C is for Color

Apple’s iPhone event has come and the rumors were horribly wrong, pushed off perhaps precisely because of the factual leaks.

Plastic isn’t always cheap

There have been persistent calls for years for Apple to release a cheaper iPhone. The credible (and entirely accurate) reports of a plastic iPhone led just about everyone to conclude that Apple had finally agreed to introduce the mythical “cheap” iPhone. The error came in assuming that “plastic” meant “cheap.” The iPhone 5c (so-styled by Apple with the appalling lowercase “c,” which becomes unforgiving with the “iPhone 5s,” a heretofore convenient plural, now recast as a proper noun) is a premium phone. Yes, the plastic body must surely be less expensive than the luxury-watch build quality of the iPhone 5/5s, but the cost differential is certain a small one. The insides of the 5c are almost exactly the same as those of the iPhone 5, which it replaces. The only minor differences are actually improvements over the year-old phone.

So why did they decide to replace the 5 with a plastic version? I think the answer may be quite simple: color. The aesthetics of the iPhone 5c perfectly match the new, redesigned iOS 7; It’s fun and friendly.

Let’s talk about price

So the purpose of the new iPhone 5c isn’t reaching a radically lower price after all (at least not immediately). But that doesn’t mean it’s not still a value play. Focusing just on American prices (for simplicity) at the moment, Apple’s previous system was based on a three tier system. The newest version starts at what I’ll call Tier 1 ($199 in the US with a contract, or $649 unlocked). After a year a new phone is introduced and the old flagship moves down to Tier 2 ($99). A “free” Tier 3 exists for phones introduced two years before, and three years after introduction they’re discontinued entirely. When the new iPhones come out they’ll occupy both Tiers 1 and 2 with new phones, with the 4s free on contract, which isn’t too different from years prior. Except this now means that you can get a new, current-generation iPhone for $99. Sure, the insides of the 5c are a year old, but as a mass-market consumer product, it’s sufficiently new enough. If Apple’s prominent positioning of the 5c on their website and product emails (and in their keynote) is any indication, they are selling it as the default new iPhone, now $100 cheaper than before. The 5s shifts to become the premium iPhone, for customers who want the absolute highest-end. Historically, the product mix has overwhelmingly favored the newest generation. Now that there are two new models, I expect the share to be split much more evenly between Tiers 1 and 2. I think it also makes the 5c a much easier upsell over the 4S.

So what are they doing to expand in China?

Apple has done something else unprecedented and that is introduced a fourth price tier. While the iPhone 4 has been discontinued in America, it remains available in China, at a discounted price of 2588 RMB (currently $423). This reduces the entry level price for an iPhone in China by 500 RMB ($82). This is hardly an aggressive change in strategy, but it does show at least some recognition of the the need for a lower price if they want to maintain their shrinking market share in China. The new iPhones also support the peculiar variant of LTE used by China Mobile, the world’s largest wireless carrier (by far) with 740 million subscribers. No announcement has been made yet, but a deal now seems likely to be finalized sooner rather than later. Since the new phones are certain to be severely supply-constrained at launch, there’s no significant loss in waiting a couple of months.

The launch of the iPhone 5c represents a deceptively subtle shift in strategy. The effective price drop is easy to miss for a cynical pundit, but will likely become quite noticable when Apple releases its next sales numbers.