You Don’t Understand Why the iPhone 5c is Brilliant Yet

Learning to be a post-technical founder of Clef, I’ve spent a lot of time studying the strategies of executives at other companies, both startups and more established players. In studying Apple’s decision to create the 5c, I found something extraordinary. I expected to see Apple’s new CEO playing to his strengths in a predictable way, but found a product that was quietly released but is about to change the market drastically.

Like many of Apple’s newer products, the iPhone 5c was leaked in the press long before it was officially launched. For the first time, Apple was going to release two iPhones, and one of them was going to be plastic. It was a radical move, and interpretations of the new iPhone came from all over. As launch neared, the consensus was that a cheaper iPhone was responding to the lower end Android phones that have overtaken the smartphone market.

What the Analysts Saw

When the iPhone 5c actually launched, though, it wasn’t cheap. Granted, it was $100 less than the new iPhone 5s, but Apple has been selling year-old iPhones with the $100 markdown for years. Analysts wanted something that could compete with the $400 Chinese market, and instead they got another $550 iPhone. This should have been the price for the iPhone 5, but the iPhone 5 was missing completely.

Instead of the radical new pricing structure they were expecting, analysts looking at the current market saw Apple doubling down on a strategy that was losing market share to Android. The iPhone 5c was a mistake, Apple had misunderstood the market they needed to target.

A New Kind of Genius: Tim Cook’s

Tim Cook is an operations nerd. He’s really good at making things happen just in time so that there’s no waste in the Apple system. Inventory at stores gets turned over every few days (instead of the normal few months), manufacturers are tightly controlled and cheaply hired, and the result is the highest profit margins in the industry. I’m going to quote a bunch of numbers in this next paragraph, and if you’re not into margins and stuff, you can skip it.

With a little time, the commentary started to come around to the manufacturing and margin benefits of building a plastic 5c. If Apple sold the iPhone 5c at the same rate as the 4s sold last year, the $13 cheaper backing alone would account for more than $1.8B in savings. Of course, the iPhone 5c is already outperforming the iPhone 4s (27% of iPhones as opposed to 23%) and iPhone sales grow 125% annually at a minimum, so the plastic component is more likely to be worth about $4.75B.

Almost 5 billion dollars saved by making the back plastic. That’s Tim Cook’s Apple.

The man (and his team) is an operational genius, and the additional complexity of carrying 5 colors in 3 sizes for 2 carriers in the US, not to mention the models for other countries, and keeping them in stock without wasting a ton of cash on extra inventory, is stunning. The profit margins are the same for the 5s and 5c, and with a little math analysts began to see a silver lining to this not-cheap-enough iPhone.

Look closer…

So Tim Cook figured out a way to mint more money without making an amazing new iPhone. Once again, Apple takes an off-year with incremental updates but sells a ton of phones and makes huge bank. That’s the story that analysts are telling right now, it’s the popular tech pundit line, and it totally misses the radical change that Apple has just initiated.

“I don’t subscribe to the common view that the higher end of the smartphone market has peaked. I don’t believe that, but we’ll see.”
Tim Cook

What can Tim Cook see that the rest of us are missing? If we all already own smartphones, how are they going to keep selling more each year?

Change Your Customer, Not Your Product

A year after the first iPhone came out, the iPhone 3G was released — a huge update. The 3G was way faster, the phone was much lighter, calls were dropped a lot less, and everyone who bought the original iPhone was stuck with it for another year because of their cell phone contracts. That was when Apple changed their update cycle. After that, Apple started releasing updates every 2 years, in line with the carrier contracts most of us carry in the the US.

With the “s” updates, Apple made sure that everyone was using iPhones that looked the same, no matter where you fell in the upgrade cycle. Each “s” update was good enough to keep people buying iPhones for the whole 2 year period, but didn’t alienate or anger customers stuck with last year’s version.

That’s all about to change.

Right now, Apple only sells each customer one phone every two years, but the 5c marks the end of the 2 year cycle. From now on, the iPhone will be updated every year so we can buy twice as many iPhones. Besides the pragmatic awesomeness of doubling sales potential, Apple is also being pushed towards yearly updates by the global market where 2 year plans aren’t the norm. With new Android flagship phones coming out every quarter, 2 year old iPhone designs are feeling more pressure.

The first step before Apple could make this change requires dealing with the networks, and convincing them to lighten up on the contracts. I’m not sure if this is magical market coincidence, or whether Apple is behind it, but all of the carriers spontaneously changed their tune (and their business models) to make upgrades a yearly process two months before the iPhone update. (Verizon, AT&T, Sprint, T-mobile)

Now, with some contractual flexibility, Apple needs to build phones that are upgradeable every year.

This is Where the 5c Gets Crazy Brilliant

The 5s will be the last “s” phone Apple sells because once they hit 6, the yearly pendulum will be in full swing. Analysts expected the 5c to address today’s market, but that market is about to shift radically, and the 5c is being positioned to catch it head on.

Next year, the market will be for yearly phone purchases, and the extra expense excludes a lot of people who currently upgrade every time their plan comes up. Buying a new phone once a year is a pretty major financial commitment and Apple knows that they could leave some customers behind with the new strategy. While shareholders are pressuring them to make their phones less expensive, Apple is working on a strategy to cost us a lot more. They’re going to need to change the market if it’s going to bear the extra weight.

Welcome the iPhone 5c, the trendy, cute, playful iPhone. Look at it next to the premium, plush, luxurious 5s and the new segmentation is clear. The 5c is obviously the cooler phone, but the 5s is classy, refined. These are not “rich” and “poor” choices, these are “hip” and “important” self-identifications. The cases for the 5s are leather, the 5c’s are polka dot. When you walk into an Apple store, the question is no longer “how much do you want to spend”, now you’re being asked who you are.

The identity question changes the smartphone market in a few ways for Apple. Firstly, the iPhone, which has always been a pretty premium product, now owns the luxury segment of the market by a mile with the 5s (the gold color is a nice touch here). The 5s, and future non-c iPhones, don’t have to play it cool, they’re the cream of the crop and they will adopt the appropriate swagger: chamfered edges, sapphire crystal home buttons, and metal and glass bodies.

Second, for a younger generation, having an iPhone doesn’t have to mean having the same phone as your parents. The 5c is appealing to a big swath of the current iPhone market, but it also expands the boundaries to newer segments who might have been alienated by the perceived professionalism or expensiveness of the device. Now, people who see their phone as a more casual component of their life don’t have to get the old iPhone. There’s a cuter, cooler iPhone for them.

Finally, the “c” iPhones replace the “s” iPhones at the $99 price point (on contract) so that the yearly update cycle can reach a wider audience even as it asks customers to cough up twice as often.

The iPhone 5c solidifies Apple’s hold on the top end of the market, expands its reach down into the middle part, and prepares buyers to buy twice as many iPhones. Both demographics are going to get an updated phone each year, and the margins for Apple are almost identical (1% lower for the 5c). Analysts were wrong to hope for a cheaper iPhone. The 5c changes the game because it’s not cheaper.

Not bad for a plastic iPhone 5.

The Best Part About This Prediction

It’s going to take 2 years for us to see the real proof of this transition (the iPhone 7). Next year, the iPhone 6 will come out just like we all expect with the 2-year updates (though the 5c will be updated and 5s will disappear, which will surprise some). It won’t be until the year after that we really know the “s” iPhones are dead. And that’s why it’s so hard for analysts to see how important the 5c really is. Short term thinking doesn’t build a 5c like Apple’s, but if you change your focus out a little further, the new plastic iPhone is a hell of a game changer.

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