The Strategy Behind Apple’s $230 iPhone Targeted At Emerging Markets

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While Apple‘s (NASDAQ:AAPL) latest iPhone 7 might be its most popular model globally, the smartphone behemoth still actively produces and sells its 2013 iPhone 5S handset in many emerging markets. A recent report indicated that Apple intends to cut prices for the device in the Indian market from $280 to around $230 – which is about one-third of the global average selling price (ASP) for an iPhone. Below we take a look at the company’s rationale for selling legacy devices at bargain price points and how it bodes for its overall strategy.

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Positioning Apple For Growth In The Mid-Range Market

India remains one of the fastest growing smartphone markets, on account of improving 4G infrastructure and a relatively young and tech-savvy population. Smartphone shipments in India grew by about 15% in Q1’17 (compared to a 4.3% global growth rate). However, the market remains very price sensitive, and smartphone ASPs in the country stood at just $122 in 2016, compared to ASPs of about $258 in China and $410 in the U.S. Low-cost phones running Google’s Android software continue to largely dominate the market. While Apple tried to bring down its pricing in the Indian market by proposing to sell certified refurbished iPhones, the plan was struck down by the Indian government, causing the company to double down on its strategy of pushing legacy devices in the market.

While smartphone prices typically drop over the long-term, the average selling price in the Indian smartphone market actually rose by about 3% last year and prices are expected to increase this year as well. This is could indicate that customers are looking for more premium and capable devices. The trend was evident during Q1’17 as well. While the global smartphone market grew by about 15% in Q1, the Rs 15,000 to Rs. 20,000 segment ($230 to $310) – which Apple is targeting with the iPhone 5S – expanded by around 158%. With this strategy, Apple could acquire and lock in customers in the market for a mid-range phone, while hoping that they will eventually upgrade to more premium devices such as the iPhone 7, which sells for over $750.

Margins Are Unlikely To Be A Major Issue

Despite the low price points, Apple is likely turning a decent profit on sales of the 5S. The device has been in production for close to four years now, using aging components that should help to keep costs low. The 5S offers just 16 GB of storage, runs Apple’s old A7 chipset and eschews some of the more advanced proprietary features that Apple has been putting into recent handsets. The manufacturing yields on the device should also be high, with tooling costs likely to be largely amortized. Moreover, a bulk of the sales are carried out online and marketing costs are likely to be minimal.

There could also be an upside coming from Apple’s Services business. Services – such as the App Store and iCloud – have been a big driver of the company’s recent performance, and low-priced products such as the 5S could prove to be a stepping-stone of sorts into the broader Apple ecosystem for customers in emerging markets. Apple’s services offerings have higher margins and help the company improve customer stickiness over the long run. The company’s services are also priced competitively in India. For instance, a subscription to the Apple Music service costs under $2 per month in India, versus $10 in the United States.

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