Cutting Room: Apple won’t be stewing over results

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Rivals shouldn’t be celebrating just yet as it appears Apple is appealing to price-conscious users, something it could build on with cheaper versions of its products 

At first glance, Apple’s results for its second quarter of 2013 provided lots of ammunition for those itching to declare that the company is in decline.

The figures, which were published in late April (see pages 20-22), show the Californian manufacturer experienced its first profit decline for 10 years during the March quarter.

Year-on-year profits fell from $11.6 billion (£7.6 billion) to $9.5 billion (£6.2 billion) – a decrease of around 20 per cent.

Add to this the admission by CEO Tim Cook (pictured) that gross margins, or the percentage of revenue that goes back to Apple as profit, has and will continue to decline, coupled with further admissions that revenue will be flat for the next quarter, and you’ve got a strong case for the argument that it is indeed on a downward trajectory.

But Apple’s rivals should refrain from cracking open the champagne for a little while longer, as what the results really represent is manufacturer’s strategic – and so far successful – move to increase its market share in emerging smartphone markets around the world.

Countries such as China and India overtaking wealthy Western nations as the largest smartphone markets in the world arguably presented Apple with a tough challenge.

This is because the new largest smartphone markets in the world are also by definition ‘emerging’ and therefore are more price-conscious than the US, where Apple tops the smartphone manufacturer rankings.

This realisation a few years ago must have left Apple asking itself several questions about its future. For example, could it release cheaper versions of the iPhone without diluting the quality of its products and its brand – its biggest assets?

Could Apple also continue to compete globally with iterations of the same phone, when rival manufacturers offer products for every budget?

And,vitally, would it have the same impact on emerging markets as it did in the West?

Apple’s Q2 results gave us the answers. Put simply, it will lower the prices of its older iPhone models with the aim of capturing first-time smartphone buyers.

Historically, the company’s smartphones have got cheaper after launch and with the release of fresher models. But this is more pronounced in certain countries to reflect varying consumer budgets.

Cook said the fact that there are lots of first-time smartphone buyers “is not lost” on the company, which has placed its hopes in China in cutting the cost of the iPhone 4 and 4S.

Another revealing detail was the company’s admission that profits per product fell because it sold more iPad Minis in relation to its more expensive full-size iPad than it had expected to.

This shows Apple appeals to more price-conscious customers, something it may seek to exploit with more cheaper versions of its products – although it can hardly reduce the size of the iPhone, which means its insides have to change.

Until then, it seems Apple’s message to consumers in emerging economies who want its products but can’t afford them is a simple one: wait. They will get cheaper. Until then, you’ll have to put up with older versions.

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