Apple Must Reduce iPhone Profit Margins Before Market Share Starts Falling [Analyst]

iphone5

Apple is one of just two smartphone makers currently seeing any kind of growth in the United States at the moment, and together with Samsung the company is slowly but surely clawing away at the market share held by the likes of LG, Motorola, and HTC. One analyst believes, however, that the Cupertino must make big changes if it wants that growth to continue.

Apple’s either has to dramatically reduce its iPhone profit margins and make the handset cheaper, or face losing valuable market share to cheaper smartphones.

That’s according to Sector & Sovereign Research analyst Paul Sagawa, who recently published a report that suggested Apple’s doomsday is fast approaching as Android devices outsold iOS devices 5 to 1. Sagawa now insists that Apple must make major changes and makes its iPhone cheaper.

If it doesn’t, the iPhone’s going to lose market share to cheaper devices, Sagawa believes.

“Seeing smartphone competitors achieving similar market scale to Apple’s flagship iPhone model and platform rivals willing to subsidize device sales to build their installed base for lucrative web applications, leaves me skeptical that the high margin status quo approach can be sustained for more than a few more years, and even then, I see inherent margin pressures that are not reflected in consensus estimates,” Sagawa wrote on Sunday.

“The more aggressive strategy seems the better one from a long term perspective, but will entail substantial cultural change, a significant re-investment of capital, and a more certain and certainly more painful hit to profitability.”

Apple’s stock price has taken a big hit in recent months. Many predicted the Cupertino company to become the world’s first to hit a trillion-dollar market cap, but that doesn’t look quite as feasible as it was a short while ago. Apple stock hit an all-time high of $705.07 in late September, and it seemed there was no sign of stopping it from breaking through the $1,000 barrier. Today, however, it’s down to $524.04.

And yet, Sagawa feels investors still do not fully appreciate the seriousness of Apple’s turbulent times.

“I don’t believe that this Sophie’s choice of a strategic dilemma is well appreciated by investors nor do I expect them to react well to future negative surprises, disappointing guidance, or downward estimate revisions,” Sagawa wrote. “Apple may not be expensive, but it is hardly cheap with that potential overhang.”

Apple may already have something up its sleeve to change all this, however. No, I’m not talking about that much-anticipated Apple television; I’m talking about an “iPhone mini.” Recent reports have suggested it’s planning to launch a smaller, cheaper iPhone mini “at some point over the next three years” to fight off the competition from cheaper smartphones.

  • technochick

    Apple has never designed or priced for market share and done very well. Why would they start now

  • Alexander530

    It’s like saying, “BMW should reduce their profit margin or else Honda and Toyota will continue to dominate”. LOL.

    The iPhone is the only phone with iOS. That is a selling point that the iPhone has that no other OEM has, for they’re all generically android. For that reason alone, Apple’s pricing for the iPhone is justified.

  • ulyssesric

    The whole article can be covered with single phrase: “Lower the iPhone price, or I’m going to buy something else.”

  • Pseudonomian

    In the U.S., the intro model iPhone 5 costs the same or less on contract than high end Android phones. They are making a ton of money on phones at that cost, and they are now have the majority of the smartphone market in the U.S. (and they’re not doing doing shabby elsewhere, either, but that’s another story). And there isn’t much room to lower their on-contract pricing, since the 4S is $99 and the 4 is $1 on contract.

    Frankly, it’s amazing who can get a job as an “analyst.”

About the author

Killian BellKillian Bell is a staff writer based in the U.K. He has an interest in all things tech and also covers Android over at CultofAndroid.com. You can follow him on Twitter via @killianbell.

(sorry, you need Javascript to see this e-mail address)| Read more posts by .

Posted in News | Tagged: , , , , , , , , , , |