Home Technology Apple Big Event: What We Don’t Yet Know About iPhone 5C

Apple Big Event: What We Don’t Yet Know About iPhone 5C

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Apple Inc. (NASDAQ:AAPL) is expected to finally unveil the iPhone 5S and the less expensive iPhone 5C at its planned media event today. While many analysts agree that a low cost iPhone is needed in order for Apple to expand its user base, concerns about cannibalization of the higher priced model have continued. And even as we go into today’s event, there are many unanswered questions about the iPhone 5C, even though we already know what the handset’s specs are likely to look like. Today’s event should answer some of the most important questions that remain about the device and Apple’s plan for it.

Apple Big Event: What We Don’t Yet Know About iPhone 5C

But even with all of these unknowns, Bernstein Research analysts see the iPhone 5C adding single-digit percentage earnings per share accretion by the 2015 fiscal year—even with cannibalization rates of between 20 and 40 percent. They kept their Outperform rating and $600 per share price target on Apple ahead of today’s event.

The promise of a low cost iPhone

Analysts Toni Sacconaghi, Jr., Jonathan Cofsky and Eric C. Garfunkel say although there has been plenty of debate about various innovations that can drive upward revisions and better multiples for Apple, the one that offers the best promise right now is a lower priced iPhone. They believe that a less expensive iPhone is one of two $10 billion to $50 billion incremental revenue opportunities. A converged PC / tablet device is the other.

They believe that the below $300 smartphone market will grow to approximately 900 million units by 2015. This would suggest that if Apple Inc. (NASDAQ:AAPL) can grab just a 10 percent share of this market (compared to the 45 percent share it holds in the over $300 market), it could add up to about $30 billion in incremental revenues.

Specs of the iPhone 5C

The Bernstein analysts note that the iPhone 5C is expected to be similar to the iPhone 5 but have a plastic case rather than a metal one. They said that it’s unknown though whether the internal parts of the device, including the chip and camera, will be more like the iPhone 5 or the iPhone 4S. The analysts said in order to minimize cannibalization, they would prefer that the specs be closer to those of the iPhone 4S or even the iPhone 4. This would provide “more of a differentiation” between the low cost iPhone 5C and the flagship iPhone 5S.

Of course they believe, like most others do, that the primary new feature on the iPhone 5S will be fingerprint recognition, which could be linked to Passbook.

What will happen to previous iPhone models?

The analysts said although the expected specs of the low cost iPhone have been reported virtually everywhere, what we don’t know are the most important details. For example, they note that from this point on, it isn’t known how Apple Inc. (NASDAQ:AAPL) will handle its previous generation iPhones. Over the last two product cycles, the company has offered the iPhone 4S for $550 unsubsidized and the iPhone 4 for $450. Sacconaghi, Jr. and team believe that Apple will keep the iPhone 5 and price it over the iPhone 5C, although they note that “this bears very close watching.”

Ultimately, they believe there will be a ladder pricing strategy with the iPhone 5S at the high end, used iPhones at the low end, and the iPhone 5C and a previous generation iPhone in the middle.

Apple’s pricing, distribution and roll-out plan

Of course the price of the iPhone 5C will be an important component of any overall pricing strategy Apple Inc. (NASDAQ:AAPL) is planning. Expectations for prices of the device have ranged from $300 to $500, but they believe a $400 price tag is the most likely one. This would be “meaningfully more expensive” than they thought a less expensive iPhone would be at the beginning of the year. They note that “a higher price and more limited differentiation among models” may risk a higher rate of cannibalization, but the impact of each cannibalized phone would be lower.

In terms of distribution, the analysts said one of their biggest questions is whether the iPhone 5C will be distributed in developed areas like the U.S. and Western Europe. In these areas, most phones are subsidized and smartphone penetration is high at 70 to 80 percent. They believe limiting distribution of the handset to emerging markets might make sense because there is limited incremental opportunity and a greater risk of smartphone cannibalization for Apple Inc. (NASDAQ:AAPL) in developed countries.

The analysts said they also would prefer if the iPhone 5S was rolled out before the iPhone 5C, but they expect both will launch at the same time. They’re predicting a Sept. 20 launch in at least nine countries with more countries added a week later.

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