iPhone 5C's China bust raises questions about Apple's pricing for '14 models

China's buyers went for the premium iPhone 5S, which is now the most-used Apple smartphone in the PRC

Apple's iPhone 5C, the lower-priced model introduced last year - by many accounts to boost sales in countries like China - has, in fact, done poorly in the People's Republic, according to an industry analyst.

"The [iPhone] 5C is not doing well in China," said Ben Bajarin of Creative Strategies in an email reply to questions. "The audience that has been buying iPhones there to date is higher-end and can afford the premium device. A $US550 5C was not attractive to them because they could afford and wanted the premium [iPhone] 5S."

Bajarin based his iPhone 5C take on smartphone usage data he collected from Alibaba, the massive China-based e-commerce conglomerate. Last year, Alibaba acquired a mobile analytics company called Umeng, which has been described as "the Flurry of China."

California-based Flurry, which Yahoo is buying, is the largest mobile analytics company in the U.S.

Bajarin's data was thus a combination of smartphone access of Alibaba's websites as well as Umeng's app usage metrics, broken down by iPhone model.

In July, the iPhone 5S became the most-used Apple smartphone in China, accounting for about 25% of all Apple's models in use, said Bajarin in a piece posted Friday to Tech.pinions ( subscription required). Until then, 2011's 4S had been the most-used iPhone.

But the iPhone 5C, which went on sale at the same time as the 5S, had a very small usage share, less than 5 per cent by Bajarin's chart. The 5C showed a small bump in February 2014, probably related to the debut of China Mobile, the country's largest mobile carrier, as an Apple partner the month before.

The iPhone 5C sells on Apple China's online store starting at 4088 yuan ($US665 at Monday's exchange rate) for an 8GB device, 4488 yuan ($US731) for 16GB. Meanwhile, an iPhone 5S starts at 5,288 yuan ($861) for a phone with 16GB of storage space.

Bajarin blamed incorrect assumptions on the part of financial analysts rather than Apple for the disconnect between expectations and actual sales.

"I think part of the initial assumption was that it was targeting China, but those who assumed that didn't necessarily grasp the aspirational brand Apple is in China," Bajarin said. "For the 5C to have been a success in China it would, and would need to be, priced around $US350 [to] $US400."

Last year, after Apple unveiled the iPhone 5S and 5C, and revealed the pricing of the latter, Wall Street punished the company for not meeting its expectations of a much lower price for the iPhone 5C. Apple's shares dropped 5.4 per cent the next day.

But some analysts argued that the pricing model for the iPhone 5C -- which listed for $US549 (16GB) in the US. without a carrier contract, $US99 with a two-year commitment -- was right in line with Apple's decades-old strategy of playing only in the premium part of a market.

The question, then, is what Apple will do next month when it debuts new iPhones. Virtually everyone expects CEO Tim Cook to tout a larger-sized smartphone, one with a 4.7-in. screen, up from the current 4-inch. Also a possibility, according to rumors and some leaks: An even-larger iPhone with a 5.5-inch. display.

If Apple does launch two new premium models, will it repeat last year's iPhone 5C experiment? Or just drop the whole idea?

"I have to be honest, I'm not really sure. I can see an argument for a revamped current-generation 4-inch iPhone. I can see the argument for not doing a 5.5-inch and just doing a 4.7-inch and updated lower-cost 4-inch," said Bajarin. "It can go so many ways that it is much harder to speculate this time around."

What Bajarin was confident in was that Apple would repeat the pricing practice it's honed for several years. "Apple will release two new models (whatever sizes they are) and take last year's model and make it the lower-cost phone for entry-level and mid-range prices in other markets," he said.

Last year, Apple did just that, launching the iPhone 5S and 5C as new -- even though the latter was essentially 2012's iPhone 5 in a different case -- and retaining the iPhone 4S as the zero-down model with a two-year contract.

"[That] also helps cleanly divide [the line] and not cannibalize the high end, which Apple can't afford to do," said Bajarin.

In that scenario, it's possible Apple would retain the iPhone 5C as the entry-level iPhone -- rather than the iPhone 5S -- and drop the no-contract price even further. At the moment, the iPhone 4S sells for 3,288 yuan ($535) in China. Pricing the iPhone 5C at, say, 2,488 yuan ($405 at current exchange rates) might boost sales of the model.

"[The iPhone] 5C is doing nothing in China but perhaps at $US400 it would?" wondered Bajarin. "Even in India, the 5C at $US400 could do really well."

In the US., an unlocked 8GB iPhone 4S sells for $US450; prices on the Apple China store are higher because they include the Value Added Tax (VAT) the country applies; in Hong Kong, which doesn't have such a tax, the same iPhone 4S costs HK$3,488 ($450 in U.S. dollars), or about $85 less than in the People's Republic of China (PRC).

Apple will reportedly host its iPhone launch event on Sept. 9, or three weeks from tomorrow.

The iPhone 5C -- the red line near the bottom -- hasn't burned down any sales barns in China. The iPhone 5S, however, is now the most-used iPhone in that country. (Image: Tech.pinions Insider Intelligence.)

Read more about smartphones in Computerworld's Smartphones Topic Center.

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