Selling a smartphone to the early adopter crowd is relatively easy. You build a “flagship” product with premium design, load it with all the latest features, make sure it’s LTE compatible, then market the heck out of it and wait for the launch day lineups.
If you’re Apple (AAPL) or Samsung (SSNLF), you’ll grab a good chunk of the market and make money doing it, too. Selling smartphones to emerging markets takes a different approach. In this case, price is critical. And while brand awareness is important, releasing an affordable device that has retailer and carrier support is key to grabbing market share.
To put things in perspective, in India — one of the most rapidly expanding wireless markets in the world, but a country where average income hovers around $1,500 — 70% of smartphones sold this year will be priced below $100.
A similar strategy is required for success in established markets. The early adopters have largely been snapped up. As more people begin to move from feature phones to smartphones, this second wave of customers tend to be more price conscious, so a $649 investment is a tough sell. That’s the group that Apple was hoping might grab an iPhone 5C … but $549 isn’t a whole lot better, and poor sales of the plastic-encased smartphone reflect this misstep.
Google (GOOG), on the other hand, is going to make a real play for those numbers when its Motorola division released the low-cost Moto G, a $179 smartphone aimed directly at emerging markets and first-time buyers who aren’t prepared to pony up $600 or more for a flagship smartphone.
This is a similar strategy already employed overseas by Nokia (NOK) with its Asha line of smartphones, not to mention Samsung with the sub-$100 Galaxy Star and the Firefox OS phones recently introduced by ZTE.
Lenovo (LNVGY) is another key player that has seen tremendous success by focusing on affordable smartphones in its home market of China and expanding into other emerging markets. By adopting this approach, LG has pushed out of third spot in global smartphone shipments and is on track to see smartphones account for 50% of its sales within five years, compared to 20% currently.
The Moto G is an interesting compromise. It’s an absolute steal in the U.S. (it costs less to buy outright than the down payment on an iPhone 5S on contract), but it’s priced higher than most of the cheap smartphones it’s going up against in emerging markets. However, Motorola has taken the approach of making the Moto G a “premium” device, with features like a 4.5-inch HD display, quad-core processor and the latest version of Android. It doesn’t look like a bargain-basement phone, and that’s important.
Instead, Motorola cut corners where users are less likely to take notice: The display isn’t full 1080p, the CPU is a less powerful model, it starts at 8GB of storage instead of 16GB, it has no LTE, and the camera is relatively low-resolution.
For first-time smartphone buyers, budget-conscious buyers and emerging markets, these compromises are less important than the fact that they can buy a full-featured Android smartphone with a big display — and full access to Google Play.
Apple, on the other hand, has resisted all pressure to release a cheap smartphone. The iPhone 5C was a half-hearted attempt, at best. At only $100 less than the flagship iPhone 5S, the slightly more affordable iPhone has failed to move the needle overseas, and it’s not proving to be a big seller in the U.S. either.
It’s really difficult to make the case for buying last year’s phone (even if it is dressed up in a colorful candy shell) for such a small discount. That has led to Apple slashing orders for the iPhone 5C by a reported 11 million units for Q4. However, there is still a healthy demand for flagship smartphones, and Apple has been killing it with the iPhone 5S.
According to Business Insider, despite a retail price of $841 (even higher than in the U.S.), the company sold out in India within 24 hours.
Combine the demand for name-brand, flagship smartphones with Apple’s efforts to expand its retail presence in India (a concerted push to bring on additional distribution partners in that country last year helped drive iPhone sales by revenue from 3.9% to 15.6% in a single quarter) and you have the strategy Apple seems determined to pursue in emerging markets: Leave the high-volume, low-revenue customers for everyone else and focus on cherry-picking the wealthy consumers.
Apple’s approach might maintain revenue and profits in the short term, but it’s inevitably going to contribute to iPhone marketshare erosion. That can be dangerous because the app advantage iPhone once held could eventually become a weakness. If Android is perceived as the dominant mobile platform, more app developers could target Google Play over Apple’s App Store.
Price-conscious smartphone buyers are gaining more earning power across the globe. Apple should fear Android getting cheap smartphones in people’s hands. Once consumers are familiar with the operating system and app store, they’ll be more likely to choose from Samsung, Lenovo or Motorola instead of making the switch to Apple if they ever upgrade to a flagship smartphone.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
