iPhone SE 2020 Strategy

The iPhone SE is back. Same price but different hardware. Over the years, Apple has charged a premium on their phones relative to its competitors. iPhones are widely known as a fashion accessory and display of wealth. So why would Apple manufacture cheaper phones?

The new iPhone SE is essentially an iPhone 8 packed with an A13 Bionic chip. Consumers are trading off some features such as Face ID and night mode. But the phone still delivers tremendous value.

If we look at the market share of mobile operating system, we can see that Android controls about 87% of the market[1]. There are a lot of phone manufacturers that sport the Android OS. But this also means that Apple could steal away some of that market share.

Source: IDC

According to an analyst at TF Securities, Apple could sell between 20 and 30 million of the new iPhone in 2020[2]. At first, you might think that cheaper phones make up the bulk of the market. But according to Counterpoint Research, only about 17% of phones sold in the US last year, cost between $400 to $600[3].

Apple’s strategy is quite simple. It wants to attract new users who will hopefully integrate in the Apple ecosystem. In other words, Apple is upselling its subscription services such as its Apple Music, iCloud Storage and Apple TV.

For over 10 years, Apple has been launching its iPhones in September. Thus, the upgrade cycle for consumers was around a year. And during that waiting time, other companies such as Samsung, OnePlus, Razer and Asus could lure iPhone customers. With this launch Apple is reducing its upgrade cycle in an attempt to retain its existing customers.

The introduction of the cheaper iPhone is Apple’s way of getting a foothold in the fastest growing markets, which are the emerging markets like India and China. However, manufacturers such as Samsung, OnePlus, Xiaomi and Oppo are gaining market share in those markets. The reason is because these markets are price sensitive. Apple initially thought that it could price its iPhones at a premium in China but was forced to re-evaluate its pricing strategy after iPhone shipments dropped by 20% in Q4 2018[4].

As for India, did you know that Apple does not own any retail stores there? Because of India’s local sourcing requirements, Apple has been relying on third party sellers for over a decade. But Apple is banking on its ability to operate its own retail stores as from 2021 to gain market share in India[5].

Apple knows that the next frontier is 5G and you should note that the iPhone SE is not 5G compatible. Customers who are switching to the iPhone ecosystem now with the iPhone SE will likely adopt the 5G-enabled iPhone when it launches. It is true that the 5G phone would be more expensive but we believe that Apple might introduce trade-in programs for the iPhone SE. As for the iPhone 5G, Apple may bundle the phone with its Airpods or even its watches.

Apple has even been fortunate this year. It launched a cheaper phone in the midst of the lower consumer spending due to Covid-19. Time will tell whether Apple’s strategy will succeed in attracting new customers.

Here is the video from this transcript: YouTube