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Pricing the iPhone 5C: what's behind Apple's decision

Premium price tag jars the industry; who is Apple's real buyer?

By , Network World
September 11, 2013 03:11 PM ET

Network World - One of the big surprises in Apple's iPhone 5C announcement was the pricing, which was much higher than nearly everyone expected. What is Apple doing…and why?

The answers to those questions, or rather the speculation about them, is being hashed out in opinion posts, analyses and stock recommendations across the Internet. Words like “failure” and “disappointment” and “mistake” are being used to summarize the assessment of Apple’s strategy.

[FIRST LOOK: Apple iPhone 5S and iPhone 5C

MORE: First hands-on impressions of new iPhones]

But the negative reactions may be missing the true nature of Apple’s business, and it’s relationship with the one group that’s more than willing to keep paying the high prices Apple charges for iPhones: the mobile operators.

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Yesterday, the stock market made its judgement: Apple’s stock price dropped from about $505 to $491  and opened Wednesday even lower, in the $465 range. A quartet of big financial firms -- JPMorgan Chase & Co., Credit Suisse Group AG, Bank of America Corp., and UBS AG -- all downgraded Apple after Tuesday’s iPhone event. 

The iPhone 5C is essentially an iPhone 5, encased in a plastic instead of an aluminum body. The year-old iPhone 5 itself is being discontinued, instead of still being offered at a $100 discount as Apple has done in the past.

iPhone 5C pricing

The third, and lowest-price, model is the 2-year-old 8GB iPhone 4S, which is still $450 off-contract, but free with contract.

At full price, the 5C is “only” $100 cheaper than the 5S. In this case, the question becomes how many consumers – those who have decided the full-price 5S is too expensive -- will see the difference as justifying a 5C purchase? At full-price, in emerging Asian markets, the 5C still is almost as much a premium phone as the 5S.

With the operator subsidy that comes with a two-year contract, the 16GB 5C is “half the price” of the corresponding 5S, or less than $100. For iPhone 5 and 4S users, this may offer a strong incentive to upgrade to the 5C instead of the 5S.

The full price numbers for the 5C are far higher than almost anyone predicted. The conventional wisdom widely insisted that Apple had to create a much more lower-priced phone in order to compete with the lower cost Android smartphones that are being snapped up by consumers in China, India and other “emerging markets.”

“My assumption going into this, sixth iteration, of the iPhone was that we would see the expansion of the iPhone into two distinctly positioned products: a low-end C and a high-end S,” writes Horace Dediu, an independent analyst who covers the mobile market at his Asymco blog

“The surprise was that the 5C was not ‘low end’ in any way other than having a plastic case,” he writes. “It has a minor spec increase over the [iPhone] 5 but is otherwise a five-feature set in a plastic skin. It also is priced as if it was the continuation of the 5, with a modest reduction in ASP [average selling price].

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