Apple's 'Low End' Strategy Disappoints - Wall Street Journal

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• IAN SHERR


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Investors punished Apple Inc.'s stock Wednesday after concluding the iPhone lineup unveiled a day earlier wouldn't usher in a new low-price strategy.

Apple chief executive Tim Cook discusses the new iPhone 5S.

The investor response spotlights a particular challenge for Apple, which has long positioned its products as luxury goods: Staying high-end could limit the company's growth, particularly in the developing world. But cutting prices to go mass market threatens its profitability, and could destroy the cachet that has made it a hit.

On Wednesday, Apple's shares fell 5.4% to $467.71 on the Nasdaq.

At issue was Apple's forthcoming iPhone 5C, which largely repackages last year's model phone with a new plastic shell as a lower-price option than the forthcoming top-of-the-line iPhone 5S. The iPhone 5C costs $99 with a contract, and $549 without one.

For some, that price wasn't low enough for Apple to address competition from Samsung Electronics Co. and other rivals that have taken smartphone market share from Apple, particularly in the developing world and among first-time smartphone buyers, by offering phones for less than $100.

In China, a market where most phones sell for less than $300, the iPhone 5C costs $733 without a contract. In the June quarter, Apple's China market share fell to 5%.

Tim Cook

"So much for the low end," Credit Suisse analyst Kulbinder Garcha said in a note to investors.

At least three brokerage analysts cut their Apple rating on Wednesday, citing a disappointing rollout of new products. Through Tuesday's close, the stock had risen 25% since the end of June. Still, it remains far from its record high above $700 last September.

An Apple spokeswoman declined to comment.

Some marketing experts say Apple may simply be incapable of competing on price. In particular, the exacting standards made famous by Apple's co-founder Steve Jobs can make it harder for a company to offer products using lower-quality materials or specifications in order to hit a specific price point.

"If you're a perfectionist company, competing on price is impossible," said Allen Adamson, a managing director at brand consulting firm Landor. "Brands can only stretch so far."

Even in developing markets such as China, part of the allure of Apple's products has been that they are gadgets on par with Western luxury goods.

Apple isn't the only luxury-product company that faced this problem, but there are others that have managed to downscale with some success.

Target Corp. worked with fashion house Missoni to offer a special line of clothes in 2011; Target consumers rushed to buy in such large numbers that it crashed the mass-market retailer's website.

Apple has pushed to remain a trendsetter, often being the first to offer new technologies in its devices like a fingerprint sensor in the iPhone 5S, but many other features are also being offered by competitors. Apple has responded with fashion itself, offering the iPhone 5S in gold, silver and "space gray." Its iPhone 5C also comes in an assortment of colors, a first for the line.

Timothy Ghriskey, co-founder of Solaris Asset Management, which holds Apple shares, said Apple's approach with the iPhone 5C shows the company is being careful to protect its profit margins.

He said he hopes the company is working on a plan to offer products that go down-market. But Apple hasn't indicated its strategy is headed in that direction, and he said there is a possibility Apple may not have a plan as well.

"If there isn't, they're ceding the mass market and developing world to their competition," Mr. Ghriskey said. "There's a big question mark there about that strategy."

If the iPhone 5C was Apple's attempt to go after a wider market, it didn't succeed, analysts and brand consultants said.

"It seems like it's too little too late," said Robert Burke, owner of Robert Burke Associates, a luxury brand consultancy in New York. He said Apple's high-end designs are good at attracting consumer interests, but its prices risk alienating customers who just can't afford them. "People are only patient for so long and then they get impatient and move on," he said.

Write to Ian Sherr at ian.sherr@dowjones.com

A version of this article appeared September 11, 2013, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Rethinking Apple's Luxury Strategy.

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