Apple's about to strike iPhone gold in China

Apple [AAPL] is hoping for the iPod nano effect when it ships its new iPhone models in a few weeks time, when it hopes to attract a few million extra customers. So what is the iPod nano effect, what might happen, and why does it matter?

Screen_shot_2011-07-25_at_14_40_16.jpg

[ABOVE: The iPod nano effect in one poor image.]

iPod nano effect

Take a look at the graph above. It shows what happened when Apple introduced the lower-priced (though not cheap) iPod nano to replace the hard drive-based iPod mini. The effect was a huge spike in sales.

It's about to happen again.

Introduction of the more affordable plastic iPhone 5C (the most recent pictures of the device were first published here this morning) is likely to widen Apple's appeal to those many consumers who today choose a Samsung Android device because they don't feel they can afford an iPhone. (Despite that company's rapidly eroding public reputation).

Make no mistake: Samsung will lose share in the face of the iPhone 5C. It's deeply exposed as the only firm to really make a good slice of the market, given it takes so many users from other Android platforms, according to Consumer Intelligence Research Partners (CIRP)'s] survey of smartphone buyers.

That survey reveals:

  • 20 percent of iPhone customers over the past year switched from Android
  • 7 percent of Samsung purchasers previously owned an iPhone
  • 43 percent of Samsung customers migrated from other Android phones,
  • 42 percent of Apple's customers are simply upgrading their existing iPhone.

Apple quality at a Samsung price

Most tellingly the CIRP survey indicates that three times as many customers migrate to Apple from Samsung as those who drop an iPhone for a Galaxy. That's a pretty strong indicator that in the event the price is right many more consumers will migrate to an iPhone and away from their Samsung phone.

That's certainly what Apple's hoping -- though the price won't be as low as many may hope -- some anticipate a $400 price tag on the device, but that's not to predict now much the carriers will charge for the upgrade.

The CIRP survey reflects the position in the US, but here's the news: Apple isn't just thinking about the US. It's chasing China (as I warned in 2011).

The Chinese market is interesting in that there's dozens of low cost low quality device vendors out there who are already stealing a chunk out of Samsung's scattergun approach to product sales. Apple's approach is different.

"Companies have to be very careful when they engage in price battles with cheap Android vendors if they don’t want to see their profits shrivel up. With the iPhone 5C, Apple is taking a calculated risk that the device will draw enough consumers in emerging markets to help it shore up its market share without doing too much damage to the company’s bottom line," writes BGR.

You see, Apple's iPhone 5C will likely spawn a range of lookalike imitators and grey market imports, but these devices won't be running iOS, meaning the company will continue to offer a distinctive device.

Regaining the lead?

The effect?  Morgan Stanley’s Katy Huberty this morning cites an AlphaWise survey of 2,000 mobile phone owners in China. The analyst estimates:

"The new iPhone 5C could boost Apple's market share in China by 13.3 points (and reduce Samsung's by 6.7 points). A carrier deal with China Mobile (CHL) could raise Apple's share by another 6 points (and lower Samsung's by 4.6 points)."

Given a carrier deal with China Mobile is another rumor du jour, then it looks like Samsung could lose up to 13.3 points of market share, while Apple would become the number one vendor in China.

Huberty notes the repurchase rate for iPhones is higher than for other smartphones, in addition to which 23 percent of potential smartphone buyers are already considering an iPhone.

This brand loyalty suggests a lot more people will choose an iPhone if the price is right. That's why there's so much excitement across Apple's supply chain. That's what Apple's betting on -- and what customers have been holding off on their smartphone purchases in expectation of.

This is the iPod nano effect in action.

I don't think Apple intends to fail. Android (and Samsung) is about to learn what it's like to be on the receiving end of serious competition. I don't think it's a lesson the Korean firm will enjoy.

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