Cook admits Apple blew the call on the iPhone 5C

'Oops,' says analyst about Apple overestimating demand for less-expensive iPhone

Apple sold a record 51 million iPhones in the fourth quarter of 2013, but acknowledged it had underestimated the appeal of the flagship iPhone 5S, making some analysts question the new two-model strategy and arguing that Apple had erred in pricing the iPhone 5C.

For the quarter, iPhone sales were up 7% compared to the year before, when the company sold 47.9 million smartphones. The iPhone also set another record, generating 56.4 per cent of all revenue for the quarter, casting the company as even more of a smartphone maker than usual.

"Cook signaled a couple of things on the call," said Ezra Gottheil, an analyst with Technology Business Research, in an interview after Apple wrapped up its conference call with Wall Street. "He essentially said, 'Oops, the 5C was a mistake.'"

During that call, CEO Tim Cook acknowledged, albeit in carefully-couched terms, that the mix of iPhones sold had included a larger percentage of the top-dollar iPhone 5S than Apple had anticipated.

"It was the first time we'd ever run that particular play before, and demand percentage turned out to be different than we thought. We sold more 5S than we expected," Cook said, tacitly admitting that the other model, the lower-priced iPhone 5C, under-performed.

In September, Apple unveiled two new iPhones for the first time, the top-end iPhone 5S and the middle-tier 5C. The latter was a repackaged iPhone 5 in a colorful plastic case that was priced $100 less than the 5S.

At the time, most analysts and pundits expressed disappointment that Apple had not priced the iPhone 5C even lower they had figured Apple would shoot for market share gains, especially in price-sensitive Asia - but some, including Ben Thompson of Stratechery, cast the move as consistent with Apple's position as a luxury, premium-priced brand.

By the numbers, it seemed that most customers agreed with the analysts who panned the price.

While Apple never splits out iPhone sales by model, the jump in the ASP (average selling price) strongly hints that the mix tilted toward the iPhone 5S. The smartphone's ASP jumped from $577 in 2013's third quarter to $US637 in the fourth and nearly matched Q4 2012's $US642.

While that was good for Apple's bottom line - it booked $US13.1 billion in net profit, equal to what it recorded in the same quarter the year prior - it made some wonder about the iPhone 5C strategy.

"I think they might have underestimated how much they could get away with on pricing and specs [for the iPhone 5C]," said Carolina Milanesi, the strategic insight director of Kantar Worldpanel ComTech. "Bottom line, they underestimated how much people are driven by the hardware and the design."

She scoffed at Cook's explanation that TouchID, the new fingerprint reader available only in the iPhone 5S, had been the primary reason why sales tilted to the pricier phone.

Tuong Nguyen, an analyst with IDC, had been skeptical of the 5C's pricing strategy last year, and felt vindicated by the fourth-quarter results. "The issue is that the price disparity [between the 5S and 5C] was not enough," Nguyen said. "In mature markets, why am I gonna bother saving a little bit of money to scale back on the technology?"

The ASP, or average selling price, of the iPhone jumped last quarter, confirming that sales skewed toward the higher-priced flagship iPhone 5S. (Data: Apple.)

The price was apparently not low enough to entice large numbers of customers in emerging markets either, although Cook defended the 5C's performance. "We saw a significant new-to-iPhone number [of sales]. It's not a number that we throw out, but we particularly saw that on the 5C, which is what we wanted to see" Cook said.

To be fair, some analysts last year predicted that the lower-priced 5C would gain momentum as time goes by since, not surprisingly, those who bought first would be those most enthralled by the latest iPhone, not a rerun of last year's. "Most consumers who wanted to buy a device on launch weekend were early adopters and enthusiasts," Sameer Singh, who covers mobile technology at his Tech-Thoughts website, said last September when asked why early sales skewed toward the 5S. "The high-end model would have appealed to them."

And Ben Bajarin of Creative Solutions didn't buy the idea that pricing was the only problem, citing other factors, including longer stretches between phone upgrades as carriers got tougher with their subsidies, which may have caused price-sensitive customers to defer purchases more than those who were willing to pay whatever it took to have the newest, shiniest device.

"Maybe this validates the strategy that Apple had before, when they brought out a new iPhone and sold last year's model for less," said Bajarin. "Maybe that's what they go back to."

Bajarin also speculated that the iPhone 5C got caught in a no-man's land between the flagship and 2011's iPhone 4S, which carriers with subsidies gave away with a two-year contract. "Maybe people want the [most expensive] iPhone or free, and the 5C got stuck in the middle," Bajarin said.

None of the analysts queried Monday thought Apple would abandon the iPhone 5C immediately.

"Clearly, they have a strategy, and they'll tweak that strategy," said Milanesi, who added that any moves would probably not happen until Apple rollls out its next-generation iPhone.

"I think that the next time they bring up a less-expensive iPhone, they'll use a bigger price separation between that and the newest," said Gottheil.

Cook, as is his policy, declined to discuss future products or pricing, but left open the door to changes. "We obviously always look at our results, and conclude what to change moving forward. And if we decide it's in our best interest to make a change, then we'll make one," he said.

Any problems selling the iPhone 5C, however, were masked by what Gottheil called a "solid, if currently not a terribly-fast-growing company that generates enormous profits."

Milanesi agreed, but took it one step further. "At the end of the day, you have a company that has grown the three main business -- smartphones, tablets and personal computers -- when others have not been able to do this," she said. "It's the only company that goes across all three [markets] and shows growth year on year."

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

Read more about smartphones in Computerworld's Smartphones Topic Center.

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