Apple's 5c gets a big F

Long known for its high-end quality, the iPhone maker has failed in its attempt to win more customers with its cheaper, colourful model

PUBLISHED : Friday, 18 October, 2013, 4:31am
UPDATED : Friday, 18 October, 2013, 4:31am

Apple co-founder Steve Jobs, who emphasised high-end consumer gadgets over cheaper ones, may have been right all along.

Last month, chief executive Tim Cook introduced the colourful iPhone 5c, a cheaper version of Apple's smartphone, to "serve even more customers" around the world. It turns out people so far are more interested in its pricier, feature-rich cousin, the 5s.

Three surveys in the past two weeks said the company's new high-end model was outselling the 5c by at least two to one.

KGI Securities, a brokerage firm, slashed its quarterly estimates for 5c sales by a third, and retailers including Wal-Mart Stores and Target have reduced the phone's price.

The Wall Street Journal reported that Apple's orders to suppliers for the 5c had been cut by a third.

Customers are shrugging off the US$99 iPhone 5c even as Apple spends heavily to advertise the handset, which is last year's model repackaged in a coloured plastic case. The 5c, which costs US$100 less than the souped-up 5s, is Apple's attempt to lure buyers in developing markets such as China, where Samsung Electronics and other Android phone makers lead. Even so, big sales of the pricier model are a boon because they carry fatter profit margins.

"Apple customers are still interested in premium products from a premium brand," said Laurence Balter, an analyst at Oracle Investment Research. "If anything, the 5c is a failed experiment in trying to please the masses. Apple should stay focused on the premium and let Samsung take the lower end of the market."

A survey released this week by Consumer Intelligence Research Partners found that 64 per cent of US iPhone customers were buying the 5s, which sports a better camera, faster processor chip and fingerprint-reading security features and starts at US$199 with a carrier contract. While the company has let loose a barrage of television and other advertising, the 5c, which does not have the same upgrades, was favoured by 27 per cent of buyers.

The early results give credence to concerns from investors and analysts that Apple priced the 5c too high to appeal to more budget-conscious customers.

The device was struggling with the perception that it is lower quality than the 5s, as well as its US$550 price without a wireless contract, said Brian Blair, an analyst at Wedge Partners. "In China, I've heard the joke that the C stands for cheap," he said. "Investors have had concerns since the pricing was announced."

A spokeswoman for Apple declined to comment.

Consumer Intelligence's numbers, along with findings by Pacific Crest Securities and Canaccord Genuity, suggest that customers are viewing the 5c like they would older iPhone models. The first wave of customers typically flock to Apple's latest device, rather than buying the cheaper version.

That was the case on the first day of sales last month, when customers were disappointed to find retailers sold out of the expensive model with the newest features - yet had plenty of 5c handsets to spare.

"To its detriment, it was targeting a certain subset of the consumer base," said Josh Lowitz, a co-founder of Consumer Intelligence.

Lacklustre demand, including discounts to as little as US$50 being offered by major retailers, led Kuo Ming-chi, an analyst at KGI Securities, to lower his projection for fiscal fourth- quarter 5c sales to 11.4 million from 17 million.

Apple gets about half its revenue from all models of the iPhone, and the device's performance with customers affects the company's financial results and stock price. The company is set to report fourth-quarter earnings on October 28.

Demand for the higher-end 5s appears to be making up for tepid 5c shipments. Apple said it sold a record 9 million iPhones on the debut of the new models last month, and deliveries of some 5s handsets still took weeks. Apple also is slated to introduce new iPad models on Tuesday.

More sales of the 5s than the 5c also will bolster Apple's profit margins, according to a report by Michael Walkley, an analyst at Canaccord Genuity.

Jonathan Rosen was waiting in line for the 5s at Apple's San Francisco store. The thinner and lighter design of the 5s outweighs any price difference, especially because he would be locked into a contract for two years, he said.

"Most people will err towards the one with the better feature set," said Rosen, who works in marketing. "The price difference just isn't substantial enough to want a 5c."