Apple’s invitation to an event at its Cupertino headquarters on Tuesday promises to “brighten everyone’s day”. Shown via satellite link in Europe it will, for the first time, also be shown to a select group of guests in China.
Even though the iPhone maker has said nothing about what is ahead, its vast supply chain in China has leaked enough details over the past few months that seasoned observers feel sure about what Apple has in store. There will be a top-end “iPhone 5S”, looking like last year’s iPhone 5, in black, white and “champagne” – a cross between gold and beige – which may include a fingerprint sensor for unlocking, and double-speed video capture.
And then there will be a cheaper “iPhone 5C” – with the same screen size as the iPhone 5, but with a tough plastic back, and in multiple colours, including strawberry red, blue, lime green, yellow and white. Those colours are how it aims to “brighten”; that, and the new iOS 7 software, designed by Sir Jonathan Ive, which brings more primary colours to the fore.
It will be the first time Apple has introduced more than one phone at a time. But Apple is at a crossroads. The share price is down from $700 a year ago to $500 (£320) with its arch-rival Samsung eating into its profits.
Only two central details have not been leaked: the price of the so-called 5C, and whether Apple has finally tied up a deal with China Mobile, the world’s largest mobile telecoms company with 745 million subscribers. (The US has 254m in total.) Those two details, analysts think, will decide whether Apple actually has bright or dark days ahead.
“Whatever they do, they aren’t going to offer a cheap iPhone,” said Ben Wood of the analysts CCS Insight. “That isn’t compatible with the brand. But I think that if you look at the price of the iPhone 4 in the UK, it will probably be the same as that.” The iPhone 4, introduced in June 2010, is still selling well in the US and UK because carriers can offer it free with a contract.
On “prepay” – without a contract – the cheapest iPhone 4 is £319 in Britain, or $450 in the US. Compared to the average price of smartphones around the world, that is high. Outside the US, prepay is about half of all phone sales; but Apple is in effect locking itself out of that market by its pricing.
That leaves Apple with a dilemma, according to Benedict Evans of Enders Analysis. “The US contract phone pricing structure today effectively puts a lower limit on the viable price for a contract smartphone. The iPhone 4 and similar high-mid range Android phones are sold as ‘free’ on contract; phones whose list price is actually much lower are sold at the same price. A $200 phone is sold to consumers at the same price as a $400 phone – and hence is uncompetitive.”
If Apple sold a $300 iPhone in the US, the carriers would simply keep the extra $100 that they charge customers for themselves – and Apple’s margins are eroding already, with the average selling price of the iPhone dropping to $581 in the second quarter of this year, from $613 in the previous quarter and an average of $634 since 2009. But a $300 iPhone could sell in huge numbers outside the US and boost profits.
For Apple, maintaining or growing its market share matters not just for profits, but to keep third-party developers writing apps for the iPhone before others. That leads to a virtuous circle where people buy iPhones because they can get early access to popular apps, and developers see fast take-up.
But the rise of Android, used on 52% of the smartphones in the US, against 40% for the iPhone according to ComScore, means that some developers are considering writing apps for Google’s platform first, making Apple second choice – a status it wants to avoid.
Though Apple’s sales are rising annually and the iPhone is still profitable, the whole market is growing faster, especially in China, where Android phones (without Google’s services) have about 90% of the market. The world market for smartphones will increase 40% to pass 1bn this year, according to research company IDC. The more Android phones there are, the more likely developers are to write apps for it first.
Nor is Android the only threat. Windows Phone, from Microsoft, is also winning first-time smartphone buyers, who are upgrading from “feature phones” which do not have internet capability. Data from Kantar WorldPanel ComTech last week suggested that Android made up about 70% of sales across Europe and Asia, while Apple has strongholds in Britain, France and Australia. Microsoft is winning new users in lower-cost countries such as Mexico, where it outsold iPhone in the past 12 weeks.
And Microsoft is sure to renew its focus on business customers, where it could offer Windows software for the desktop, mobile and backroom systems.
A China Mobile deal could make much of that less relevant. Until now, the carrier’s unique signal encoding and demands on revenue shares have stymied a deal. Rumours that Tim Cook has been to the country, and the fact that Tuesday’s announcement will be shown in Beijing as well, suggests that Apple is making a deal – and that the next iPhones will be on sale there before Christmas. “There used to be a wait of a few months before Apple launched their latest products in China, but nowadays, China is too important for Apple and so it will be the first batch of markets,” a source at one Chinese carrier told Reuters.
“It’s a very good direction that Apple is launching its latest model so soon in China when its brand attraction is on the decline,” Nicole Peng, an analyst at Canalys, told Reuters. “It is a sign that they value the Chinese consumers.”The bright colours of the new iOS 7 software, shown off to Apple developers in June, are expected to be popular with Asian customers. But another Asian trend – towards larger screens dubbed “phablets” because they are a cross between a phone and a tablet – is unlikely to be followed. While Apple is reported to be testing iPhones with larger screens, and developer sources say that the iOS 7 software is suitable for larger screens, nobody is expecting an Apple “phablet” on Tuesday. “I think that there’s enough pent-up demand for ‘new’ iPhones even if they’re the same price as the old iPhone 4,” said CCS Insight’s Wood. “It will feel like a new device. And that’s what people want.”
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