Yesterday Apple announced its new flagship phone, the iPhone 5s, and a new model, the iPhone 5c. The 5c was meant to be Apple’s foray into the lower-end of the market, helping it to earn market share among developing-market consumers for whom Apple’s existing range is too expensive.
Surprisingly, however, Apple declined to compromise on price. Unsubsidized, the device will sell for $549 in the United States and a whopping $733 in China. This is several times more expensive than an entry-level Android device.
You have to credit Apple for sticking to its guns. This announcement was in spite a rising chorus of opinion from Wall Street and the pundits that Apple needed a low-end product in order to compete with Samsung (and Chinese manufacturers that create even cheaper handsets). But Apple has never had much interest in the low-margin segment, and made it clear yesterday that it is quite happy to maintain a staggeringly profitable franchise at the expense of market share.
There’s nothing the matter with this strategy in general; it has certainly worked for Apple for a long time. But as everyone now understands, the competition between Apple and Google/Samsung is now in large part defined by the extent and quality of the ecosystem that exists around each player’s platform. How many users and applications a platform has matters very much to buyers who are deciding which platform to affiliate with. In this way, the dynamics are very similar to those in payments, where customers ask before joining a network with whom they will be able to transact.
Apple today seems to have reaffirmed that it is in the business of selling devices to the rich world (i.e., developed markets) and rich people everywhere else. What I wonder about is whether this strategy is really sustainable long term in the way that it is for, say, high-end fashion brands, where exclusivity is as much of a selling point as a liability. Users want as many apps as possible, and app developers want as many users as possible. iPhone users will get little consolation from the caché of the brand of their phone if they find that their friends with Android devices are getting new apps, and updates to old apps, faster than they are.
Sometimes when people ask me what I like about living in Asia, I say it is like “living in the future.” In this case, I think that’s true. Most app developers in Asia have already moved to an Android-first model. Indeed, the exceptions prove the rule: the luxury-travel-booking apps debut on iOS, not those with mass-market appeal.
Operating systems succeed when they achieve ubiquity; Apple’s business model succeeds when it sells its high-margin hardware to a finite set of users with high willingness-to-pay. This is Apple’s most fundamental dilemma, and there is no easy way to square this circle given its operating system is indivisible from its hardware. Yesterday’s announcement is a bet that Apple can sustain its business model even while excluding a large fraction of the world’s smartphone users from its ecosystem. It’s not one I would make. In the TNW article by Jon Russell I linked to above, Darius Cheung, CEO of BillPin, says that their market research indicates that many iPhone users in Singapore—the high-end segement that has propelled Apple to such extraordinary profitability to date—"are looking to switch to Android devices the next time they buy one.” They are expressing a preference not so much for Samsung's hardware (although big screens are awfully popular in this part of the world), but for the Android ecosystem. It is a trend that spells trouble for Apple, but one that is perhaps not yet perceptible in Cupertino.