Why Apple Should not Produce Low-Cost Phones

Speculation and rumor will tell you that next month Apple is set to introduce a low-cost phone. Some will argue this makes sense since Apple is competing in a field with other companies such as Samsung and HTC which produce devices across many price points. The question worth asking however is whether this strategy is logical in the long-run. After all, aren’t mobile devices the natural evolution of PCs and laptops and hasn’t Apple learned that to be successful in those markets, you want to stay as far away as you can from being seen as a low-cost, commodity electronics producer?

A glance over at the recent struggles at HP and Dell show why Apple made the right decision in not introducing a netbook and low-cost PC line when virtually every PC manufacturer did so.

In the US, the idea of a phone being a subsidized device which locks consumers into buying services is not new and indeed the multibillion dollar wireless market revolves around this premise – at least for now.

In 2011 I wrote about how Amazon’s wireless tablets are being subsidized by services in a similar way to how carriers subsidize the devices they sell. I went on to suggest no margin will remain in selling standalone computing hardware.

In the US and much of the developed world the iPhone is the halo product shielding all other manufacturers to some degree. In other words if it wasn’t for the lead of the iPhone I believe the entire developed world would be seeing even lower-cost wireless devices.

Quite often it is instructive to look at ecosystems in nature to get an idea of how things will work in the business world. A phenomenon called island gigantism is especially instructive as it shows that when animals are stranded on an island, they typically grow much larger than their mainland cousins. The reason is because quite often the large predators from the mainland don’t make it to these islands and as a result there is less pressure on mammals to stay small to avoid predation.

Likewise, in developed markets the iPhone has dominant market-share and a high-cost which reduces the need for super-low prices as you can present your phone at a much lower price than something from Apple and still make a nice margin. Subsequently, profits are larger  just like the “protected” animals on the island.

China can be considered the mainland because it doesn’t have the iPhone halo as iPhone marketshare in the country is relatively low at 9%. As a result, a company like Samsung has sold lots of phones in the country but is struggling to make outsized profits.

In other words, predators are rampant, large and vicious.

Some of the competition in the country comes from China Mobile m2a_1.jpg selling smartphones for as little as $80 and Xiaomi, a local manufacturer who looks at hardware as a way to sell ancillary services like ecommerce and games.

Xaomi is embracing the Amazon concept of reducing hardware margins in exchange for the sale of services.

Apple is somewhat insulated from this type of competition because it represents a status symbol. As Xaomi and companies with similar business plans look to replicate their success across the globe, the market for cheap and mid-level smartphones will continue to come under margin pressure – it will be a war.

In such an environment the premium brands will be one of the few protected – similar to how Apple’s laptops can still charge top dollar today.

If Apple decides to offer a low-cost device it will be wildly successful in the short term but over time it will tarnish the brand.

You can think of it being similar to what would happen if BMW was to offer a $10,000 car in the US.

There are many good reasons for Apple to consider a low-cost device but if protecting the reputation of Apple as a premium brand is important to the company, it should be tread very carefully.

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