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Apple refuses to play low-price ball, stakes strategy to premium brand rep

Tuesday's event, iPhone 5c pricing showed Apple has no intention of marching to someone else's drum, says analyst

September 12, 2013 06:49 AM ET

Computerworld - Apple's decision to price the plastic chassis iPhone 5c at $549 without a contract, the same price the company has historically charged for the previous year's iPhone, has upset financial and industry analysts' models, which had expected much deeper cuts.

Wall Street punished Apple Wednesday, driving down the company's stock price by 5.4%, with some analysts claiming it was already "too little too late."

Meanwhile, industry experts -- while not consistently panning the pricing of the iPhone 5c -- have at least questioned the number and have said that it won't help Apple in its market share battle against Android devices, especially in China -- long a fertile market for the Cupertino, Calif., company but now a region where upwards of 80% of all smartphones sold are Android devices.

But, in retrospect at least, Apple's move was in concert with its long-term strategy, one put in place decades ago by co-founder Steve Jobs, an independent analyst said today. In fact, it was an emphatic restatement that made plain where Apple stands on the tug between market share and margins.

"The entire presentation yesterday was about demonstrating why an iPhone is a superior value," said Ben Thompson, an industry observer and analyst who covers technology at his website, Stratechery.com. "Apple essentially said, 'We don't need to be cheap, we don't need to be low-end.' Everyone in the tech press and financial press cares, but Apple's contention is that consumers don't care that they're not in the low end."

Apple showed its hand, said Thompson, from the very start of the event, when it devoted precious minutes in its most important product launch of the year to highlighting a music festival it's hosting in London. Thompson argued that the time spent touting the Apple "experience" exemplified Apple's attitude and its strategy.

Most analysts had anticipated an unsubsidized price of between $300 and $450 for the iPhone 5c, the long-rumored lower-cost model. That pricing would have meant a free phone in markets like the U.S. where carriers habitually subsidize customers' new devices. More importantly, a low-priced iPhone -- $300 would have been ideal, analysts speculated before Tuesday -- would let Apple compete with global smartphone brands powered by Android, like Samsung, and the plethora of in-country, Android-using handset makers in markets such as China, like the hard-charging Xiaomi.

Minus a lower price and the strategic shift necessary to support it, they warned, Apple risked losing its prominent place in developers' minds because it would continue to shed market share, notably in Asia, China specifically.

Instead, Apple ran an unexpected play: The 16GB iPhone 5c, a repackaged circa 2012 iPhone 5 inside a colorful polycarbonate chassis, was priced at $549 unsubsidized, and at $99 with a two-year contract in the U.S.

The $100-$250 difference between the expected price of the iPhone 5c and the actual price generated headlines as many expressed dismay that Apple had not followed the outsider consensus. "Apple's shares tank as new iPhones fail to dazzle," stated Reuters. "Analysts Knock Apple for Not Announcing 'Cheap' iPhone," said the Los Angeles Times. "Apple's 'Low End' Strategy Disappoints," reported the Wall Street Journal (subscription required).

Thompson, who wrestled with his pre-presentation pricing bet, first bought into the lower-is-better concept, he said in an interview. But last Sunday, he changed his mind and predicted Apple would retain its pricing structure with one major change: It would sell the new iPhone 5c at the price it has previously charged for the old model from the year prior.

He nailed the outcome.

Today he explained why he thought Apple made that decision. It wasn't about protecting the brand, not explicitly, nor was it due to concerns that the iPhone 5c might cannibalize its flagship -- which, going forward, will be the full-priced iPhone 5s, which starts at $649 unsubsidized and at $199 with a carrier assist after signing a two-year contract.



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