These Numbers Suggest Apple Had Better Get a Low-End Smartphone


iFolks are still reeling from Apple's precipitous drop after it reported earnings Jan. 23, not to mention the pressure on its shares leading up to the news. Without rehashing the particulars, slightly depressed margins, and concerns regarding opportunities for future growth, seem to be driving Apple's share price down.

So, what's Apple CEO Tim Cook and his 80,000-person team to do? According to a recent study completed by the research folks at IHS, the answer's pretty clear.

The data
After selling nearly 48 million iPhones in its recently released fiscal 2013 first quarter, Apple solidified its dominant top-end smartphone position, particularly here in the States. According to Kantar, Apple now accounts for 51% of the domestic smartphone market; which is both good and bad. On the good side of the ledger, that kind of market penetration is an incredible accomplishment and drove Apple's record revenue and earnings results.

The downside of Apple's market share is part of what's been driving its shares down of late -- is the market saturated with iEverythings? If so, how does Apple continue growing sales at such a phenomenal rate, something investors and market pundits alike will punish unmercifully (as we've seen) if it can't?

According to IHS, the answer lies in further infiltrating the fastest-growing segment of the smartphone population -- the international, low-end smartphone consumer. By 2016, as per IHS, low-end smartphone shipments will nearly triple from 2012's 206 million units, jumping to 559 million. That kind of explosive growth equates to a 51% compound annual growth rate, compared with a 12% annual growth rate for the global high-end smartphone market.

So where will all those new phones end up? Not surprisingly, China is expected to lead the way, and Cook's trips to the Far East of late make it pretty clear he gets that, too. Unlike many international markets, as Nokia learned recently, some Chinese carriers will actually subsidize the cost of the phones. Nokia's deal with China Mobile to offer its Lumia phone to China Mobile's 700 million customers was a coup. The icing on the cake for Nokia was China Mobile's decision to subsidize the cost of its Lumia, making it essentially free for its customers.

Other areas of international growth are expected to be in the Asia-Pacific region, Eastern Europe, followed by the Mid-East and African markets. Smartphone growth in North America will bring up the rear; IHS expects we'll see about 4% annual growth. The data is pretty clear: Low-cost phones in emerging markets are critical for future growth -- not just for Apple, but for all the usual smartphone players. For the countries that shy away from subsidizing the cost, and there are many, price point becomes a critical component of any strategy. No matter the features, it's hard to imagine a typical smartphone customer in a Third World country plopping down $500 or $600 for an iPhone.

Where Apple fits
For Apple fans, Nokia may not warrant mentioning in the same breath, but Cook and team can take a page from the Finnish phone maker. Of the 86.3 million mobile devices (primarily phones) sold during Nokia's recently announced Q4, 9.3 million of them were its new Asha phone. What does that have to do with Apple? Nokia released its new Asha lineup for one reason, and one reason only: ti directly target the mid and low-end phone consumer-primarily overseas. And it's working.

Samsung took over the No. 1 spot in global phone sales, surpassing Nokia last year, in large part because of its wide array of phone alternatives, touching multiple price points. Google is another major player that, like Nokia and Samsung, has a smartphone directly competing with Apple's iPhone 5, and based on its recent earnings report, hardware sales were strong. However, Google has also shown a willingness to move into lower price points other hardware players wouldn't. While its Nexus 4 starts at $300, its Motorola unit could easily attack lower price points to secure better Android positioning in the low end.

What's the plan?
If we can agree that the domestic smartphone market's growth is limited -- not saturated, but limited -- and come to terms with the fact that no one's paying $600 for an unsubsidized phone, we return to the original question: What does Apple do about it?

I recognize that Apple's margins will be pressured offering a low-end smartphone alternative, but those concerns need to be set aside to address the larger problem: Where does continued sales growth come from, if not the low-end market? Yet another iteration of a high-end iPhone? Apple TV? A double-decker, super-mini iPad? No, the data is undeniable. It's time for Apple to come down from on high and take a look at what Nokia, Samsung, and, yes, even Google, are doing.

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