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High Time for Apple to Choose Between Margin and Market Share

April 15, 2014 | About:

Latest rumors about Cupertino-based Apple (NASDAQ:AAPL) hint that the tech giant is looking at a price hike of $100 per device for the next iPhone. While this news might stir up things for the telecom carriers, it’s no less a stressful point for the company as well. But is Apple realizing that?

Apple’s Joy And Carrier’s Sorrow

Apple enjoys huge profit margins on iPhones and iPads. According to industry experts and analysts, the margin for the iPhone 5S stands at a mind blowing 69%, while that of the 5C is almost equal at 68%. Even the iPads are sold at equally high margins – the iPad Air is said to have margin ranging from 45% to 61%. These are huge numbers, no doubt! So you can now imagine what kind of money Apple makes on the devices.

While Apple was and is still busy reaping the fruits of its innovations, the telecom carriers such as Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) are all somehow struggling to manage the already high subsidies for the devices. On top of that another $100 hike is something which these telecom players will surely not look forward to. It’s bad for the telecom giants alright. But, it is just going to affect them only? I don’t think so. I think Apple will get into trouble with this move.

Why Is the Price Rise Bad for Apple?

The success formula in the smartphone and tablets space is very simple: low price and large screen. At least that’s the present trend, especially in the emerging markets. Apple has created a brand identity for itself and that has been a huge driving factor for the company’s ongoing success. But gradually the company is losing its hold on the market and players such as Samsung (SSNLF) have managed to become the market leader thanks to Google (GOOG)'s Android platform. And it's not just Samsung, but other players also, such as HTC, LG, Motorola and several others.

All these players have adopted the success formula and have produced great smartphones at much cheaper rates with larger screens. If you look at the new Nexus 5 or the latest Moto X, you will be able to spot two great devices with significantly larger screens, capable of doing almost everything an iPhone 5S does (or will probably do a bit more too) and yet is available at such reasonable rates. The top tier of the mobile market which prefers buying exclusive devices that not everyone can afford has become saturated and the market is growing solely based on the other tiers which prefer cheaper, affordable devices with decent specifications. Simply put, they go after value for money.

Therefore, it was obvious Samsung and similar others would gain prominence. On top of this, these players have massively improved their hardware also. As far as specifications go, the newly launched Galaxy S5, the successful Nexus 5 and Moto X all sport great hardware, probably better than that used in iPhone 5S. All this along with very fast improving Android platform is posing as a huge threat to Apple.

Taking all the above points into consideration, my question is, can Apple really afford to raise prices? The rumored iPhone 6 is expected to come with a 4.7 inch display. With this Apple will have one component of the success formula ready. But what about inexpensive devices? Unless the company is able to strike a balance between the two and deliver both to the consumers, Samsung and Google will keep getting preference and will keep eating into Apple’s market share. Apple surely tried doing that with iPhone 5C, but failed badly.

Another point that needs to be considered is the U.S. consumers will probably be able to afford the next iPhone even if the price goes up by $100 because of the contracts available from the telecom players. But, a majority of the rest of the world and particularly the emerging markets don’t have that facility. Consumers there have to buy the devices off-contract only. In such markets the increase in the price will strike a severe blow on the company’s market share.

Departing Thoughts

If Apple has to produce handsets which are easier on the pocket and come with a larger screen, it will just have to compromise on its margins. The tech giant simply can't expect to maintain the margins while increasing features supported by increase in prices. There is a glass-ceiling to this. After a point, consumers will start finding the price to be unreasonably high (some already do) and will shift to other smartphone makers, a growing trend already observable. The company can’t go on raising prices for ever. Apple needs to understand that and needs to curb costs if it wants to maintain its hold on the market.

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