3 Reasons Why Apple's iPhone Still Has Room for Growth
Apple's growth story is over, right? Critics argue that the company has exhausted the premium smartphone market, and that if it introduces a low-cost iPhone to combat saturation, lower margins will offset any revenue gains. Though critics could be right, I think the odds are against them.
iPhone sales accounted for more than half of the company's revenue in its most recent quarter. If any segment is going to meaningfully move the needle for Apple in FY 2014, chances are it's the company's iPhone segment.
Fortunately, Apple has three major drivers set to work in the iPhone segment's favor over the next year or so: a low-cost iPhone, a potential arrangement with China Mobile, and an Apple iPhone trade-in program. Let's discuss the potential of each.
A low-cost iPhone
Apple's rumored low-cost iPhone is pretty much inevitable at this point. With a likely Sept. 10 iPhone media event just around the corner, countless leaks continue to suggest that Apple will introduce a lower-cost iPhone along with a refreshed new premium lineup.
By how much could a lower-cost iPhone boost sales? In China alone, Morgan Stanley analyst Katy Huberty believes the so-called iPhone 5C could boost Apple's market share in China by 13.3 percentage points. That's a significant gain considering recent data from Canalys that said Apple's smartphone shipments in China in the second quarter of 2013 accounted for just 4.8% of all shipments in the country.
With 740.2 million wireless subscribers, the world's largest wireless carrier, China Mobile, is nothing to laugh at. If Apple lands a deal with the carrier to sell its iPhone -- and it looks very possible at this point -- Apple will surely benefit. According to Huberty, the arrangement could boost the company's market share another 6 percentage points (on top of a 13.3 percentage point gain from a low-cost iPhone).
Apple's already piloting an in-store iPhone trade-in program, and sources told MacRumors that it is scheduled to launch on August 30.
Third-party trade-in programs for iPhones have been around for a long time. But an Apple-endorsed trade-in program at Apple retail stores is a whole different beast. Apple has 408 retail stores, worldwide, with average revenue per store of $10.1 million in the last quarter.
Even more, Apple plans to resell these iPhones in emerging markets, according to MacRumors' Eric Slivka.
It's already been done
All three of these potential growth drivers for the iPhone segment focus on Apple's opportunity in emerging markets. Fortunately, Apple isn't going into these markets blindfolded. It has already been testing this price range with the iPhone 4.
So far, the company is pleased with the results. Apple CEO Tim Cook explained in the company's third-quarter earnings call that "the number of first-time smartphone buyers that the iPhone 4 is attracting is very, very impressive. And we want to attract as many of these buyers as we can."
For a company with Apple's retention rates, new customers are great for Apple investors. And as far as the argument that low-cost iPhones will hurt Apple's margins, I've already debunked that here.
So is Apple's iPhone segment at the end of its growth trajectory? I don't think so. But fortunately Apple isn't priced for much growth beyond inflation anyway, so if the segment growth doesn't play out as nicely as I hope, investors aren't doomed. If growth does resume nicely in Apple's iPhone segment, consider it a bonus.
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