National Geographic Daily News
A journalist looks at a new iPhone.

Apple's latest iPhones will come in a bevy of colors and two distinct designs. One will be made of plastic, while the other aims to be the gold standard of smartphones and read your fingerprint.

Photograph by Marcio Jose Sanchez, AP

Timothy Carmody

for National Geographic

Published September 12, 2013

Since 2007, Apple's annual unveiling of its new iPhone has been the company's biggest event. Year after year, Apple has made its smartphones available in more countries, with more features, in new designs, on more carriers, and at lower prices.

The first iPhone started at $499; now, shoppers in countries whose carriers subsidize handsets with two-year contracts can get last year's iPhone for as little as $99, and two-year-old iPhones for free.

On Tuesday, Apple added a sweetener; instead of offering last year's iPhone 5 at a subsidized $99, it gave the older phones a colorful redesign and a solid boost in battery life, calling it the iPhone 5c. The company is not merely clearing out older inventory; it's offering a brand-new iPhone at a lower price point.

Apple observers have long been hoping for a cheaper handset to take advantage of a burgeoning global market for inexpensive net-connected mobile devices. For most people throughout the world, these devices are their first and primary encounter with computers.

When news of this release first bubbled up, many people—from investors and analysts to customers and app developers—excitedly predicted that Apple could finally bring its high-quality devices to customers all over the world. It looked like good business for Apple and good news for millions, if not billions, of people.

Yet after the event, even the analysts were unhappy with Apple. Why?

Pricing Out the Masses?

First, the iPhone 5c isn't actually that affordable.

Most of the world doesn't have subsidized handsets. In the U.S., the 5c costs $549 off-contract; in China, that balloons to 4,488 yuan, or about $733.57. In Brazil, the 5s and 5c haven't been priced yet, but if the current prices for the 5 and 4s hold (as they have elsewhere), they'll start at 2,299 reals ($1,009) and 1,399 reals ($615), respectively.

Throughout Europe, too, unlocked (off-contract) iPhones regularly run over $900 each, which is more than a 40 percent markup on the U.S. equivalent and 450 percent of the subsidized cost.

Therefore, for most of the world, even a "less expensive" iPhone would seem to remain largely an aspirational device at best.

"Apple has always been in the business to make premium products more accessible, but not to make them accessible to everyone," says Sarah Rotman Epps, an analyst at Boston-based Forrester Research, which follows the tech industry.

Epps said, "Like everyone else, Apple is in a race to connect the next billion customers. With the 5c, they may reach more of the middle classes in more countries, but it's not anywhere near cheap enough to make a difference to the least wealthy people," even in countries like China, Brazil, India, and elsewhere—places with huge populations, growing economies, and more and more people looking to buy their first computers in the form of smartphones.

Carl Howe, an analyst at the Boston-based Yankee Group—which studies the mobile sector—agrees. Even in China, which boasts nearly 600 million Internet users and where Apple sells more iPhones than anywhere except the U.S., there's a huge disparity between the newly wealthy who buy Apple products and the modest middle class, which opts for less-expensive smartphones mostly made by local manufacturers.

"Rumor has it that [Apple makes] more money in any of the five stores in China than they do in the Fifth Avenue store in New York," Howe told ABC News, but "the price of an Apple product is a significant fraction of the average Chinese worker's salary."

Even if Apple can strike a deal and make its iPhone technology compatible with China Mobile, which has 750 million subscribers—"like seven or eight Verizons combined," Howe says—most smartphone users in China won't own an Apple product any time soon.

China's Evolving Market

So who is actually connecting the "next billion" smartphone customers? In China, the top smartphone maker is Xiaomi, which recently passed Apple, according to Gartner. Xiaomi phones are sometimes described as Apple knockoffs, and there's definitely a design resemblance. But as a business, it's more like a cross between Amazon and Facebook: It has no retail stores or third-party distribution, but sells directly over the web. It's known for its popular games, online store, and social messaging app. Because its smartphone sells its other products and services, Xiaomi can and has undercut Apple across the board.

Apple might still offer the highest prestige and the most finished experience, but Epps notes that everywhere in the world, "consumers who have significantly less disposable income just want 'good enough,' and they need it at a lower price … Apple could disrupt itself by creating an insanely cheap iPhone. Instead, they leave themselves open to other companies who will do it first."

Besides Xiaomi, Korea's Samsung is competitive in China, as are Lenovo, Yulong, Huawei, and ZTE. Lenovo, known worldwide for its laptops, has been able to penetrate rural China by delivering its handsets via donkeys. Lenovo has also been able to expand its smartphone sales beyond China to Russia, India, and Indonesia. All three countries are similar to China insofar as they have high inequality but growing popular interest in the Internet. Nobody, and certainly not Apple, has a firm position in these countries.

In most of these places, too, inequality is shrinking while interest in smartphones is not. Today, just 124 Brazilians may be worth a tenth of the country's GDP, but as Quartz's Roberto Ferdman notes, that's largely a legacy of the 20th century. As its economy matures, Brazil's inequality is falling, and falling faster there than it is worldwide.

Microsoft Makes a Play

In the global handset market, that means less-expensive smartphones like Xiaomi's and Lenovo's, but also cheap feature phones like Nokia's. While Apple holds on to the top end, Microsoft just acquired Nokia's entire global hardware division, partly to better integrate its phone software with Nokia's smartphones. But it puts Microsoft in the unusual position of also owning Nokia's low-end Asha handsets, which retail for less than $99.

"Windows is very much a global brand," says Epps, "and [Microsoft is] quite cognizant of reaching that next billion customers." Still, much like Apple, Microsoft hasn't been in the position of selling inexpensive products. Exactly what Microsoft will do with Asha remains a mystery, Epps says, but "that's Nokia's best business right now. It would be a shame to squander that."

Epps points to Google's Chromecast as a model example of a technology company reversing its strategy. It switched from expensive set-top boxes and integrated television sets to a $35 dongle that does the absolute minimum needed to perform its task of streaming Internet video to a television set. Microsoft (or Google) could do something very similar in the handset market, delivering applications on the most stripped-down product that can remain viable -- much as Facebook has done with Facebook Zero.

"More Competitors Than Ever Before"

Furthermore, changes in global manufacturing mean that almost anyone can make a play for the global handset market, provided they execute well. Four years ago, Xiaomi didn't even exist. It launched its first smartphone in 2011. Now it sells more smartphones than anyone in China.

"The supply chains are established and available to anyone," says Epps. "You can go from a concept to a product in six months." And that includes companies that aren't traditional players in smartphones or technology. Epps points to the growing wearables market, where apparel brands like Nike are suddenly becoming technology companies.

Epps speculates that if you extended this concept to mobile devices, an agriculture-focused device in rural India or Ethiopia could be driven by a company like ConAgra. "The changes in manufacturing and maturation of supply chains means we'll see more competitors than ever before."

As the world's emerging markets grow, and the Internet grows with it, the bottom of the market for hardware, software, and connectivity grows just as fast, if not faster. It is wide open, but it is happening. Apple may become a competitor in that segment, or it may stay exactly where it is, near the top.

Maybe a race to the bottom is not one Apple can win. Apple certainly still has enough elite customers to maintain a significant global presence. But it's no accident that its new high-end iPhone 5s comes in gold.

Follow Timothy Carmody on Twitter and Google+.

1 comments
Xira Arien
Xira Arien

Frankly, the bottom 99% is ignored because it's not as prestigious as a gold-plated supercomputer in your palm.

The margins are also smaller, the work is greater, and the brand establishment is not as secure.

It's better to sell 10 widgets at 100$ and 10% profit based on an enduring brand than 100 widgets at 10$ and 10% profit based on a brand that someone can undercut tomorrow. The first is a mature and reliable income stream, the 2nd only lasts until someone comes up with a better idea or a cheaper process than you.

http://llltexas.com <- my blog

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