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The great 'iPhone 5C is a failure' freakout

John Cox | March 19, 2014
The iPhone 5C is six months old in March. It's been declared a disaster, a dud, a fiasco and a flop. The reports of its death have been greatly exaggerated. Here's why.

The iOSphere commentariat almost universally misinterpreted Apple CEO Cook's comments during the earnings call as saying that Apple overestimated demand for the 5c and that its sales were disappointing. As we'll see, he said no such thing.

By contrast, based on Apple financials, other public information, and his own model, Asymco's Dediu has created four charts shown above that suggest the iOSphere is at least premature in its verdict about the 5c. "I'm not sure whether we have all that much evidence one way or another," Dediu says. "The data for one quarter (a launch quarter) is not very useful in assessing such a brand extension."

The "Pricing" chart confirms the upward tick in the ASP. But they also show in "Mix" (the relative number of iPhone models sold in a given quarter) and "Revenues" (for each iPhone model in each quarter) that the iPhone 5c in the Oct-Dec 2013 quarter performed roughly as well as the discounted iPhone 4S in Oct-Dec 2012, as the less expensive alternative to iPhone 5. "I don't have a crisp conclusion about the 5c because I don't know what the company expected exactly," he says. "The default (i.e. simplest) view is that they felt a 5c would be better than keeping the 5 [as a discounted model]."

The latest round of disasterism was triggered in late January during the earnings conference call on Apple's Fiscal Q1 results, and has now become a well-established, incontestable meme. Here's a typical example. "Cook signaled a couple of things on the call," said Ezra Gottheil, an analyst with Technology Business Research, reported in a ComputerWorld story. "He essentially said, 'Oops, the 5c was a mistake.'"

Yet Cook neither said nor implied any such thing, as even a superficial review of the conference call transcript shows. Nearly all of his comments were taken out of context and misunderstood or misinterpreted, or both, by many bloggers, analysts, and commenters.~~

The 5c product and pricing plan
Before turning to the conference call, recall Apple's product and pricing strategy before the 5c. Apple created a three-tier price structure over time. Each year, a new flagship, high-margin phone is announced. One version of the previous year's model remains available at a $100 discount, with a two-year mobile contract. One version of the 2-year-old model is available free, with a two-year contract.

"In the early days of this strategy, it was a great way to continue to build up the iOS user base without having to compete in the lower margin feature phone space," pointed out Anand Lal Shimpi, in his AnandTech review of the iPhone 5c.

But the iPhone 5 was a much more expensive product to produce: it was the first iPhone with a 4-inch screen, it made use of in-cell touch display technology, premium construction, and other high-end features. It "quickly became a device that Apple would rather not discount," said Lal Shimpi. He sees the iPhone 5c as Apple's solution to this dilemma, allowing it to continue its three-phone product scheme and its long-standing business model of high-margin products.


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