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Apple's iPhone 5C misses the low-cost mark

The Cupertino, Calif., giant needs to sell more devices in places like China, but its new "low-cost" iPhone may not be low enough.

The iPhone 5C's $99 and $199 price tags make it appealing to anyone on a budget, as long as they sign a two-year contract.
Josh Lowensohn/CNET
Apple just expanded its smartphone line with the lower cost iPhone 5C, but don't expect throngs of budget-conscious consumers to line up for the device, at least not in places like China.

That's because the supposedly cheap iPhone 5C is, well, not really cheap. The 16GB model retails for $99 with a two-year service contract, and $549 without a subsidy. Tack on an additional $100 for the 32GB model.

The rationale for the iPhone 5C is that the more affordable model would better compete in markets where consumers don't sign contracts and pay an unsubsidized rate for their smartphones. It's in these markets where the flagship iPhone struggles, and where Apple has to try harder to win over consumers.

While Apple still sells a truckload of iPhones, the fate of its continued growth is a little less certain. The Cupertino, Calif., company may have invented the modern generation of touchscreen smartphones, but it faces stiff competition from companies unafraid to offer dirt-cheap, but functional, phones. While the iPhone remains king in the US, it has since ceded its leadership position elsewhere around the world. Globally, Apple has been losing market share to Android devices, particularly from Samsung.

As if that weren't enough, sales are slowing in its core high-end smartphone market, which means both it and Samsung have to find new areas for growth. An obvious source is China, which has millions of consumers who already covet the Apple brand. But in China and other regions, such as India, a vast majority of the people can't afford an $800 smartphone.

That's close to what they're getting even with the supposedly more affordable iPhone 5C. According to Apple's Chinese site, a 16GB unsubsidized iPhone 5C costs RMB 4,488, or $733, while the 32GB version sells for RMB 5,288, or $864. A 4S will set a buyer back RMB 3,288 or $537. The iPhone 5S starts at RMB 5,288, or $864, for 16GB.

Now playing: Watch this: iPhone 5C makes its debut

At that pricing, the iPhone 5C isn't exactly cheap, particularly in a country where the majority of smartphone users don't have contracts. Apple needs the China market, but it may find it tough to compete with devices from Chinese companies or even some of the cheaper phones from Samsung, which currently is China's biggest smartphone vendor.

So rather than help Apple attract the mainstream or low-end customer, the 5C instead helps it better build its position at the high end. It might even help the company nibble away at Samsung's market share with mainstream buyers. But it's not going to completely turn around Apple's position in China.

"Anyone expecting Apple to come truly down market with the iPhone 5C was fooling themselves," Ovum analyst Tony Cripps said. "The day that happens is the day the company signals that it has run out of headroom for expansion. It's far from ready to concede that yet as its greater interest in Japan and China show."

When Apple hosts its event in China in a few hours, all eyes will be on the company to see if it says anything different about the devices in that region. What could give the company a boost is the expected plan to offer its phone through China Mobile, the world's biggest wireless carrier with nearly 750 million subscribers. But unless the two reached some deal to offer iPhones at better prices, Apple won't sell nearly as many devices as it could with an unsubsidized phone that costs $400.

The iPhone 5C comes in five colors. Josh Lowensohn/CNET

An Apple spokeswoman didn't comment about China Mobile but said the company's event in the country is a replay of Tuesday's event with the same news. She added that "carrier partners will work on their service and pricing plans" and will make announcements in the coming days. We've also contacted China Mobile and will update the report when we have more information.

Apple is no newcomer to China and other emerging regions. The company opened its first store in China in 2008 and started offering the iPhone in the country the following year. However, it hasn't opened stores as quickly as it had planned, and up to now, its devices haven't been available at China Mobile.

In the latest quarter, Apple's revenue from Greater China -- China, Hong Kong, and Taiwan -- tumbled 14 percent from the previous year to $4.64 billion. The sequential percentage decline was even worse, with sales in the region down 43 percent from what CEO Tim Cook had called Apple's "best quarter ever." The drop marks the first time growth has slowed in the region since Apple started reporting China's results, raising concerns about Apple's prospects. Cook attributed the decline to Hong Kong but said it's unclear exactly why it occurred.

At the same time, Samsung's position in China has been soaring. In the second quarter, Samsung sold a record 15.3 million smartphones in China, giving it the region's highest market share of 19.4 percent, according to Strategy Analytics. Its closest rivals -- Lenovo, Coolpad, ZTE, and Huawei -- saw their shares range from 9.6 percent to 12.3 percent. By comparison, Apple sold only 3.4 million units, giving it a 4.3 percent share.

The biggest advantage that Samsung has in the region is its diverse product line. The company has long followed a strategy of providing as many devices as possible at as many price points. It customizes smartphones for certain regions and introduces specific features, such as two SIM card slots, to appeal to local buyers. It also works to please carriers in China and other regions and operates many retail stores in those countries. In addition, Samsung can price its smartphones much lower than rivals but still make money because it builds most of the components.

Apple, rather than introducing multiple iPhones each year, has kept its older devices on the market. While it has offered those at sharply discounted rates, they're still too expensive for some regions where carriers don't subsidize the phone cost. And tech-savvy shoppers in places like China sometimes don't want out-of-date iPhones when they can buy brand-new yet cheaper devices from other handset makers.

Where the 5C could help is by giving buyers the chance for a less expensive phone that's still brand new. If they want something even lower priced, there's the 4S. But just like 5C pricing is still too high for many people, so is the 4S. In many markets, an $450 unsubsidized phone -- the new price of the 4S -- is classified as a mid- to high-end device, said Soumen Ganguly, a director at strategy consulting firm Altman Vilandrie & Co. The sweet spot for mainstream devices is $300 to $450, he added.

"They're right at the top of that," Ganguly said. "The 4S at least helps them have a play in that, but [the 5C] is not the volume driver many expected. ... The 5C will help them in China but not in the low end. It will be a defensive play in the mid to high tier."

For now, Samsung and the Chinese vendors likely aren't too worried.