The iPhone 5C and the youth factor

The iPhone 5C and the youth factor

The iPhone 5C has drawn sneers because it’s not the low-cost device the
tech industry expected. Here’s why Apple had something different up its
sleeve.

Apple’s iPhone 5C has suffered from a case of mistaken identity.

When leaks about the
iPhone 5C
started showing up earlier this year, tech industry observers started
speculating that this was the long-conjectured “iPhone Mini.” Those
expectations were based solely on the previous success of the
iPod Mini,
which was smaller and less expensive than Apple’s flagship iPod and
went onto become the best-selling model in the product line.

The timing was perfect for such a product, the tech industry
surmised, because Apple has been losing market share in emerging markets
to sub-$300
Android devices. When Apple officially unveiled the iPhone 5C on Tuesday,
it was not that device. It started at $99 on contract and over $500
without a contract. As such, the tech press and market analysts frowned.
(Some actually sneered.)

However, evaluating Apple is a yin-and-yang thing. You have to look
just as closely at what the company doesn’t say and doesn’t do because
it says so little and is extremely calculating with every product
decision since it releases so few products.

If you want to understand what Apple’s doing with the iPhone 5C and why
it could make sense, here are the two factors to think about:

1. Apple did not release a new iPod Touch

One of the regular
features of Apple’s annual September product event is the release of new
iPods. It didn’t happen this year. While Apple continues selling last
year’s iPod models (they are still available in the online store and at retail stores), the product is quickly reaching end-of-life.

In July, Apple reported in its earnings call that the number of iPod units sold was down 32 percent
year over year, one of the largest dips in the history of the product
line. That’s significant because the iPod Touch has continued to be a
strong seller during the past several years. As recently as 2011, there
were quarters when iPod Touch sales rivaled iPad sales.

The
iPod Touch was extremely popular among children and teens, who could
use it to enjoy the benefits of iPhone apps over Wi-Fi. Apple sold more than 80 million iPod Touch devices from 2007 to the end of 2012. (During that same period, it sold 244 million iPhones, by comparison.)

While the entry-level iPod Touch never cost less than $199 — the
same price as the entry-level iPhone on a two-year wireless contract —
the appeal was that you didn’t have to pay $70 per month for a
smartphone contract with a data plan like you did with an iPhone.
However, the economics of smartphones have changed drastically over the
past 12 months.

2. US kids are converting to smartphones

During the past
year, US wireless carriers have introduced family data plans, which have
made it much more practical for parents to get smartphones for their
kids. A household with two adults who are already sharing a data plan
can now add a child’s smartphone to their plan for as little as a
monthly fee of $10 (T-Mobile), $20 (Sprint), $35 (AT&T), or $40
(Verizon).

As a result, 37 percent of US teenagers now own a smartphone (up from 23 percent in 2011), according to Pew Internet’s report, “Teens and Technology 2013.” Separately, the Zact 2013 Mobile Families Survey,
found that 44 percent of US kids aged 12 to 17 are using smartphones in
2013. It expects that number to grow to 51 percent in 2014, 59 percent
in 2015, 66 percent in 2016, and 73 percent in 2017.

All of this means that there is likely to be about 40 million to 50
million iPod Touch-owning kids in the US who could soon potentially
convert to smartphones. That’s partly because of the improved economics
of family data plans and partly because many of these iPod Touch owners
will be aging into smartphone ownership.

That adds up to a huge
market opportunity. It’s a new segment to tap in a smartphone market
that looks increasingly saturated across the US and Europe.

And
since most of these iPod Touch kids are already invested in the Apple
ecosystem with music and apps purchases, Apple has a natural advantage
to win them over to the iPhone.

From that perspective, the
carnival of colors available for the iPhone 5C and its colorful silicone
cases makes perfect sense. They’ve got “youthful self-expression
written all over them. They are also destined to stand out in displays
at wireless stores across the world.

Bottom line

Let’s not think of the iPhone 5C as the low-cost iPhone for emerging
markets. Apple may or may not make that product, but this is not it.

Instead,
let’s think of the iPhone 5C as Apple’s iPod Touch replacement for a
wave of kids who are about to convert to smartphones.

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