Can Apple Succeed Balancing Cheap With Premium?

| About: Apple Inc. (AAPL)

Apple's (NASDAQ:AAPL) innovation over the last year reminds me of the great Sahara desert, yet despite this, there has been a raft of rumours floating around regarding completely innovative and new product lines such as a wearable iTech and a watchable iTV.

We have heard several hints from Tim Cook ("TV is an area of intense interest") and more recently on Apple's interest in wearable tech but nothing innovative has really come out of the Apple camp.

As we slowly forgot what Apple is about, we have slowly flocked towards the 'Release something, ANYTHING' attitude which looks to culminate in the iPhone 5C (Colour or Cheap depending on your opinion on Apple).

I haven't been an Apple stockholder officially but I do hold component maker Dialog Semiconductor (OTC:DLGNF), meaning an estimate of units sold is of significant importance to me. Using the midpoint of 148m iPhones sold in 2014 and 155 in 2015 I decided to look at the iPhone brand as a combined number with a cannibalisation rate of iPhone Cheaps to iPhone expensives. For me, I don't much care as long as the ASP for Dialog remains the same in each device but this exercise got me thinking, what if the cannibalisation rate is much higher than anyone expects?

Let me push Dialog aside and talk in plain English...

Over the past twelve years, the smartphone industry has shown initial signs of pricing wars as differentiation becomes more and more difficult. Furthermore, volume players such as Huawei from Asia have led to an increased raft of choices for potential consumers.

It's not rocket science to notice that the pace of smart-phone innovation has slowed. I remember switching my iPhone 3 to a 4 after being wowed by almost every improvement made. In particular the screen had a noticeable sharpness despite the even more compact form factor. The iPhone 5 didn't really add much; or not enough for me to decide to embark on another overly expensive contract.

Samsung is equally as guilty, with gimmick upon gimmick such as smart-scroll added but in reality, there was no great reason to spend a small fortune to gain additional functionality.

Even mobile phone design seems to have stopped. If I told my grandfather to take his spectacles off and tell the difference between an S4, a Z10, an iPhone 4, iPhone 5, Moto X, HTC 1, Xperia, Ascend ... he would not be able to find one!

iPhone Premium

What convinces a person to shell out $700 for an iPhone 5 when he can pick up a Lumia 520 for $200.

1. The Brand - Without question, Apple has created a brand perception like no other. When people hear Apple, they think cutting edge, flawless design, premium technology.

2. The Apps - The original AppStore and still the focal point for most developers. If you are particular about certain apps then why take a chance with an OS that will make your life a little more difficult. Furthermore, if you have bought your back catalogue of music on iTunes, why do you want to block yourself access.

3. The quality - Of course the brand perception can't come without the product to match and iPhones arguably remain the most intuitive, easy to use phones out there and the components used to build these phones are always custom sourced in order to bring maximum punch to a small device.

4. Part of the Crowd - All your friends constantly make fun of your crappy old feature phone. "what's the matter, too poor to own a real phone??" - peer-pressure and the want/need to convey yourself as fashionable etc etc may lead you to pick a premium brand.

With the release of the cheaper iPhone 5C you get the Apple name, the Apple design, the IOS (extremely important) and most important a huge amount of extra money in the bank. If this is the case, why spend the money on the high end stuff?

As I mentioned earlier in the article, the pace of technology has slowed and OEM's are continually pipping each other in aspects that don't matter that much to a consumer. Take the screen, LCD, AMOLED, PMOLED, SUPER AMOLED, SUPER DUPER AMOLED, EXTREME SCREEN SUPER DUPER ULTRA LED.....I stopped caring past the iPhone 4. The screen was crisp and brilliant and to be honest, I really can't see much difference when looking at the screens of different phones. As long as I can watch an HD movie on it, this seems to be the benchmark.

It's not just me either... Apple itself reported strong sales of the older 4 and 4S. Adding to that, the Galaxy S3 shipped around 10m in the last quarter showing resilience for the former Samsung Star.

Cheaper phones as being launched at record rates with Nokia's 5XX series and Android powered phones built by Huawei and Lenovo.

The 5C may well sound great for shareholders as it will tap into developing markets as well as those who simply couldn't afford its expensive hardware. I have no doubt that it will boost unit sales significantly and in my opinion 170m iPhones (both cheap and expensive) could be sold by 2015. Of course this is all wonderful news for business sentiment but what happens if your premium customers decide to drop down as well?

In this author's opinion, there is a real distinct threat that consumers (after showing an increased interest in saving money at the expensive of being on the cutting edge) will realize that the iPhone 5C gives them everything they want from a smart-phone without the price tag.

While this doesn't bother me too much as a person who only cares about their volumes, it may well limit the upside that Apple can create.

I am still on the fence regarding which way it will go but what do you think? If the 5C gives you IOS7 (and therefore all the apps), a nice screen, good battery life and a solid design would you decide to keep the cash?

Disclosure: I am long OTC:DLGNF. 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.

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Tagged: , Personal Computers, Buyside Insight
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