iPhone vs Android: Will Widening Price Gap Cost Apple?

Google's  Android operating system continues to widen its lead in the mobile phone market over one-time king Apple's  iOS. That lead may continue to grow as the price gap between Android phones and iPhones has grown and is expected to grow further when Apple releases the iPhone 6.

The price gap has grown consistently since 2010 as the number of companies making Android phones and the variety of models has exploded. The chart below details how the divide has increased even though the average selling price of an iPhone has decreased to $657 in 2014 from a high of $710 in 2011.

2013 actually had Apple's phones selling at the lowest average price in the five years examined on the chart. The number should climb a little in 2014 because the not-yet-announced iPhone 6 is expected to be offered in a version with larger screens. These bigger iPhones will be sold at a $100 premium, pushing the average price gap to $403, according to an IDC forecast.

Is the smartphone market growing?

Though the market may have peaked in the United States, global smartphone sales are expected to increase in 2014. Worldwide smartphone shipments will reach a total of 1.2 billion units in 2014, marking a 23.1% increase from the 1 billion units shipped in 2013. From there, total volumes will reach 1.8 billion units in 2018, resulting in a 12.3% compound annual growth rate (CAGR) from 2013-2018, according to IDC.  

The biggest threat to Apple's continued success is where that growth will occur.

"What makes smartphone growth so amazing is where the growth will be taking place," said Ramon Llamas, research manager with IDC's mobile phone team. "Smartphone shipments will more than double between now and 2018 within key emerging markets, including India, Indonesia, and Russia. In addition, China will account for nearly a third of all smartphone shipments in 2018. These - and other markets - will offer multiple opportunities to vendors and carriers alike, but the key will be balancing affordability with expectations."

If price is a factor then that favors Android. In emerging markets it's hard to imagine Apple gaining significant market share unless the company releases a cheaper phone -- something it has been reticent to do.

Average phone prices are falling

Globally, IDC expects the average selling price of smartphones to reach $314 in 2014, down 6.3% from the $335 ASP in 2013. From there, ASPs are expected to reach $267 by 2018. The reason the prices have fallen and will continue to fall is that cheaper phones are no longer clearly inferior. High-end phones may be better, but the bottom has risen so much that the cheapest Android phones are still pretty impressive.

"Until recently, low cost has equaled poor quality in the smartphone space," said IDC's Ryan Reith. "Given the competition at the high end, vendors like Motorola are trying to skate to where the puck is going by offering extremely affordable devices like the Moto E, which offer a 'good enough' experience that will suit the needs of many. This goes to show that components that were used 2-3 years back in high-end smartphones are still sufficient in many aspects, and ultimately will allow vendors to come to the table with viable low-cost solutions."

Apple has very good and even great phones. That may not matter if other companies offer good enough for much less money, especially to an audience that doesn't know what it's missing.

Which operating systems will grow?

Android and iOS are not the only players in the smart phone market -- Microsoft  is attempting to grow the small share it has with Windows Phone and BlackBerry  is fighting to stay alive. Still Android is unlikely to be toppled from its throne anytime soon as IDC predicts its market share will hit 80.2% in 2014. The researcher does ultimately expect Windows Phone will steal a small amount of business from Android.

"Android has been, and will continue to be, the platform driving low-cost devices," IDC wrote. "ASPs of Android smartphones were well below market average in the first quarter of 2014 and are expected to be $254 for full year 2014, dropping to $215 in 2018. Growth of Android phones is expected to outpace the market in 2014, rising 25.6% with volume just shy of 1 billion units."

IDC expects Apple's share to drop from 14.8% in 2014, to 13.7% in 2018. iOS volumes are expected to hit 184.1 million in 2014, growing to 247.4 million in 2018. Growth of 20% this year will slowly drop to year-over-year growth of 6.1% in 2018, more in line with overall market growth. 

Windows Phone, IDC predicts, will slowly build its global footprint and growth is expected to outpace the market throughout the forecast period. In 2014, volumes are expected to grow 29.5% over 2013, reaching 43.3 million shipments. This momentum is expected to continue into 2015, reaching 65.9 million units, continuing on to 115.3 million in 2018. 

BlackBerry is barely a player anymore and IDC expects volume to drop 49.6% in 2014, equivalent to 9.7 million units. Those numbers will continue to fall through 2018 with it being likely that BlackBerry will struggle to exist as a handset maker.

What can Apple do?

If Apple does not launch a much cheaper phone it's unlikely to be able to sell to these customers. While that seems unlikely Apple, could do what it has done with its iPad line and offer older models at a lower price. Perhaps Apple can reintroduce the iPhone 3 or 4 in emerging markets as an alternative to Android. If it doesn't it's likely to never have a chance to capture audience share in emerging markets. Even if those customers can eventually afford an iPhone it's much harder to convert them once they become used to another OS. 

By keeping prices high Apple has protected its margin. That's a strong positive but at some point falling market share cannot be made up for with high margins. Apple should not cede the developing world to Android and there are clearly ways the company can offer a cheaper phone without lowering the prices on its premium models or making them less desirable.

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The article iPhone vs Android: Will Widening Price Gap Cost Apple? originally appeared on Fool.com.

Daniel Kline is long Microsoft. He has never visited a developing nation. The Motley Fool recommends Apple and Google (C shares). The Motley Fool owns shares of Apple, Google (C shares), and Microsoft. 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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