Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Two-and-a-half years ago, Apple released a cheaper version of its high-priced smartphone that was supposed to be popular in emerging markets like China.

The iPhone 5c was a failure, and Apple killed it off less than a year after it was introduced.

This week, Apple is releasing the iPhone SE. Like the 5c, it’s cheaper than the marquee handset by recycling some of the previous year's tech specs. Notably, the screen (an iPhone's single most-expensive component) remains not only smaller but of lower quality than more-recent iPhones.

Yet there are a few reasons why the SE will succeed in China where the 5c didn't.

Apple meant for the "C" in iPhone 5c to stand for "color," and the rest of the world thought it stood for "China," but the Chinese had a different interpretation: Cheap.


If Chinese consumers wanted a cheaper smartphone, then and now, there's hundreds of choices available. Many brands, such as Xiaomi and InFocus, have offered models that look remarkably similar to Apple's iPhone. It's easy to get a cosmetically pleasing "Made in China"  handset that lacks only the "Designed by Apple in California" small print. 

China's Appletite
China's rising consumer class is driving Apple's sales in China
Source: Bloomberg, Apple


Like consumers in many countries, more and more Chinese flock to the iPhone every year not despite its premium price but because of it. At the same time that iPhone 5c was introduced, so too came the iPhone 5S, itself an upgrade to the previous year's model.

Sitting down to dinner with friends or business associates and plunking down the latest, genuine iPhone is a sign of status and chic. The 5c's failure was not only that it came in cheap-looking plastic colors but that it was marketed as being the cheap version of the real deal.

No self-respecting Beijing yuppie would dare be seen plunking down a bubble-gum blue iPhone over dumplings and red wine.  

Apple's decision to add the same A9 and M9 processors to SE as is used in the current full-priced iPhone 6S models looks at first glance like it's generously bringing more power to a cheaper device. But in fact the A9/M9 have been in production at least six months, with its suppliers already achieving the yields and volume that allow costs to be lowered. That means there's likely little, if any, price premium to the A9 than if Apple was to revert to the older A8 or A7 that are ready to be phased out. The better 12 megapixel camera is certainly a splurge, but for similar reasons it's also not the cost driver that might otherwise be imagined.

That brings us to the 5c’s other failure in China, where it was positioned within a paradigm that states that going cheap is the only way to increase sales. In fact, average sales price data from Canalys shows that China's tastes have been getting richer, not cheaper. "Consumers are losing their appetite for ultra-low-cost devices," Canalys analyst Jingwen Wang wrote in April. This was evidenced by Huawei's march up the Chinese ladder last year with a catalog of high-priced smartphones. 

 

Expensive Tastes
Smartphone average prices in China have been trending up, led by Apple
Source: Canalys

Where the iPhone SE differs is in timing and positioning

By releasing the device mid-cycle, Apple is offering consumers a chance to buy a cheaper iPhone while still keeping the facade of being the latest device from Cupertino (thanks to an already-mature processor). That timing then allows Apple to position the device as a Special Edition, not overshadowed by a concurrent device that would steal the limelight (or sales).

Apple's Bruised iPhone Empire
The iPhone is Apple's most important product by far. But after eight years of unbelievable growth, sales of iPhones are expected to decline this year for the first time ever.
Sources: Apple and UBS (for FY 2016 estimated iPhone sales)
Note: Apple's fiscal year ends in September



As a bonus, those who've yet to upgrade in the past two cycles, who've lost or broken their iPhone, or are ready to switch from Android all have the option of taking up the mid-cycle offering before committing to the next iPhone that's six months away.

In one fell swoop, Apple has managed to offer a cheaper device with the cachet of a premium new product that Chinese consumers can still boast about owning. Because as Barney Stinson would tell you: New is always better.

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

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

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