iPhone 5C

Financial analysts and investors were hoping Apple would release a cheap iPhone to compete against cheap smartphones from other companies targeting markets like China and India where cheap smartphones sell well. The unsubsidized cost of the iPhone 5c is US$550, which isn’t cheap at all and far more expensive than what financial analysts and investors expected. (What’s cheap? The $249 16GB Nexus 4.) What happens when a company does not meet expectations, even if those expectations are based more on hope than reality? Stock prices fall, and fall it did: AAPL fell $26.93, or 5.4 percent, to $467.71 today.

Apple doesn’t need a cheap iPhone to succeed in China. (Full disclosure: I own two shares of AAPL.) Why do analysts think Apple needs a really cheap iPhone to succeed in China? Consider this: China has a population of more than 1.3 billion. Let’s assume the top five percent are rich, meaning they can afford an Audi A6, a TAG Heuer watch, and a Valentino suit. Five percent of 1.3 billion is 65 million, and that’s about one fifth of the entire population of the U.S. Apple announced it sold 31 million iPhones for the June quarter. If Apple can capture just one fifth of the top five percent in China the company can sell 13 million iPhones. The top five percent in China do not need or want a cheap iPhone; they will buy the iPhone 5s. For the rest of the country who can afford a smartphone and the monthly bills the iPhone of choice will be the iPhone 5c. And that’s a lot of people. Apple believes it doesn’t need a cheap iPhone to succeed in China and the lack of a new cheap iPhone is proof. Apple could be wrong, but I’m not willing to bet against Apple.

IPHONE 5C ≈ IPHONE 5

The iPhone 5c is effectively the iPhone 5, but with a plastic shell in five colors. Both have the same A6 CPU, camera, and almost everything else. The $99 iPhone 5c slots below the $199 iPhone 5s and above the free iPhone 4s, exactly where the iPhone 5 would have been had it not been discontinued. Apple’s pricing strategy for the iPhone is exactly the same. But the iPhone 5c heralds a new chapter for Apple’s iPhone: The iPhone is now a family, a family of two. The iPhone 5s is the older, more refined, and more expensive sibling while the iPhone 5c is the younger, more playful, and more affordable one.

I’m glad Apple didn’t mess around with the size of the display and I hope it doesn’t for quite some time. Apple instead focused on software by color coordinating the default wallpapers to the hardware color of the iPhone 5c, and the visual experience is enhanced even more by the translucent UI and parallax effect in iOS 7.

Folks who were looking to purchase the $99 iPhone 5 will purchase the $99 iPhone 5c. And because the iPhone 5c is new and feels new compared to a year old iPhone 5, folks who were looking to purchase the free iPhone 4s might consider spending $99 more to get the iPhone 5c, too. Although I’m not the target market—I would upgrade to the iPhone 5s instead, if I could—I think the iPhone 5c will sell well in the U.S. as well as in China.