Can Apple Regain Lost Momentum with Two New iPhones Tomorrow?

Tomorrow, the world anticipates Apple announcing a new iPhone model—possibly two new models, if rumours of a cheaper plastic smartphone hold any water.

The world’s most valuable technology company, whose shares are down $200 from a high of more than $700 last year, has profited wildly from the iPhone since it launched in 2007—but critics feel that Apple is no longer setting the bar for innovation in the smartphone arena. As a result, sales growth has slipped, says Jan Dawson, chief telecoms analyst at Ovum.

“The key challenge for Apple this week is to demonstrate that it can maintain momentum in overall sales of iPhones, and to do so in a way which won’t drive down margins significantly,” he explains. “iPhone sales have now fallen into a fairly predictable cyclical trend, spiking in the fourth quarter of the year, following a September launch, and falling over the rest of the year until a new device in launched. But as the overall numbers have grown, the year on year growth rate has slowed significantly, from 100% to 24%, even accounting for the cyclical trends. It’s largely driven by Apple’s increasing saturation of its addressable market.”

According to Dawson, a cheaper iPhone—rumoured to be called the iPhone 5C—is key to tapping more of China’s market, which should allow Apple to drive growth at a higher rate again.

“China is a key market for Apple, but its sales have flagged there lately and getting beyond the two smaller carriers is critical for future success. The cheaper iPhone is critical for expanding the addressable market, because many people in China and elsewhere simply can’t afford to buy a current generation iPhone, especially when it’s not subsidized,” he says.

However, a risk for Apple in launching a cheaper iPhone is that it may cannibalize sales of the high-end phone, the analyst notes. And “That would exacerbate a problem Apple’s had for the last few quarters, as average selling prices for iPhones have fallen from $608 to $581 in the past year.”

According to Dawson, the trick is for Apple to position a cheaper device so that it’s attractive for those that haven’t been able to afford an iPhone before, but is missing enough key features for the new flagship iPhone to remain compelling. “That means getting the price for both devices right, but it also means figuring out how to make the lower-cost variant feel like a real iPhone while stripping out significant cost,” he says.