The iPhone 5C Helps Make a Strong Argument for the iPhone 5S

With the iPhone 5C, the "C" stands for "cake."

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Even though Apple’s iPhone 5C was well-expected ahead Tuesday’s press event, it still managed to be a surprise in one area.

At a starting price of $100 on-contract, or $550 without a subsidy, this is not the inexpensive iPhone that pundits and analysts anticipated.

The price isn’t low enough to stand in for the iPhone 4S, which now becomes the least expensive option (free with a two-year contract, $450 without), and it doesn’t address unsubsidized and prepaid phone markets in a way that previous iPhones haven’t. Instead, the iPhone 5C will represent the middle price tier, while the new iPhone 5S will become the top-shelf option.

Why did Apple even bother with the iPhone 5C, instead of just downgrading the current iPhone 5 to mid-range status like it has in previous years? Let’s first consider Ben Thompson’s take, written before Apple announced the 5C:

It is true that Apple has been selling multiple iPhones for a few years now; right now they sell the iPhone 5 for $650/$199, the iPhone 4S for $550/$99, and the iPhone 4 for $450/$0. However, while this does capture some customers further down the demand curve, I think that the overall demand for “old” iPhones is much lower than demand for “new” iPhones.

The 5C, on the other hand, will be about as “new” as an iPhone can get, particularly with its colorful enclosures. Even if it’s priced the same as an iPhone 4S or 4, it will sell many, many more units because of stronger demand.

The smartphone market is maturing. People are becoming happier with cheaper smartphones, and while Apple sells a lot of older iPhones, an all-new mid-range model could be an even bigger success. If the iPhone 5C happens to bring fatter profit margins for Apple by virtue of its plastic build materials, all the better. The fact that Apple will offer a 32 GB iPhone 5C, priced at $200 on-contract, raises the profit potential even further; it’s the first time a mid-range iPhone will ever allow for more than 16 GB of storage.

There’s another angle to think about: With the iPhone 5C occupying the middle tier, the new iPhone 5S will represent your only option for a premium designed, 4-inch iPhone. The iPhone 5C creates a clear separation between high-end and mid-range that wouldn’t have existed if the iPhone 5 stuck around.

I know, it’s a tired line that the latest iPhone is just a minor improvement, and it’s true that Apple doesn’t need to reinvent the iPhone every year. But people are becoming more inclined to purchase lower-cost phones — not just iPhones — so it’s getting harder to make a case for the more expensive model. The iPhone 5S’s Touch ID fingerprint sensor sounds interesting, but outside of enterprise scenarios I’m not sure that’s a big enough marquee feature to reverse the trend.

That leaves the difference in design between the iPhone 5C and the iPhone 5S. Had Apple simply kept the iPhone 5 as the mid-range option, the iPhone 5S would be an even tougher upsell, and Apple would take even more flak for not protecting its high-end business. (This was already happening long before the new iPhone announcements.)

With the iPhones 5C and 5S, Apple is trying to have it both ways. It wants to give the growing mid-range market a product that feels fresh, maybe even at higher profit margins than before. At the same time, Apple wants to make a clear argument for spending more on the high-end iPhone.

I think it’s a clever strategy; how other people will feel depends on how much they were looking forward to getting an aluminum-clad iPhone 5 on the cheap.

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