The Genius of Apple at Work

I have to hand it to Apple , the marketing department has outdone itself. The bears who have been calling for Apple's downfall have been, at least temporarily, silenced by the company's strong Thanksgiving weekend sales.

Now, what exactly impresses me? Let's examine:

The 5c and 5s
Traditionally Apple would move past models down a slot-price whenever it would introduce its newest flagship model. For example, when the iPhone 5 was released, the 4s was designated the mid-tier model, and the 4 was given away for free with any carrier contract renewal. 

With the 5s, Apple bucked tradition by concurrently introducing the 5c, giving consumers the apparent choice of two new models.

In fact, the 5c, as most savvy investors know, is basically just the iPhone 5 with a few minor changes inside. Yes, the techies will tell you the 5c has a slightly better  LTE support, and an upgraded front facing camera, but for all intents and purposes, it's the iPhone 5.

The big change
The big changes are on the outside- most importantly that the 5c is made out of a hard plastic, making it cheaper to produce vs the iPhone 5 ($173.45 versus $197) - which translates to greater profit margins/ flexibility in pricing. It also freed up production resources to make the metal 5s.

You'll likely remember, the iPhone 5 had a long lag time in getting into the hands of its buyers. Analysts largely attributed this to supply chain issues. In making their second-tier phone plastic, Apple has allowed itself greater flexibility in resource allocation, helping it better meet the high demand for the 5s today. Who knows how long the wait time might have been had Apple not addressed this issue.

Lack of demand for the 5c?
But some analysts will point to the fact that there is lackluster demand for 5c versus the 5s, and describe the 5c as a "flop."

As a shareholder, I consider consumers overwhelmingly demanding the higher priced product a positive. The 5s costs $198.70 to produce and sells unlocked for $100 more than the 5c meaning higher margins and profits for the company.

Furthermore, sales of the 5c should not be compared to the 5s; the most apt comparison would be to the sales of the 4s when the iPhone 5 bumped it down a slot.

Colors + flexibility
Additionally, the 5c now comes in different colors, adding an element of choice for consumers. As the model costs less to make, Apple has additional pricing flexibility to compete with other phone makers while maintaining margins, as demonstrated over Black Friday when Wal-Mart  (no doubt with the blessing of Apple) was offering the 5c for $45 with a $75 gift card (on contract), meaning consumers were seemingly getting paid $30 to haul away a brand new 5c. 

According to the LA Times, "Wal-Mart said Apple is not selling the devices to the retailer at a discount. That means the giant retailer is likely choosing to take a smaller slice of profits per device in the hope that it will make up the difference by selling more iPhones," or by getting customers in the door to purchase more items. I called the electronics department  of five Wal-Marts in Oregon on Black Friday, and each separately describing "very, very long lines of people with appointments to purchase the 5c."

Meanwhile the 5s continues to fly off the shelves, recording strong sales not only in the US, but also in Japan where the  of all smart-phone sales in October.

continues to do everything it can to commoditize smart-phones. Subsidiary Motorola recently lowered the off contract price of the MotoX to that approaching its Nexus line amid disappointing third quarter sales which at an estimated 500,000 units were well below expectations.

According to Yahoo Finance "If Google can sell 6.6 million Moto Xs, about 0.5% of all smartphones sold globally, that would produce $2.3 billion of new revenue and add about $2.07 to earnings per share next year, the analysts say. Analysts on average were expecting Google to earn $22.31 per share in the second half of this year and $51.28 per share in 2014."  Obviously the half million sales unit per quarter just isn't going to come close to meeting those expectations. 

Many analysts criticize Google for making so little from Android, but what most people don't understand is that for Google, a large part of Android's value continues to be the data it collects which helps buttress its search engine moat.

That said, I still believe Google remains Apple's biggest threat.

Final thoughts
Expect an excellent upcoming quarter from Apple when it reports in January. Apple deserves an A+ for its marketing, planning, and handling of resources. 

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Margie Nemcick-Cruz owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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