Wall Street isn't very happy with Apple's new iPhones, and here's why!

Yesterday Apple made the iPhone 5s and iPhone 5c official. And Wall Street collectively shrugged at the news. Rather than simply attack Apple's strategy or dismiss investor reaction, let’s talk about Apple the company and the stock. Let’s have a discussion about what these guys are doing (or perhaps failing to do) when it comes to meeting the expectations of the market.

The news from the big event came off pretty much as expected with one noticeable difference. This one difference likely explains Apple’s stock dropping from about $505 yesterday to $470 as I write this.

That one thing is pricing. Specifically pricing of the 5c. Nearly everybody was expecting a less expensive iPhone. Instead we got a replacement for the iPhone 5. If Apple hadn’t launched the 5c, the iPhone 5 probably would have dropped by $100 as the one year old model always does. So the 5c simply fills that spot. No real change in pricing at all.

Wall Street isn’t happy. Investors and analysts think Apple is missing a huge opportunity to gain traction in China, India and other emerging markets where price is a major issue. In fact, the iPhone 5c will cost over $700 off contract in China. That’s a huge sum of money to the average consumer in that country.

To be honest, I share this concern. But I realize that Apple knows more about how to price and market its stuff than I do. Same goes for pretty much any professional analyst or money manager out there. Very few of them know anywhere near as much about sales and marketing as Apple.

So I’m willing to sit back and watch. Let’s see what happens. The current free phone (on contract) in North America and many other countries is the iPhone 4S, which has a different screen size than the 5c and 5s. By this time next year we’ll almost certainly be looking at a full portfolio of iPhones that have the same screen size. Maybe at that point they’ll take a bigger step towards emerging markets and lower prices.

In the mean time the 5c is clearly not aimed at super price conscious people. It’s aimed at people like my wife. She doesn’t currently have a data plan because she never felt it was worth paying for. But she loves her iPod Touch and has been an Apple user for a long time now. Last month she told me she’s decided to buy an iPhone and wanted my input on which model to buy. I suggested waiting for yesterday’s launch. We watched a replay of the keynote last night.

You know what? She couldn’t care less about the feature enhancements of the 5s. Fingerprint sensor, 64-bit processor, colour balanced flash ... she couldn’t care less. But she freaked out when she saw all of the cool colour combinations between iPhone 5c and the covers with the circular cutouts.

The cool colours and the neat covers sold her. People buy on emotion and justify with logic. The $100 lower price tag was that logic. I suspect there are a lot of people out there just like my wife. She’s fashion conscious and budget-minded without being a total miser. She’s not a tech geek and would never think to ask about specs. Guess what folks? That’s a huge chunk of the market. Colourful fashion, high function and a $100 savings wins them over.

Just because Apple didn’t launch a much lower cost iPhone this year doesn’t mean it will never happen. And I’m not making excuses for them. I thought it would be the right thing to do, and the right time to do it. I might be wrong. Maybe they take small steps towards cheap phones over time. Maybe they never do it.

This morning I was out for a run listening to an interview-style podcast. Funnily enough, the person being interviewed was the well known Silicon Valley entrpreneur and former Apple Chief Evangelist Guy Kawasaki. He talked about defining success and failure as an entrepreneur. He asked if Porsche is a failure because it only has a tiny sliver of the car market. Are they? Of course not. They’re massively successful within the market they go after.

Apple has also been successful despite having perhaps one tenth of Microsoft’s market share in PC land. Yet in Mobile they have significantly more market share than in the PC market. And just like in the PC market they aren’t going to be #1. Android is #1 and I think it’s reasonable to suggest they hang onto that position for the foreseeable future. Maybe Apple is willing to sit back and collect its profits from the 20 or 30% of the market that is willing to pay a premium for its brand, while Android vendors compete for the rest.

I can’t say there’s anything wrong with that strategy. And as a shareholder, I recognize that the tablet & smartphone market is bound to be much bigger than the PC market ever was. If Apple can keep delivering awesome products in a market that is much larger, and they can do so with 3 or 4 times the market share they earned in the PC market I think they’ll do just fine.

But I’d be lying if I didn’t say I still hope they go after emerging markets in a more meaningful way.

Chris Umiastowski

Former sell side analyst, out-of-box thinker, consultant, entrepreneur. Interests: Wife & kids, tech, NLP, fitness, travel, investing, 4HWW.

  • Great article as always, Chris. My thought, though, is next year the top of the line may have a 4.5-4.7" screen. As far as this paragraph:
    "The cool colours and the neat covers sold her. People buy on emotion and justify with logic. The $100 lower price tag was that logic. I suspect there are a lot of people out there just like my wife. She’s fashion conscious and budget-minded without being a total miser. She’s not a tech geek and would never think to ask about specs. Guess what folks? That’s a huge chunk of the market. Colourful fashion, high function and a $100 savings wins them over." You are 100% right. That is my wife. She jumped from feature phone/iPod touch to the 4S last year. LTE, 4" screen, lighter? Didn't mean enough to her to spend the extra $100. Plus, all the "cool" cases at the time (the Saturday before the 5 launch) were for the 4/4S factor. Looking ahead? She is looking at the 5C already (in blue). Even said maybe she can score one free next summer. Ha! Sent from the iMore App
  • My wife is all over the 5C too. She's getting the green one. Sent from the iMore App
  • What you seem to be forgetting is that Apple was in fact not successful in the computer market. If not for a bailout from Microsoft they would almost certainly not be around anymore. Even today with all their success they are a remarkably undiversified company considering their size. Other than their big pile of cash, they are not very well positioned to withstand mistakes.
  • Apple views that lack of diversification as a strength, allowing them to focus. You are certainly correct that it does leave them horribly vulnerable to a misstep, but Wall Street has already taken that into account; that is one reason why their stock price is relatively low compared to other companies with comparable P/E ratios, and also why the stock market swings after every Apple event that is not seen as a slam dunk, because investors are terrified of being caught on the other side if/when Apple does make that misstep.
  • Well, that and 'investors' really aren't investors anymore... the term you're looking for is day-traders. ;) Apple just isn't great for them anymore unless the huge upswing were to continue. It costs a LOT per share, and isn't likely to swing like smaller stocks. But, I agree, it is low were one actually investing.
  • This article is related to your post: http://m.washingtonpost.com/blogs/wonkblog/wp/2013/09/09/how-the-cult-of... Whether you agree with its central thesis or not, one of the items documented is how drastically investors (and consequently, most corporate boards) have swung towards the short term in the past 30 years. Sent from the iMore App
  • That so-called 'bail-out' was more a benefit to M$ than Apple. The DOJ was breathing down M$'s neck at the time, and they needed to show non-monopolistic behavior. The big thing was keeping Office on the Mac, the 'investment' was a gesture (not sure if they hang onto it, but if they did, they made a killing). Apple would have eventually been in trouble had they not changed course (due to a long time of horrible CEOs and making moves the 'experts' and analysts liked), but that 'investment' was insignificant in the overall picture.
  • While there is little question the transaction served Microsoft's interest, Apple was out of cash. Had Microsoft or someone else not made a huge influx of cash available, Apple would have had to cut or shut down operations. They were literally running on empty at that point. So please, no need to rewrite history. Apple and Microsoft both made what clearly were good strategic decisions.
  • In their own calculus they see the 5C as a winner. Wall Street begs to differ. Both are right and wrong both for the opposite reasons. Make no mistake Apple will make a killing with this. that said they still blew a great opportunity.
  • "But I realize that Apple knows more about how to price and market its stuff than I do. Same goes for pretty much any professional analyst or money manager out there. Very few of them know anywhere near as much about sales and marketing as Apple." More importantly, Apple has the confidence to know what it wants to be. What I heard from them in the presentation greatly increased my confidence that they'll put product quality and customers first, rather then paying attention to analysts and hedge fund managers. The whole presentation was a big FU to them. Hell, I would have loved it if they were able to bar Carl Icahn from buying Apple shares.
  • Maybe that Porsche analogy is how Apple sees themselves, but I would venture a guess that investors see something else. While the color options will play well in established markets, that market is already saturated with smartphone users...not sure how much they can gain. However that emerging market is huge. Over 35% of the world's population lives in China and India. Maybe that market is not important enough for Apple to change its strategy, but that is a substantial gamble if it doesn't work out.
  • The Porsche analogy only goes so far, as Apple is far more crucial in the tech market than Porsche is in the car market. If we imagine a Porsche that is far bigger than any other car company, has a substantial share of the market, and pretty much owns certain segments... then maybe we'd have something.
  • I am not a typical female, at least not in this instance. I have no interest in the cutesy colors, I want every bell and whistle and in an elegant form factor. Design matters to me, and I don't find the 5C even remotely appealing. From a financial standpoint, I think 5C is going to do significantly better than Wall Street wants it to do, but I also think they could've come down $100 on the off-contract price, keeping the on-contract price exactly as it is, and made like gangbusters.
  • Yea, I guess not being a (typical?) female, I don't get it either. I'm guessing my wife might like the look of the C better than the S, but I think she'd really like that fingerprint login rather than the code... as would I. (And, females don't care about a better camera?) But, I totally agree on the pricing. While I was actually HOPING Apple didn't go after the cheap end of things, I'm a bit surprised by the C actually. It just plain isn't a good deal. The ONLY reason I can see buying one is for the color case. The 5S is EASILY worth $100 more. But, as you say, a much better off-contract price might have meant something, at least to me. I wonder how many other people even think about off-contract though. I think most people seem to just look at that monthly price and don't even consider the end cost.
  • I really think most females *are* going to care about the bells and whistles, including a better camera. As fashion-forward as many women can be, we're not all that tech-stupid. But I think the off-contract pricing spread should've been substantially wider.
  • Apple mobile market share is going down too fast. They need more than just high margins. They need to keep iOS relevant outside the US -- niw the direction is the exact opposite. This is not PC business. The ecosystem needs to remain viable, too. And Chris, you better recheck those market share numbers you mentioned...
  • IMO, market-share is rather irrelevant, so long as you're a major player in the game. And, what really counts is IN USE share, not how many refrigerators there are with your OS.
  • I think what they really need is adequate profit growth quarter over quarter. Whatever that level is. Market share seems largely to be a leading indicator of whether profits growth will slow. As for China, i think they are like 7th and in the single digits so they have room to grow share. But I'm not sure if only appealing to the high end in China will do the job. I don't know if there are enough high end customers now or if that sector in these countries like china and india are growing fast enough. Take PCs, Apple made themselves the premium brand but lost the pc battle to the everyman affordable pc. Seems to me Android is slowly doing the same thing. Being the everyman affordable os resulting in affordable phones. Hell i haven't remotely ruled out my next phone being Android.
  • Apple didn't change their pricing strategy for the 3 models on the consumer side so no the 5c isn't going to drive market share in China. What they did to get a lower cost phone in China was keep the iPhone 4 around for just that market (and maybe some other emerging markets who knows). Considering how many people in North America are still using an iPhone 4 I wouldn't overlook the potential importance of this. Also Wall Street should keep in mind that the iPhone 5c does help Apple in another important metric that they have been concerned about recently which is Margins, if they had kept up the old strategy and dropped the iPhone 5 to the $99 on contract model it would have had worse margins than the 5c which sheds itself of the metal case in favor of a plastic one that will be less expensive to manufacture, giving Apple better margins on their mid-range iPhone. Also they took this opportunity to increase the number of LTE bands in the phone which could help reduce the number of skus needed to support different countries and potentially increase the number of markets they are able to serve with this phone, which both help economies of scale and market share. Just because they didn't do what pundits expected doesn't mean they aren't making strategic moves to address both market share and improve their margins, and unlike Wall Street and those pundits they have a proven track record of knowing exactly how to do both of those things over the past decade.
  • Apple isn't targeting the "average consumer" in these markets. They are targeting those with the disposable income to be able to afford an iPhone. China's middle class numbers 200million, and most of the discretionary spending in that country comes from the top end of the middle class.
  • Fair point... there are probably a lot more people in China that can afford one than in N.A. Well, that and the fact that as time goes on, that will be all the more the case. And, the way things are looking, there might not even be a USA market much longer.
  • When I first heard of the colored poly-carbonate back going on an iPhone in the rumor mills, my first gut instinct told me it was going to be a replacement to the 4s as the budget model. I think it's pretty safe to say most of us know that manufacturing costs (i.e. parts, assembly, etc.) on these boogers decreases as time goes on. The iPhone 5 carried all of the R&D costs for the new design, so when the 5s comes out, they will be able to use those $$$ to do all the internal upgrades without losing margins. It has been the same cycle since the beginning when they were taking each older model down a step as the new one comes out each year. Now back to my initial thoughts on the 5c. I had thought by replacing the 4s with the poly-carbonate back and calling it a new "budget" model, they strip away the costs of the metal band and glass back, keep the same internals (cost savings), and price it at $350 off contract, you would have a huge winner in the emerging markets and for the people (my wife included) who would see it as a cheap, stylish looking smart phone and not have to pay an arm and a leg for an Apple product. And, you would save the ever important margins at the same time. But like many of you have said, is that really where Apple wants to go?
  • "By this time next year we’ll almost certainly be looking at a full portfolio of iPhones that have the same screen size. " I hope not. No matter what kind of impressive tech is under the hood on the iPhone 6 next year, if it still has a 4-inch screen, it will be poo-poo'd by the tech world and Wall Street, IMO. That's what's happening to the 5s now despite some pretty cool advancements from its predecessor. Apple needed a bigger screen like 2 years ago.
  • ROFL stylish? The 5c looks like a god damn leap pad.
  • Chris one of your best posts. Balanced. For the most part is right where my thoughts on the subject are. I think Apple is hoping they will continue to simply be a premium brand in China & India and that portion will either grow significantly (not what analysts think) or grow enough to still make a hefty profit growth on those customers. That said, I can't help but think of your Porsche analogy. I'd love to have a Porsche and they are great cars. However I'd rather have the profits of Toyota aiming at the many more price conscious customers. Totally agree with your wife. I'm meh on all that 5s specs. And i'm price and style conscious. Most consumers are like that. Though we probably differ on style as i'm not much for the colors and the think the 5c's are ugly. I prefer black. But i will say i don't think that is all as you say buying on emotion. I think it is a simple practical calculation the average person makes. They hear 64bit and go "will it make a big difference?" If it won't they don't care. Maybe clearer pics aren't an issue cause they were never judging the clarity of pics in the first place. They just want a good enough pic of their friends at the club or beach or something. They may not care about a fingerprint scanner because they don't care about logging onto their phone. It don't think it's bad. I just think the average person does not care about all those small things that the tech person loves.
  • There's a reason apple will focus on the 5C in marketing. It has to ramp up first. Scale will drive down the cost. Soon enough this will be free on contract with minimum impact to margins. By the time apple introduces the iPhone 6 and 6X, the 5C will be the phone that Wall Street imagined. No need to worry. Apple knows what it's doing.
  • Of course, had Apple done a low cost iPhone it would almost certainly be low margins and the street would have dinged them for reducing margins. On China... people here seem to have the idea that all Chinese are poor. But with 1.1b people even if only the top 20% earn enough to buy an iPhone that's a market 2/3 the size of the entire US population.
  • from what i've read the problem is, one, apple does horrible in China, and two that high end top percentile, isn't a growing market. That is by this all apple will get is what they already get in china. The one way of growing would be a china mobile deal which would mean at least they can get some of the high end that china mobile has but they are still like 7th and not in a growth area. But the area of massive growth is at the other end of the income bracket and they are all buying $100 Chinese phones.
  • Terrific article Chris. I think Apple's biggest issue is they called it the iPhone 5c, people assumed the "C" was for cheap... I think the hundred bucks price difference works both ways... I look at the 5c and think its cool but then is not that much of a jump to the 5s... maybe this pricing is in fact a stroke of genius on Apple's behalf?
  • I don't think it's a name issue. The China, India, growing markets vs stagnant markets issue was an issue long before iphone names were announced.
  • Always love your articles & your insights, Chris!