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Apple Misses the Mark With the Cheap iPhone

Palo Alto, Calif. — For the last six years, Apple has had a simple, increasingly risky plan for selling the iPhone. Every year, the company makes only one new model, a phone that represents Apple’s platonic ideal — the one phone it thinks everybody ought to have. Apple usually sells the new phone for around $650, and wireless carriers sell it to customers for $199 with a two-year plan. To hedge its bets against low-priced competitors, Apple also keeps selling its previous models, reducing the price of each by $100. Last year, when Apple unveiled the iPhone 5, it kept selling 2011’s iPhone 4S for $550 ($99 with a contract), and the 2010 iPhone 4 sold for $450 (free with a contract).

The advantage of this strategy is clear. Unlike its competitors, which make dozens of phones every year, Apple can focus its design and manufacturing energies on a single new model, and it can push customers to purchase its highest-end, highest-margin device. But the downside is clear, too. The iPhone is Apple’s biggest business, accounting for two-thirds of its profits. By releasing only one new phone every year, Apple keeps putting more and more of its eggs in a single basket. What if that basket has a buggy antenna? What if it doesn’t seem like much of an upgrade? What if its screen isn’t big enough for some customers? What if it’s just too expensive?

This year was supposed to be different. For months now, analysts have speculated that Apple would finally do what many observers have long called on it to do — to diversify its iPhone lineup. The logic seemed obvious. Samsung, Apple’s fiercest rival, has been cleaning up in developing markets like India and China by offering models that cater to every market niche, from the low end to the high end. By making a new phone that sold for around $300 to $400 without a carrier subsidy — which is how many people in developing markets buy phones — Apple would be able to compete for price-conscious phone buyers, creating a whole new class of iPhone users who currently can’t afford Apple’s shiny baubles.

But last week, Apple whiffed.

At the company’s headquarters in Cupertino, Calif., CEO Tim Cook did unveil two new iPhones rather than just one. But neither of these phones is the cheap iPhone that people had been predicting. Indeed, Apple didn’t really change its pricing strategy in any meaningful way. Across the globe, it will still be charging the same for its phones as it always has. It’s not a stretch to say that instead of a good price, Apple is now offering budget-conscious consumers around the world a strange deal: OK, the iPhone isn’t any cheaper than it used to be. But hey, look, it comes in lots of colors! Colors! Even pink! How will you be paying?

The new top-of-the-line model — called the iPhone 5S — looks the same as today’s iPhone 5, but it’s got a faster processor, a better camera and a fingerprint scanner that lets you unlock your phone much quicker than with a password. (I tried it out at Apple’s demo area and found it very easy to set up and speedy to use.) The 5S — which comes in black, white, and gold — will sell for $650, or $199 with a contract, the same as last year’s iPhone 5.

Then there’s the iPhone 5C — the long-rumored cheap iPhone that isn’t. It’s made of plastic instead of the aluminum found on the bigger iPhone. It comes in five colors: green, blue, yellow, pink and white. Other than that, it’s got the same internals as the iPhone 5: same camera, same processor, same capabilities. And same price. Indeed, the 5C is so similar to the 5 that Apple is discontinuing that model. The 5C will sell for $550, or $99 with a contract. This isn’t a cheap phone. And if the 5C is cheaper for Apple to produce than the 5 would have been — which seems plausible given its plastic body — it might even be a way for Apple to boost its profit margins rather than scale them back.