Cook admits Apple blew the call on the iPhone 5C

'Oops,' says analyst about Apple overestimating demand for less-expensive iPhone

Apple sold a record 51 million iPhones in the fourth quarter of 2013, but acknowledged it had underestimated the appeal of the flagship iPhone 5S, making some analysts question the new two-model strategy and arguing that Apple had erred in pricing the iPhone 5C.

For the quarter, iPhone sales were up 7% compared to the year before, when the company sold 47.9 million smartphones. The iPhone also set another record, generating 56.4% of all revenue for the quarter, casting the Cupertino, Calif. company as even more of a smartphone maker than usual.

"Cook signaled a couple of things on the call," said Ezra Gottheil, an analyst with Technology Business Research, in an interview after Apple wrapped up its conference call with Wall Street on Monday. "He essentially said, 'Oops, the 5C was a mistake.'"

During that call, CEO Tim Cook acknowledged, albeit in carefully-couched terms, that the mix of iPhones sold had included a larger percentage of the top-dollar iPhone 5S than Apple had anticipated.

"It was the first time we'd ever run that particular play before, and demand percentage turned out to be different than we thought. We sold more 5S than we expected," Cook said, tacitly admitting that the other model, the lower-priced iPhone 5C, under-performed.

In September, Apple unveiled two new iPhones for the first time, the top-end iPhone 5S and the middle-tier 5C. The latter was a repackaged iPhone 5 in a colorful plastic case that was priced $100 less than the 5S.

At the time, most analysts and pundits expressed disappointment that Apple had not priced the iPhone 5C even lower -- they had figured Apple would shoot for market share gains, especially in price-sensitive Asia -- but some, including Ben Thompson of Stratechery, cast the move as consistent with Apple's position as a luxury, premium-priced brand.

By the numbers, it seemed that most customers agreed with the analysts who panned the price.

While Apple never splits out iPhone sales by model, the jump in the ASP (average selling price) strongly hints that the mix tilted toward the iPhone 5S. The smartphone's ASP jumped from $577 in 2013's third quarter to $637 in the fourth and nearly matched Q4 2012's $642.

While that was good for Apple's bottom line -- it booked $13.1 billion in net profit, equal to what it recorded in the same quarter the year prior -- it made some wonder about the iPhone 5C strategy.

"I think they might have underestimated how much they could get away with on pricing and specs [for the iPhone 5C]," said Carolina Milanesi, the strategic insight director of Kantar Worldpanel ComTech. "Bottom line, they underestimated how much people are driven by the hardware and the design."

She scoffed at Cook's explanation that TouchID, the new fingerprint reader available only in the iPhone 5S, had been the primary reason why sales tilted to the pricier phone.

Tuong Nguyen, an analyst with Gartner, had been skeptical of the 5C's pricing strategy last year, and felt vindicated by the fourth-quarter results. "The issue is that the price disparity [between the 5S and 5C] was not enough," Nguyen said. "In mature markets, why am I gonna bother saving a little bit of money to scale back on the technology?"

iPhone ASPs
The ASP, or average selling price, of the iPhone jumped last quarter, confirming that sales skewed toward the higher-priced flagship iPhone 5S. (Data: Apple.)
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