The handset market is so brutally competitive that Apple, the most successful smartphone maker, is preparing to step up its game this week by offering two new iPhones instead of one.
The company is set to unveil for customers worldwide a new iPhone with a faster processor, along with another model that will be sold at a lower cost, at an event on Tuesday at its California headquarters.
The company's profit growth has slowed in response to a saturated handset market in America and parts of Europe. Many people already own a smartphone and are not upgrading to new devices as often as before. (Cheaper iPhone for India?)
A lower-cost smartphone could allow Apple to expand into overseas markets - especially China, where the iPhone has been highly desired among many consumers but is just out of reach because of its price.
"A cheaper model will open up the market significantly for Apple," said Chetan Sharma, an independent telecom analyst who consults for phone carriers.
Apple declined to comment on the new products. But analysts expect the higher-priced model to be an improvement over the current iPhone, including a faster processor and better camera flash, as well as a fingerprint sensor for security.
The second iPhone is expected to be a cheaper version of the soon-to-be-outdated iPhone 5, coming in a variety of colors, with a plastic case, instead of aluminum. Analysts expect the full price of the lower-cost iPhone to be $300 to $400, positioning it as a mid-tier product.
Apple has been enormously successful, with the iPhone driving most of its revenue. In the second quarter, the company took 53 per cent of the profit in the global smartphone market, with Samsung Electronics, which uses Google Android software to run its smartphones, taking the rest, according to a survey by Canaccord Genuity, an investment bank.
But both Apple and Samsung face a common enemy: The tide of manufacturers that produce dirt-cheap Android phones. While they make all the profits, Apple and Samsung have seen their combined share of the worldwide smartphone market drop to 43 per cent in the second quarter, from 49 per cent a year earlier.
The makers of cheaper phones - including Huawei, Yulong and ZTE of China, and Micromax and Karbonn of India - are raking in sales in emerging markets, where high-end smartphones are not popular. "We've had several indications from the handset market that vendors are in real trouble," said Tero Kuittinen, an analyst for Alekstra, a mobile diagnostics firm. "The biggest threat to all the companies seems to be the low-end Androids."
In terms of sales, smartphones surpassed traditional flip phones this year. There are a few markets remaining where traditional cellphones are still outselling the smartphone, including India, Brazil and Russia. Data from Qualcomm suggest that Latin America, China and India are adding substantially higher numbers of smartphone subscriptions than North America, Japan, Korea and Europe.
China, with its huge population, is an attractive target for Apple. But Timothy D Cook, Apple's chief executive, said recently in a call with investors that the company was puzzled about why sales of its products were struggling in China. Sales there fell four per cent in the second quarter, compared with the same quarter last year. And, Apple's sales in Hong Kong were down about 20 per cent.
A cheaper iPhone could help it gain traction in China, depending on its cost.
Analysts said the introduction of the cheaper iPhone would probably coincide with an expected partnership deal with China Mobile, which has about 700 million subscribers - about seven times as many as Verizon Wireless. Capturing even a small percentage of China Mobile customers would translate to tens of millions more iPhone sales.
Apple already sells its phones in China through China Telecom, a major network operator, but it slipped to sixth place among smartphone makers there in the second quarter, with a share of only 4.8 per cent, according to Canalys, a research firm. Overall, China is the largest smartphone market in the world, accounting for a third of worldwide shipments of smartphones in the second quarter; the US is in the second place, accounting for about 14 per cent of shipments in the same period, according to Canalys.
Despite Apple's efforts to keep its plans secret, clues about the new iPhones leaked out. China Telecom briefly posted a message last week on a blog platform soliciting early orders for the new devices. It identified the high-end model as the iPhone 5S, and the lower-cost one as the iPhone 5C. The post was later removed. A spokesman for China Telecom declined to comment, citing non-disclosure agreements.
In Japan, where Apple is much stronger but faces a renewed challenge from domestic smartphone makers like Sony, the company had struck a deal to sell the iPhone with the country's biggest mobile phone carrier, NTT Docomo, two people briefed on the situation said Friday. Docomo has 60 million customers, but it has been losing market share to Japan's other two main mobile operators, SoftBank and KDDI, which operates under the brand name au. Both have been marketing Apple's phones aggressively, giving Apple a 40 per cent share of smartphone sales in the first quarter, according to research firm IDC.
Historically, so that it can protect the quality of its products as well as profit margins, Apple has refused to make cheaper products just to get more customers. Therefore, a lower-cost iPhone would most likely be positioned as a mid-tier product, similar to the approach Apple took with the iPad Mini. At $330, the iPad Mini is cheaper than the bigger, $500 iPad, but not as affordable as the smaller Android tablets offered by Google and Amazon, which cost from $160 to $230.
Realistically, a lower-cost iPhone would be $300 to $400 at full price, Alekstra's Kuittinen said, significantly less than the current iPhone, which costs $650. Overseas, many phone carriers charge full price because they do not subsidise the upfront cost of a smartphone the way carriers do in the US. And while a lower-cost iPhone would drive up Apple's revenue, it would probably not be a blockbuster hit in economically disadvantaged markets, Kuittinen said.
"Nobody is saying Apple should have a $130 iPhone," he said, "but if they price this iPhone 5C at $400 or above, it's just not going to be effective in countries like India, China or even Brazil." Still, even if the price is fairly high, a cheaper iPhone should appeal to a subset of people in developing countries who flaunt gadgets as status symbols, like jewellery. People who were on the fence about buying an iPhone might pay a little extra just to be able to show off, telecom analyst Sharma said. "Consumers are willing to shell out money to own a brand," he added. "I think a $300 price gives them a chance to own it."