Tropical Apple

Jobs' vision disadvantages it in emerging markets

Less than a year ago, Apple Inc was the world's biggest company, measured by stock-market value. Its shares were trading at more than $700 then. Yet, today, they're around $420, and expectations from the company have dimmed. That's because Apple is caught in a dilemma. On the one hand, its extraordinarily powerful brand is built around top-of-the-line engineering and features - its co-founder, Steve Jobs, insisted that no compromises be allowed to make a gadget with the Apple logo a little cheaper. On the other hand, growth comes from the emerging world, where prices matter more. In the United States, handsets are frequently sold deeply discounted, with the difference made up in higher fees from an associated telecom company with which Apple and the user will sign binding contracts. In India, for example, that doesn't happen - so the entire price, frequently in the region of '40,000, is paid up front. That limits Apple's marketing options.

Apple Inc released results this week that nevertheless surprised investors. It reported $35.3 billion of sales, $300 million more than in the equivalent quarter of 2012, and a couple of hundred million dollars more than the consensus expectation. But the company's net profit was $6.9 billion, down nearly 22 per cent year-on-year, from $8.8 billion. On the results conference call, Apple's CEO Tim Cook specifically mentioned strong growth in India: "From an iPhone point of view... we saw very strong sales in several of the emerging markets, sort of pre-pay markets. India was up over 400 per cent." Clearly Cupertino understands that pre-paid markets are different. And 400 per cent is impressive. But will selling slightly older models end Apple's dilemma? In India, its growth came from aggressively pushing the iPhone 4 the model that came out prior to the current iPhone 5, which with many discounts can retail in the low '20,000 range.

Asian electronics major Samsung should still be giving Apple nightmares. Over the last quarter, it replaced Apple as the world's most profitable handset company: sales were up 56 per cent year-on-year, while Apple's growth was only 20 per cent - far below the overall figure for the industry, of 47 per cent. Meanwhile, Samsung's operating profit from mobile telephones was $5.2 billion in the last quarter; the corresponding division in Apple showed profits of $4.6 billion. And Apple's share of the market slipped to just over 13 per cent, its lowest since 2009 and the beginning of BlackBerry's decline. China, in particular, is a problem for Apple: sales for Apple slipped 43 per cent over the previous quarter, and 14 per cent year-on-year. Samsung, on the other hand, is going from strength to strength in China, and dominates the market there - by creating a variety of products that offer consumers granular choice over price and features. This is exactly what Apple has chosen not to do, and it is far from clear how it can overcome this self-imposed hurdle.

Mr Cook hinted that a big release from Apple was in the offing in the coming months. Many expect that this will be a lower-cost iPhone, perhaps with a plastic body of the sort common in emerging markets. Yet it is not clear how much other function the company is willing to sacrifice to give potential customers an affordable price. Nor can it wait too long. Forget Samsung - Google's Nexus phones and tablets now beat Apple on features. Meanwhile, the old market leader Nokia hasn't given up; its Lumia phones, in partnership with Microsoft and Windows Mobile, showed big gains. And nobody in India will ever completely write off BlackBerry, which has released a new only-for-emerging-markets handset that received glowing reviews. For Apple, a change in culture is hard, and it would look like a repudiation of Jobs' vision - but without one, it will likely become just one of the pack.