higher priced "cheaper iPhone" will have difficult time penetrating into the emerging markets since most countries don't subsidize the price of a new phone once consumers sign a contract with the phone providers. Investors were hoping that this "cheaper iPhone" would be able to grab market share in countries such as India and China where local phone makers make much cheaper smart phones and take advantage of Google (NASDAQ:GOOG) Android's open source attribute. This is what has propelled Google's stock to unprecedented levels (quantity>quality).

There is no doubt that iPhone 5C's higher margins will help Apple's bottom line profits; but this comes at sacrificing market share in emerging markets. The bigger question here is that will Apple (NASDAQ:AAPL) be able to sell and penetrate into emerging markets with such expensive "cheaper iPhone" . Obviously the best case scenario would be higher market penetration and higher top and bottom profit lines. But will the people in emerging markets be able to afford the "cheaper iPhone"? Are profit margins more important to the company than total market share (quality>quantity)? I guess time will tell if Tim Cook made the right choice.

One piece of news that was lost in all this new product cycle hype was that now, the governing bodies in China have approved Apple's iPhone to run on China Mobile (NYSE:CHL) networks (largest provider in the world with over 700 million phone subscribers). Will apple continue to lose market share to cheaper Android devices or will Cook's strategy pay off in the long run? Only time will tell...

Disclosure: I am long AAPL.

Stocks: AAPL, GOOG, CHL