Ovum analyst on Apple's big dilemma – make the iPhone 5C cheap, but not too cheap, and sexy, but not too sexy

It seems as if we know what is coming tomorrow from Apple – an enhanced version of the iPhone (the 5S?) and a budget version of the iPhone (5C). So we are now hearing from industry analysts as they try to highlight what the key issues facing the brand are.

Jan Dawson, chief telecoms analyst at Ovum, has just published his thoughts and they make very interesting reading.

Dawson mainly focuses on where Apple should position the budget 5C. He says that the trick is to make it cheap enough so that it can attract non-Apple buyers, especially in emerging markets like China, but not to make it too cheap to tarnish the premium reputation of the brand. Also that the new 5C needs to be nowhere near as exciting as the 5S.

He says

“The cheaper iPhone is critical for expanding the addressable market, because many people in China and elsewhere simply can’t afford to buy a current generation iPhone, especially when it’s not subsidized. However, the key risk for Apple in launching a cheaper iPhone is that it may cannibalize sales of the high-end phone. That would exacerbate a problem Apple’s had for the last few quarters, as average selling prices for iPhones have fallen from $608 to $581 in the past year. That in turn squeezes margins, and it’s only likely to get worse with a cheaper iPhone. The trick is for Apple to position a cheaper device so that it’s attractive for those that haven’t been able to afford an iPhone before, but is missing enough key features for the new flagship iPhone to remain compelling.”

Dawson also believes that Apple needs “demonstrate that it can maintain momentum in overall sales of iPhones, and to do so in a way which won’t drive down margins significantly.”

He points to the way in which the iPhone growth rate as slowed year on year, largely because of Apple’s increased market penetration.

He concludes by saying

“All of this, along with similar trends in the iPad space driven by the launch of the iPad Mini, increase the pressure on Apple to launch a new line of products to keep overall growth going. We’re not going to see such a product at the iPhone event, but Apple needs to demonstrate in the coming months that it has other product lines which can start to make up for slowing growth and falling margins in iPhone and iPad. That’s a tall order, because both the iPhone and iPad generate $400-600 in revenue per unit, and sell tens of millions per quarter. A smart watch or even a revamped Apple TV are unlikely to generate anything close to those sorts of numbers, and that’s a problem Apple will have to work hard to overcome.”