Pricing dilemma

Apple struggles to deal with price-sensitive markets

Perhaps the most extraordinary facet of Apple Computer’s long run of success over the past decade is that the company has hardly put a foot wrong. Pretty much every single move that it has made — the iPod, the iPhone, the iPad — has gone into enhancing its brand, and strengthening the impression of coolness and exclusivity that so many consumers are willing to pay for. Much of that, surely, was due to the steely personality and leadership of its late leader, Steve Jobs, who was always unwilling to compromise with market conditions, technological constraints, or indeed anything that conflicted with his own, internal design aesthetic. For an uncompromising company that sells only high-value handsets to corner approximately 22 per cent of the market, as per latest figures for its iOS operating system, is a remarkable achievement.

But good times do not last forever. There is reason to think that Apple is now, for the first time, beginning to worry; the tech business is a hard one, and everyone is always looking to see if it has peaked. Adaptation is key. BlackBerry, till recently called Research in Motion and now desperately trying to regain market share with a well-designed new operating system, serves as a signal warning to smartphone makers that domination is not forever. For Apple, the blows have come thick and fast. In December, the US Patent Office provisionally invalidated a crucial patent for “multi-touch”. Given that such patents are at the core of Apple’s strategy to hold off its competitors, this was particularly unwelcome. Apple continued to lose market capitalisation, meanwhile, and in end-January its year-long reign as the world's most valuable company was ended by energy giant ExxonMobil, which recaptured the position it had earlier held since 2006. And its most recent quarterly results, while posting record profits, warned that sales growth in the next quarter would only be around 7 per cent, a sharp slowdown. Its shares lost an additional 10 per cent on the news. Apple has also reportedly cut orders for smartphone parts.

Unsurprisingly, the challenge from Google’s Android operating system, which occupies more than 70 per cent of the market, is worrying Apple. The problem is that Android — and its related makers, especially Samsung and HTC — have made inroads into growth markets in the developing world that are more cost-conscious. As consumers there upgrade inevitably to more and more sophisticated smartphones, a vast cohort of possible Apple users is instead becoming accustomed to Android, and Samsung’s varied Galaxy range. Apple has of late decided to push hard in developing markets; some reports suggest that it has more than doubled its sales in India over the last quarter. China saw record revenue growth for the company, too, but the launch of the iPhone 5 there was relatively lacklustre. Indian growth has been driven by closer integration with retailers and adapting to cash-constrained consumers by offering comfortable arrangements for payment through instalments as well as trade-in schemes — somehow a dilution of the way that Apple has traditionally done business.

But that won’t be enough, probably. In the end, a new iPhone costs around $700 across the developing world, and Samsung and others can sell comparable phones at a third of that price. And hence the reports that Apple is working on a smaller, cheaper iPhone variant, to be sold at around $100-150, have grown of late, with Bloomberg reporting last week that it might be on sale by the end of the year. The question remains, however: won’t making the iPhone cheaper dim its fabled lustre, turning it into just another phone, taking away its coolness, its USP? One thing’s for certain — Steve Jobs would never have done it.