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Why Apple can't meet its luxury brand expectations for the iPhone

To maintain its course, Apple will have to become the world's biggest luxury brand and outperform top luxury companies like Mercedes and BMW.

Credit: flickr/techburst

Only one point stands out in IDC's recent smartphone market share and revenue forecasts. It’s not that smartphone revenue will account for almost a half-trillion dollars by 2018, nor is it that the projected average cost of the iPhone, at $636, is more than three times higher than the average Android smartphone, at $184.

What stands out is the prediction that Apple’s luxury iPhone brand will account for 12.8% of the total smartphone market through 2018. Looking at more mature markets like automotive, luxury brands BMW and Mercedes together combine for little over 4.3% of market share. Apple’s share of the luxury market is out of balance.

120214 chart1 IDC

In his October interview with Charlie Rose, former Microsoft CEO Steve Ballmer hinted at Apple’s challenges maintaining a luxury price while the competition closes in with equal or better quality at lower prices.

Rose: Would you want Microsoft’s Hand, Google’s Hand, Amazon’s hand, or Apple’s hand?

Balmer: It depends on your time frame. If your time frame is one year, I’d probably take Apple because they have all the earnings. If your time frame is thirty years, I would take Microsoft and Google.

How big can a luxury brand get without succumbing to the margin-eroding down drafts of commoditization? A recent report by Baine and Co. estimates the total annual luxury market to be worth about $278 billion, out of a total consumer economy of $34 trillion. Before you start counting zeros to balance billions and trillions, in 2018 Apple is projected to earn $157 billion in iPhone revenues, more than half the size of the luxury goods market.

The smartphone market isn’t like the PC market in its early days, where there was a distinctive difference between PCs and Macs. PC users would throw up their arms after a Microsoft virus exploit and then spend 40% more for a Mac. That’s not the case with smartphones, where people seem to exchange without much complaint. In an enterprise, switching costs might be high, but for consumers, switching costs are hardly a factor. Users switch smartphones surprisingly easily, including from iPhones and Android smartphones to Windows Phone. Macs are a better product with a satisfactory OS and slightly better design, justifying the higher selling price.

The big polls, like JD Powers, which always seem to big the biggest and best, have been behind the iPhone. But a number of studies, such as those from ACSI and On Device Research, put Android in the lead. Google proved with the Nexus 5 that Android phones could be fast and affordable (at $350), and with KitKat it boasted an OS that was comparable iOS. It just adds up, to the point that it will take a miracle in brand management to keep iPhone pricing three times higher than Android commoditized pricing.

How can Apple maintain its position as the world’s biggest luxury brand? As Ballmer suggested, it can’t.

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