Apple’s own numbers show that it should make cheaper iPhones

Remember this old thing?
Remember this old thing?
Image: Reuters/Morteza Nikoubazl
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Apple had a fantastic first quarter. So good, in fact, that the company surprised itself—in January it forecast revenues of between $42 billion and $44 billion. Instead, it raked in $45.6 billion, blowing away its own and analysts’ projections. And it sold 43.7 million iPhones, up 17% from the same quarter last year. Analysts had expected a meagre 39 million.

The reasons for Apple’s massive quarter are fairly straightforward. China Mobile, the world’s largest mobile operator, started selling iPhones in the first quarter of this year. Japan’s Docomo network finally relented and did the same the previous quarter, and by the end of the first three months of 2014, sales of iPhones in Japan were up 50% over the same period last year. Emerging markets such as Brazil, Indonesia, Poland and Turkey saw what Apple CEO Tim Cook called “strong double-digit” growth, and in India and Vietnam, sales doubled.

All great stuff, as far as headline numbers go, but look a little deeper and there is a different story to be told. The average sale price of an iPhone dropped $41 to $596, which a Sanford Bernstein analyst called the “largest sequential decline that we’ve seen in history.” Apple’s new finance head, Luca Maestri, attributed the drop to more sales of Apple’s three-year-old, 3.5-inch iPhone 4s:

When you look at the $41 of decline, I would say about half of that was driven by the fact that we have continued to do very well in emerging markets with the 4s. I have mentioned that there is a lot of markets where we’ve grown very strongly in Latin America, in Asia-Pacific, in Eastern Europe. So, about half of that decline came from the stronger sales of the 4s.

This is good news for Apple if it means Android smartphone-users are switching over. And it’s an indication that Apple can make more money selling cheaper phones—the volume business it has traditionally shunned. Over to Tim Cook, from a transcript of his earnings call (emphasis added):

We’ve seen our ability to attract new users to iPhone to be very significant in the emerging markets. We were seeing new to iPhone numbers on the iPhone 4s sales in the 80 percentages in certain large geos [geographical areas]. So, this to us give us a great comfort that we can continue to grow and we may not be able to attract some of those buyers to our top phone because of the price point. But if we can get them in on the entry iPhone, it gives them a great product, at a great value and gets them into the ecosystem.

That ecosystem includes the app store, where 30 cents goes to Apple for every dollar spent. All this indicates that Apple can easily keep growing and extend its reach in the parts of the world where cheaper Android devices have taken the lead. Indeed, the company even brought back the discontinued iPhone 4 in India, Indonesia and Brazil, though Cook says “we sold a very, very low single-digit percentage of those and so it had extremely minimal impact of results on the quarter.”

That is unsurprising. What people want is not the cheapest iPhone available, but the one that offers the best value for money—which for now is the 4s. Now that Apple has evidence that customers in emerging markets will buy iPhones—and not just the cheapest one around—perhaps it is time to revisit the idea of new, less-expensive model (unlike the much-touted “cheap” iPhone 5c, which turned out to actually be pretty pricey). That way, emerging market customers will have a new iPhone to buy that actually makes sense, instead of shelling out for a three-year-old model.