Apple discounts iPhone 5C 8%-9% in five markets via storage cuts

Reaction to poor sales, eroding share and fierce competition from below

Apple today unveiled an 8GB iPhone 5C that costs between 8% and 9% less than the previous lowest-priced model with 16GB of storage space.

"This is a very clever way for Apple to lower prices without discounting," said Ben Thompson, an independent analyst who covers technology on his Stratechery website.

In China, the new 8GB iPhone 5C was priced at 4,088 yuan, or 8.9% less than the same smartphone with 16GB. Apple Australia, meanwhile, listed the 8GB model at A$679, an 8.1% price cut.

Computerworld found the 8GB iPhone 5C on Apple's e-stores in just five markets: Australia, China, France, Germany and the U.K. Spot checks revealed that the model was not available in other major markets, such as Brazil, Canada, Hong Kong, Japan, Taiwan and the United States.

In those markets where Apple began selling an 8GB iPhone 5C, the company retained the iPhone 4S in its line-up, contrary to some earlier speculation that it would drop the 2011 handset from its inventory. For buyers in China, an 8GB iPhone 4S costs 3,288 yuan, or 19.6% less than the 8GB iPhone 5C.

What was interesting about the pricing was that Apple discounted the 8GB iPhone 5C about half as much as it does the 16GB model when compared to the higher-priced 32GB 5C. In China, the 16GB iPhone 5C listed for 15.1% less than the 32GB model, while in the U.K, the difference was 14.6%.

It was almost as if Apple was saying it didn't really want to sell the 8GB iPhone 5C, but felt it had no choice. That was the take of some, who portrayed the 8GB iPhone 5C availability as a reaction to slow sales of the plastic-encased smartphone that Apple rolled out last September.

"This is discounting," said Jack Gold, principal analyst at J. Gold Associates, agreeing with Thompson. "The 5C has not sold up to expectations, including Apple's. So how do you get ride of that product? You cut prices."

Apple has acknowledged poor sales of the iPhone 5C. In its January earnings call with Wall Street, CEO Tim Cook CEO admitted, albeit in carefully-couched terms, that the mix of iPhones sold in the December quarter 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.

When Apple launched the iPhone 5C, it characterized the handset as a mid-tier smartphone through its pricing. Many, but not all, analysts had expected Apple to go with dramatically lower prices for the 5C, perhaps down to the $200-$300 range. Instead, Apple burnished its luxury product reputation by slapping a sticker price on the iPhone 5C in China that was just 15.1% lower than the flagship iPhone 5S. China had been the presumptive target of the iPhone 5C because unlike in the U.S., most Chinese carriers do not aggressively subsidize handset purchases, making consumer much more price sensitive.

Thompson saw today's 8GB iPhone 5C pricing as Apple continuing its premium brand drive. "Apple is cognizant of the effect discounting can have on a brand, and storage gives them a way to lower prices without discounting," Thompson said in an email today.

Gold thought differently. "There is a lot of lower-priced competition, particularly in less-developed markets, which is significant. Apple's come to the realization that it cannot always demand premium pricing. It's not immune to pricing pressure, despite what some people think."

Apple's move comes as competitors, especially a host of Android-powered phones, erode the iPhone's sales share from the low end. According to Kantar Worldpanel CommTech, in China Android held an 81% sales share for the fourth quarter of 2013, up 6 percentage points, while Apple's iOS share was 17%, down nearly 5 points. iOS was down 3 percentage points in France, down 6 points in Germany, and flat in the U.K.

Others scoffed at Apple's pricing, arguing that an 8GB iPhone 5C was worthless, that there is too little storage space available to make the smartphone useful.

Gold countered. "At the lower end of the smartphone market, most people aren't coming close to filling up 8GB," he said, pointing out that that was plenty of space for apps, although not enough for heavy video recording or viewing. "I don't think that's going to be a stumbling block."

By choosing only five markets -- Australia, China, France, Germany and the U.K. -- Apple tipped its hand about those it believed were most likely to need pricing help, and those that would react best to price cuts. "Apple's very good at knowing how to price things, identifying the markets with the most pressure, whether they are the most competitive markets, the ones where Apple has the lowest market share, or both," said Gold. "These are the markets that Apple wants to stay competitive in."

The 8GB iPhone 5C is available for ordering today from the Apple online stores in the five markets, with estimated ship times within 24 hours.

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.

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