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The Android Junk Smartphone Market and Why It Has Apple worried

“There’s always a large junk part of the market. We’re not in the junk business.” Apple CEO Tim Cook said this in an interview with Bloomberg, speaking on the proliferation of cheaper smartphones. That is a lot of tough talk or trash talk depending on who you look at it. Going beyond the bravado of that polarizing junk smartphone statement, Tim Cook realistically acknowledges the rise of, what Bloomberg’s Sam Grobart calls, the “low cost manufacturer” . Apple’s strategy is simple. It will not be competing for a slice of lower priced smartphone sales. Apple feels that the market is big enough for Apple’s iOS devices to thrive without going after market share.

Most analysts have recommend that Apple should release a cheaper iPhone. You really cannot blame Tim Cook for not following this advice. In 2012, Apple released a cheaper iPad, the iPad mini, and it did not stop Apple from losing its majority share in the tablet market. Analysts have predicted Apple to hold a steady 17-18% share in the smartphone market for the next four years. We will probably see analysts adjusting those figures.

Apple’s rival, Samsung, said in its January 2013 earnings statement that the “furious growth spurt seen in the global smartphone market last year is expected to be pacified by intensifying price competition, compounded by a slew of new products.” Whether you take Samsung’s cautionary response or Apple’s bravado, both companies acknowledge that the low cost manufacturer will take a significant portion of the market.

Each has responded to the new threat in its own way. Apple, was able to engineer a marketing coupe by announcing the sale of 9 million new iPhone’s in its launch weekend, a new record. However, as pointed out by the Verge, year on year comparisons are not possible since Apple changes its launch markets each year. Notably, the iPhone 5S and 5C are the first iPhone’s made available in China in its opening weekend. Also, in previous years, in reporting new iPhone sales, Apple would report only the sales the top of the line model. This year, Apple’s flagship and second tier model are both new, and lumped into the 9 million sales figure. Last year, buyers who opted for a new iPhone 4S were not counted in the company’s opening-weekend sales tally. Only iPhone 5 sales were tallied. Note that the this year’s iPhone 5C occupies the same price point occupied by the iPhone 4S last year.

Even with all that, it appears that the actual sale of both models is closer to 7 million than 9 million. Morgan Stanley’s Katy Huberty released the following statement on Tuesday:

“We estimate the breakdown of the 9M [9 million] first three days’ sales as: ~3M iPhone 5s sell-through (with real demand closer to 6M), ~4M iPhone 5c sell-through, and ~2M iPhone 5c non-Apple retail inventory build (representing 1-2 weeks of inventory).”

Apple sold 5 million iPhone 5’s alone last year.

It does look a bit like smoke and mirrors. But what matters more are quarterly sales figures rather than opening weekend sales.  It is still a brilliant marketing move. Apple is counting on high sales reports, while goading you not to buy a cheaper phone by labeling them “junk”. This tough talk (or trash talk), seems to be motivated by the fact that, in terms of technology, Apple really has little to talk about. These “junk” smartphones are getting pretty good. It is inevitable that as the pace of innovation slows down, those who started further back in the line start to catch up.

Xiaomi Mi-3
Xiaomi Mi-3

Two years ago, when I saw the first premium “low cost manufacturer” offerings, they looked like awkward attempts at creating a smartphone. Junk smartphone would have been a good description. Today, things are very different. Xiaomi, one of the most interesting names in mobile these days, recently launched its Android-powered Mi-3 in China. For US$327, they are offering a 5-inch Full HD smartphone equipped with Qualcomm’s latest S800 chipset and a Sony MP camera. Basically, something to rival Apple’s iPhone 5S or Samsung’s Galaxy S4 at half the price.

In the end, all the competition is beneficial to the consumer. The big players might be getting a bit too rich, at our expense. After all, Xioami seems to be able to build superphones, too, at half the price. As one reader of a small blog I maintain commented: This “(S)martphone race to the bottom is awesome.

Image Credit: Android Authority


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