They Just Don’t Get the iPhone 4S

After Tuesday’s (Oct 4, 2011) announcement of the iPhone 4S, reporter after reporter, and analyst after analyst, either bashed Apple, or at best, had a lukewarm reaction. One of the few dissenting responses, by David Urban, called it a “game changer“.  While this article concentrated primarily on the phone’s features, most notably, Siri, which he considers revolutionary, my take on Apple’s announcement is much more in line with some of David’s other points.

It seems to me that this release was less about features and wowing people (although they did try), and more about mundane topics, such as market share and penetration, growth rates, emerging markets, product synergies and the like.  Tim Cook spent a lot of time at the beginning of the presentation talking about where and how Apple’s various products fit within the overall technology landscape.  I thought that investors would have keyed in on this portion of the presentation, rather than any anticipated whizbang demonstrations.

Apple’s View of the Cellphone World

The iPhone, with all of its success, still only commands 5% of the overall cellphone market.  It is first in smartphone sales and customer satisfaction, but there is oh, so much more that Apple would like to do with their flagship product.

The most important part of Cook’s presentation, in my mind, was at roughly the 15:30 mark, where he goes on to describe Apple’s view of the cellphone world (“over time, all handsets become smartphones”), and how this view reveals an “enormous opportunity for Apple”.

So what is central to Apple’s plans to corral a much larger percentage of the over 1.5 billion in annual units sold?  Well, I can tell you it’s not Siri, nor the iPhone’s HD video camera.  Nor is it the excitement that will be generated when a newly designed iPhone 5 is finally unveiled.  No, it is much more basic than that.

Market Share

In the past, Apple has always been a bit of a boutique product company (albeit, the largest boutique in the world!).  While their products have enjoyed success, with the exception of the iPod, and now the iPad, they have never been top dog in market penetration or sales.  They have excelled at being the number one company in profit margins though, and that’s what has mattered to them and investors the most.

Now, Apple seems to be setting it’s goals higher, or if you prefer, shifting their goals away from a pure high cost, high quality, high profit margin paradigm.  That aspect will always be there, no doubt, but now, they seem to be adding a new wrinkle to that tried and true formula.

  • Low Cost: Apple has reduced the cost of it’s entry level iPhone 3GS to free.  This is huge.  Now, anyone who signs a standard 2 year cellphone plan, can get an iPhone free of charge.  Price is no longer a factor, and as consumers start rolling off of their present contracts, you can bet that more and more of them will be choosing the iPhone as their phone of choice.  The evidence indicates that those who are currently without an iPhone, desire that device more than any other (see, among others: mobile OS preferences,  Android users plan to switch to iPhone).  And the retention rate of the iPhone is top in the industry, by far, so you can bet there will be few issues with defection.
  • New Carriers: Apple is constantly expanding its distribution channels.  One of the more overlooked aspects of Tuesday’s announcement, is that they have reached agreement with Sprint and several other carriers, further increasing the number of ways the public will be able to obtain their device.

Clever Boy

For most companies, a plan to increase its market penetration in a single industry would be lofty enough.  But not with Apple.  I see this as just part of their overall quest for word dominance.  Think about how all of this ties into the ecosystem they have built:

Of course, the arrows go the other way as well, at least for the two boxes on the left.  As more and more consumers jump on the Apple bandwagon, the larger audience precipitates the development of more apps, and affords Apple the economies of scale necessary for more attractive price points.

So in the big picture, Apple is choosing at this time to concentrate on the box in the upper left — lower price points and greater market penetration.  What the press by and large seems to be concentrating on is the box on the right — more product features.  While the latter may make for more attention grabbing headlines, it is the former that makes the most sense for the company as it looks to grow its business.

At least that is what Apple is betting on.

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