Apple earnings expected to disappoint after iPhone 5C gamble falls flat

The iPhone 5C's cheaper price point was expected to lure price-sensitive customers, a tactic which likely did not work
Apple iPhone 5C phones. The company was criticised for not earning users' trust over security issues.
In the US, Apple's best performing market, the 5S accounted for 67% of sales in Photograph: Adrees Latif /Reuters ADREES LATIF/REUTERS

When Apple launched its latest iPhones in September, it tried a new tactic: cheap – well, cheaper, anyway. Later today, the company is to update investors, many of whom are worried the tactic may not have worked. The initial signs are not good.

Apple once ruled the smartphone market but now faces stiff competition from Samsung, HTC and others running Google's Android operating system. In September it launched a high end 5S iPhone aimed at its core customers and a cheaper, plastic-backed 5C that many supposed was meant to lure in new, more price-sensitive, consumers.

Just a month later, The Wall Street Journal reported that Apple suppliers had been asked to cut production of the 5C. Localytics, a marketing platform for mobile apps, calculates that the 5S has comfortably outsold the 5C in every single market since launch. Online, Apple says there is a three week wait for the 5S, but the 5C ships in 24 hours.

Sales of iPhones matter massively for Apple. Barclays Research estimates that the iPhone accounted for 53% of Apple's revenue for the fiscal year that ended September 30, compared with 19% for the iPad. Signs of a slip could send Apple's shares spiraling. "They are extraordinarily dependent on that product," said Gartner's Carolina Milanesi.

Before the new iPhones launched, International Data Corporation said Apple posted a year-over-year decline in global market share during the second quarter of 2013. Android and Microsoft's Windows phone managed slight increases.

As yet, the 5C doesn't seem to be winning back sales. In the US, its best performing market, the 5S accounted for 67% of sales in the first month compared to the 5C. Localytics has found some evidence that the 5C is now gaining sales in the US over the 5S. In the rest of the world, however, 5S sales remain strongest. In the UK the 5S took 71% of sales, in Germany 87% and, perhaps most worrying of all, in China the more expensive phone took 83% of sales relative to the 5C.

Apple's 5C with its colourful plastic back arrived after investors had pressured the company to offer a cheaper phone that might attract less wealthy buyers, particularly in China. The 5C is basically an iPhone 5 with a cheaper case – but it is still not cheap. At launch, the device retailed in the US for $549, but can be had for $99 with a two-year contract. In China an unsubsidized iPhone 5S costs about $866, while an iPhone 5C costs $735.

In a note to investors after the launch, Toni Sacconaghi, tech analyst at Bernstein, expressed his frustration. "We worry that Apple's inability/unwillingness to come out with a low-priced offering for emerging markets nearly ensures that the company will continue to be an overall share loser in the smartphone market until it chooses to address the low end," he wrote. "In essence, Apple continues to risk being relegated to a high-end niche player."

Yankee Group analyst Carl Howe said it was too early to write off the 5C. "The truth is we don't know. They don't break out sales for different models, so it's a guessing game." But he said the 5C was likely to pick up sales after launch with more price-sensitive shoppers. "The 5C buyer isn't the sort of buyer who stands in line. Once the 5S frenzy has died down, the 5C will be more popular," he predicted.

Milanesi said Apple's market share was slipping but that it was too simplistic to look solely at how much of the pie Apple was taking. She pointed out that only Apple and Samsung were managing to make money from smartphones and that Apple was protecting that position by retaining its premium position.

With the company so dependent on the iPhone, Milanesi said it was unlikely to mess too much with its magic formula until it had another "wow" product to do the heavy lifting. In the meantime "cheap" is likely to remain a relative term at Apple. "I always question this idea of market share. I don't think Apple wants consumers who just want the cheapest iPhone. They want the consumer who buys into the ecosystem, who will buy and iPad, apps. They don't want to be the phone for everybody."