Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

"Mass market" has been a dirty phrase for Apple. It looks as if Tim Cook is crossing it off the company's list of banned words. 

Just two months ago, a Wall Street analyst gave the Apple CEO a chance to revisit his company's product-pricing strategy. People's willingness to pay Apple's luxury prices for increasingly commodity products like smartphones and personal computers has helped Apple collect the bulk of hardware industry profits even with small or minuscule market share.

In the smartphone business, for example, Apple siphons about 90 percent of all industry profits even though the company sells fewer than 20 out of every 100 new smartphones globally.  

Premium Apple
Most smartphones are getting cheaper. But Apple continues to command premium prices for the iPhone.
Sources: IDC and Bloomberg Intelligence
These figures differ from Apple's reported average sale prices because IDC accounts for markups when sold to consumers.

But times are changing. Cook was asked whether Apple needs to go to "middle market or lower" prices, especially at a time of global economic hiccups. That would help increase the number of Apple product owners to target in Cook's new obsession with add-on Web services like apps, iTunes downloads and Apple Pay transactions. 

Cook said, in essence, "Don't expect us to go all cheap on you." The "low cost" iPhone option for a while has been older models, whose prices are cut as newer models hit the showroom floor. "I don't see us deviating from that approach," Cook said on the January conference call with analysts.

Yet on Monday, Apple essentially replaced the 2013 iPhone 5S in its lineup with the new iPhone SE -- for a base price of $399, or $50 less than the two-and-a-half-year-old model. Apple also introduced a new model of its Apple Watch that cuts the entry price by $50, to $299.

Taken together, the moves nudge Apple a bit into the mass market. And for the first time in recent memory, the company seems to be grabbing for market share -- something Apple has said it didn't care about with the iPhone.

For sure, the new iPhone SE is hardly a budget smartphone; the average price for an Android smartphone was about $215 as of late last year. But consider that even what was considered to be Apple's play for a "cheap" iPhone -- the 5c, from 2013 --was introduced in the U.S. with a retail price of $550. 

It's hard to imagine Apple making its entry-level iPhone SE this inexpensive if the company wasn't staring at the first decline in iPhone sales in history. The tweak in strategy shows Apple is willing to try new tricks as the iPhone -- which accounts for two-thirds of Apple's revenue -- exits hypergrowth stage, at least for the time being.

After all, the iPhone is the linchpin of Apple's strategy in addition to the biggest component of its revenue. Even if the company has to compromise on price, Apple's best chance to sell the world more Apple Watches, iCloud subscriptions or Apple TV devices is getting more iPhones into people's hands.

Apple executives on Monday didn't detail their reasoning behind the price of the iPhone SE, which has the same 4-inch screen size as the 5S but with the components and some features of newer models. Apple executives said some people prefer a smaller phone, including in the world's biggest smartphone market -- China.

Apple also disclosed for the first time that it sold 30 million of its 4-inch iPhones last year. If they were referring to Apple's 2015 fiscal year ended in September, that would mean about 87 percent of the 231 million iPhones were the newer, larger-screen devices. That is hardly a riot-scale demand for a smaller iPhone.

Still, the iPhone SE can be considered a success even if just props up sales in the early part of the year, when iPhone sales tend to hit a lull like the sleepy hours after Thanksgiving dinner.

Sales of iPhones recently have dipped 15 to 20 percent in the March and June quarters compared with sales in the prior three-month periods. That scale of decline would be a disaster this year because the typical holiday season bump wasn't as big as it was in 2014, when Apple introduced the first bigger-screen iPhone 6. 

Apple's Spring Swoon
In the first half of each year, iPhone sales soften ahead of the typical September launch of a new iPhone model. Can the March launch of a new iPhone help smooth out the lumps?
Source: Bloomberg and Piper Jaffray (for estimated sales)
Note: The time periods labeled here are calendar quarters, rather than Apple's fiscal quarters.

Apple's smartphone price comedown no doubt will make some people opt for an iPhone for the first time, or trade in an older model. Still, the iPhone SE wouldn't have this price tag -- nor would Apple be stressing its Web services business -- if the company didn't think its business was shifting into a new phase in which growth is harder to come by. The mass(er) market is a smart playbook for Apple, but it's a strategy born from a position of weakness. 

Here's Why Apple Has a Big iPhone Problem

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net