iPhone 5C still too expensive for emerging markets

Apple is pushing into China, but its "low priced" 5C will be too expensive for most subscribers

Apple is pushing full-steam ahead into China as news broke Wednesday morning that Apple has secured a license to run on China Mobile, along with two other Chinese carriers: China Unicom and China Telecom Corp.

That’s great and all, but will Apple actually have a phone that people outside of the U.S. can afford?

When the company revealed the reduced-price iPhone 5C on Tuesday, the common assumption was that Apple would rely on this device to gain a foothold in emerging markets, like China, India, Brazil, and Russia. But then it announced the price: $99 for the 16GB version and $199 for the 32GB version on a two-year contract.

So, a difference of $100. But that means an unsubsidized iPhone 5C will likely start at $499—which is still pretty damn high. Apple is offering the 16GB 5C on the T-Mobile website for $550.

“As we had written previously, the potential attraction of a lower-priced smartphone from Apple could be the expansion of the addressable market. While the 5C is a first step away from the high-end, we do not think it is a big one,” said J.P. Morgan analyst Mark Moscowitz in a research note. “This higher price point could be good for the gross margin profile of the iPhone portfolio, but we had thought a price point closer to $350 could drive greater market coverage, particularly in emerging markets, setting the stage for accelerating growth.”

Investors clearly were expecting something more dramatic at yesterday’s event. Whether they’re dissatisfied with the iPhone 5S or the iPhone 5C pricing, they’re clearly not happy. Apple shares dropped 5.5% in pre-market trading Wednesday morning to $467 after climbing to $507 on Tuesday.

That could be because Apple is missing a huge opportunity to tap the market of prepaid subscribers in China who will be upgrading to a smartphone in the next few years.

BTIG analyst Walter Piecyk estimates that 80% of China Mobile’s prepaid subscribers will be first-time smartphone buyers in the next 3-5 years, compared to 60% of China Mobile’s postpaid subscribers. But an estimated 80% of China Mobile’s 750 million customers are prepaid subscribers.

Piecyk posits that Apple is targeting a 60% market opportunity on 125 million postpaid customers at $550 to net a $40 billion return, but in doing so, it’s stepping over an 80% market opportunity on 625 million prepaid customers at a price point of $300 for a $150 billion return.

The iPhone 5C could cost Chinese subscribers as much as $700, which is not a very compelling price point for first-time smartphone buyers.

“Even if the profitability margins on those lower priced phones was much lower than higher priced postpaid targeted phones, the opportunity in prepaid still seems more sizable to us,” wrote Piecyk in a blog post.

Apple doesn’t have to peddle a wooden wind-up iPhone at a price point of $50 to tap emerging markets, but $550 to $700 kind of misses the point altogether. 

Image source: engadget