Apple Can Penetrate Emerging Markets by Riding Side Saddle with More Carriers

Apple (NASDAQ:AAPL) may have seen a steep growth in its iPhone sales numbers over the last few years but it may still be dwarfed by what is to follow, as the company expands its presence in more countries and brings in more carriers to sell its iconic product. According to Morgan Stanley’s Katy Huberty, who reiterated an Overweight rating on Apple’s shares, carrier expansion presents a huge upside to Apple’s stock. She sees immense potential for growth in the emerging smartphone markets such as Asia where post-paid subscriptions are on the rise. ^[1] While we agree with her analysis, we also see Apple facing huge competition in these markets from the cheaper phones based on Google’s (NASDAQ:GOOG) Android, sold by Samsung, HTC, and other Asian rivals.

When Apple launched the first version of what was to become the immensely popular iPhone series, only one carrier, AT&T signed up to sell the phone. Today, three years later, that figure has gone up to nearly 230 carriers in 105 countries. However, there is still a huge room for growth considering that there are over 760 carriers in 225 countries that have so far been untapped and that its competitor, Research In Motion (NASDAQ:RIMM) has contracts for its Blackberry with almost 80% of the 760 carriers Huberty has identified.

Our $502 price estimate for Apple stock is about 33% ahead of market price.

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Carrier expansion in emerging markets is key

Emerging markets such as the Asia Pacific region have seen little iPhone penetration with only 22% of the carriers in the region having access to the iPhone. ^[1] Customers in the region, especially the young populace, have shown a growing preference for smartphones as evidenced by the sudden growth of Asian players in the smartphone market.

Although these phones are priced much cheaper, we believe that these phones have served to whet consumer appetite for some time now and the time is right for Apple to make an entry with the real deal. Of course, Apple will not be able to maintain the huge margins it currently has when it makes an aggressive entry into emerging markets. But access to a huge 25-34 year old demography in China and India, an age group that has seen the highest smartphone penetration, will more than make up for the loss in margins with increased sales.

Apple has already been decreasing prices for the older versions of the iPhone as it rolls out new versions. The iPhone 3GS is now available for free on AT&T and the iPhone 4 for $99. The company can look to push these older versions into emerging markets initially before launching the newer phones, which will bring down the overall iPhone pricing in a few years.

Postpaid growth will lure carriers

While carrier expansion may help Apple increase its presence in these markets, what might act as a hindrance is the customers’ higher preference for prepaid plans in these regions. However, recent years have seen customers show an increasing preference for postpaid plans as shown in the graph above.

As postpaid plans see increased adoption, Apple will be able to entice more and more carriers to bundle the iPhone with long-term contracts, driving iPhone sales further. This has worked well in the developed markets where postpaid adoption rate is much more than in emerging markets.

1. Apple: Morgan Stanley Sees iPhone Growth Following RIM-Like Pattern, Barrons’, November 21st, 2011 [↩] [↩]