In a somewhat surprising move, Apple (NASDAQ:AAPL) rolled out a cheaper version of the iPhone 5C in certain European and Asian markets Tuesday. The new smartphone is not very different from the existing iPhone 5C models as far as specifications go, but at 8GB, it has half the memory capacity of the previous entry-level 16GB variant. This could be a restricting factor for many smartphone users given the ever-rising memory requirements for downloading new apps and movies. The device is therefore likely to be positioned as an on-ramp for first-time smartphone buyers looking to enter the iOS ecosystem. That the 8GB variant has been launched only in the U.K., France, Germany, Australia and China shows that Apple is looking to target those markets where 4G LTE is either being introduced or is only in the initial stages of adoption. This is probably why the model hasn’t been launched in the U.S., where LTE is a far more established 4G standard.
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However, instead of discontinuing the 8GB iPhone 4S, Apple has chosen to position the new device between the 8GB 4S and the 16GB 5C in terms of pricing. We believe that this limits the potential number of users that will find the new smartphone appropriate value-for-money given the horde of price-competitive Android options available in the market at similar price points. Apple has priced the new 8GB 5C cheaper than the 16GB variant by only £40 ($66) in the U.K. and €50 in France, diverging from its usual strategy of maintaining a price differential of $100 between competing variants in a bid to differentiate its LTE-compatible 5C from the non-LTE 4S. The good thing about this pricing is that it reduces the chances of cannibalization of the higher-priced 16GB and 32GB 5C models. It also gives carriers two iPhones to promote at the entry-level, a costlier one with LTE compatibility for subscribers looking to move to the new-generation 4G standard and a cheaper one with support for more mature and widely deployed 3G networks.
The new product launch also points to Apple’s newfound strategy of differentiating its product portfolio based on geographies. In recent months, Apple has reintroduced the iPhone 4 in India at a price point of roughly $350 to be able to compete better in the fast-growing mid-tier segment. It has also continued to sell the same model in China, at about 20% cheaper than the 4S, despite discontinuing it everywhere else. That the U.S. isn’t one of the initial launch markets for the 8GB iPhone 5C indicates that the company doesn’t see the lower-memory option as particularly valuable to buyers there, given the higher proliferation of LTE handsets in the country. This differentiated marketing strategy should help Apple better tap growth opportunities in markets outside the U.S., where carriers are looking to increase penetration of LTE as well as smartphones. In the U.S., on the other hand, demand for high-end smartphones is stagnating, especially with carriers looking to cut down on their subsidy costs. Last quarter, Apple’s sales in North America fell by about 1% over the year-ago period despite a strong holiday season.
Given the increasing LTE push in European and Asian markets, the newly launched 5C model will help Apple increase its potential market for iPhones. While the new model will retail at an unsubsidized price of about $650-$710, depending on region, which makes it a premium smartphone in many countries, the carrier subsidies should make the smartphone’s price more palatable. In the U.K., for example, O2 is offering the 16GB 5C for £90 while the upfront cost of the 8GB model is about £60 less for the same £33/month 2GB data plan. What this essentially means is that an O2 subscriber looking to access 4G LTE speeds in the U.K. can now do so at about one-third the upfront cost as earlier.  However, the fact that the smartphone has only 8GB of internal memory constricts the number of data-intensive applications and movies that the subscriber will be able to store on the phone at any time, limiting the usefulness of being able to access LTE to an extent.Notes: