Shares of Apple took a mighty plunge this week following Apple's new iPhone announcement. Apparently investors weren't thrilled with the pricing on the iPhone 5c, a device which was, without any evidence whatsoever, pre-emptively touted as a low-cost iPhone.
In truth, the iPhone 5c, while mildly cheaper than the iPhone 5s, is nowhere close to being cheap. On Apple's website, an unsubsidized 16 GB iPhone 5c retails for US$549, while the 32 GB model goes for $649.
So what gives? Why did Apple go through the trouble of developing the iPhone 5c if not to make it cheaper for the masses?
Simple. Apple doesn't view amassing market share for bragging rights as a worthy pursuit. Apple is not, nor has it ever been, in the business of flooding the market with cheap products in an effort to build its customer base, which is why it's no coincidence that Apple has over $100 billion in the bank.
That said, the iPhone 5c is not, and presumably never was, positioned to be the extremely low-cost iPhone for the masses. If you want an affordable iPhone, the iPhone 4s is still alive and kicking.
The iPhone 5c, meanwhile, is all about padding Apple's margins.
Instead of making the iPhone 5 available for $99, Apple completely repackaged the device into what we now know as the iPhone 5c. By all accounts, the iPhone 5c is a re-purposed iPhone 5 with cheaper, and yet still high-quality, materials.
Apple recognizes that not everyone needs or can afford the latest and greatest iPhone. So why not maximize profits for the demographic not willing to shell out a minimum of $199 for the iPhone 5s?
It's a smart business strategy, compounded by the fact that Apple has now introduced colors into the mix. And sure, it's easy to scoff at that, but if history is any indication, the iPhone 5c, with its assortment of colors, will be a huge hit amongst consumers.
What's more, there's a psychological component to what Apple is doing as well.
If Apple simply made the iPhone 5 available for $99 with contract, it would have the aura of a last-generation device sold on the cheap. Old hat. The iPhone 5c, though really just a souped-up iPhone 5, seems, feels and appears like a completely new product.
The 5c shifts the iPhone-purchasing debate from "new iPhone vs. old iPhone" to "new iPhone with bells and whistles vs. new iPhone with color and more affordable price point."
Psychologically, I think this will help make the iPhone 5c extremely popular, though we'll have to wait for earnings season to see how this all plays out.
Either way, Apple is sitting pretty. The company already controls the lion's share of profits in the industry and it now stands poised to take even more. Apple's flagship iPhone will always be a cash cow, but with the iPhone 5c, they've turned what was previously a slight margin liability into a more profitable product.