It’s been several days since the release of the new, less expensive iPhone 5C, and no one has quite gotten over how expensive it is. It’s a common view that pricing a phone that was supposed to appeal to the Chinese market at $735 in Beijing dooms the entire project from the start.
The solution for Apple (AAPL) is to make buying a phone in China and other countries look more like it does in the U.S., says Rafi Mohammed, the author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow. “If you are trying to get into a market where people can’t afford it, the only way to succeed is to push a new pricing strategy,” he says.
Mohammed points out that this has worked for luxury automakers, which largely lease their products to status-seeking drivers who can’t or won’t buy the cars outright. Likewise, the iPhone would’ve had a much tougher time appealing to U.S. consumers if carriers hadn’t been willing to cover most of the retail price for their network subscribers. Wireless companies in other countries, however, haven’t been as inclined to front the device costs.
Carriers in China do help their customers pay for phones. Wong Teck Zhung, an analyst for market researcher IDC, says at least 40 percent of all smartphones shipped to the country last year were subsidized. (Other estimates have put the number slightly lower.) Apple is already selling subsidized phones in the country; among China’s major carriers, only China Mobile (CHL) doesn’t offer iPhones on service contracts, and the two companies are expected to have an agreement in place soon.
“The trend we see is that Chinese carriers are offering more subsidized phones to consumers. This is not restricted to high-end smartphones such as the iPhone and Galaxy 4S, but also low-end smartphones,” Wong wrote in an e-mail.
While U.S. carriers essentially hide the price of a new phone, paying for most of it in exchange for a new contract, Chinese wireless companies recompense their customers over time. A customer in Beijing has to pay China Telecom (CHA) 4,488 renminbi ($733) for an iPhone 5, but if he signs a two-year contract for service that costs at least $47.23 a month, the company will give him $556 worth of rebates in installments during those two years. The carrier is still picking up about three-quarters of the iPhone’s cost, but it’s making its service, not the phone, seem cheap.
Similar systems have developed in lower-cost markets around the world. They do more to protect wireless companies in case customers break their contracts, a greater risk in countries where credit systems are less developed. “Carriers are afraid that consumers will take the subsidized phone and run away,” Forrester Research (FORR) analyst Bryan Wang wrote in an e-mail. “Even with the locked device, there are many small stores in China to help customers to root/unlock the phone.”
Wang says Apple’s big chance to sell iPhones in China will come later this year, when it finalizes an agreement with China Mobile to begin selling devices that are compatible with the carrier’s new LTE network. (Chinese regulators cleared iPhone use on the network earlier this week.) The deal would give Apple a shot at 700 million potential new customers. It would also help China Mobile appeal to the country’s small niche of wealthier, iPhone-loving smartphone users. Such consumers seem to be Apple’s best chance in China, where even if the carrier helps cover the costs, customers will still have to lay out a lot of money upfront.