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Apple Goes Downmarket With New iPhone – Shares Tumble 5%

Conceding that the industry it once dominated is moving downmarket, Apple has launched something closer to a commodity smartphone.

In a media event in California on Tuesday, Apple unveiled two new iterations of the popular iPhone. One of those models, the iPhone 5S, follows the company’s traditional strategy of releasing high-end, high-priced devices aimed at consumers who want state-of-the-art phones.

The other model, the 5C, is the first Apple smartphone designed specifically for more cost-conscious buyers – a demographic that has grown faster in the past year than any other segment of the smartphone market. On a two-year contract, the 5C will cost about $100 – or roughly half as much as the 5S.

Over the past year, many of Apple’s competitors have responded to the rise of price-conscious consumers with myriad mid-range and low-end devices. Now, Apple is doing the same after watching the most profitable smartphone line in the world, which account for about half of the company’s profits, slowly lose market share.

According to research from market monitoring group Kantar, Android phones make up a little more than 51 per cent of the U.S. market, compared to 43.4 per cent for Apple phones. Outside the U.S., however, that gap is much wider – in China, for example, where Apple is desperate to gain ground, Android phones make up more than 70 per cent of the market.

“Seeing how Samsung and Google/Motorola played out with their recent devices, I think we’re seeing the maturation of a product and the maturation of a space,” said Neil Bearse, associate director of marketing at the Queen’s University School of Business.

“We’re not going to see leaps forward every time.”

While the 5C is Apple’s cheapest iPhone, it’s far from low-end. Internally, the device boasts many of the same specifications of the current top-of-the-line Apple smartphone, the iPhone 5. Without a contract, the phone still costs $550 (U.S.), or hundreds of dollars more than many cheap smartphones. The Nexus 4 from Google, for example, is available without a contract for about $250.

“Anyone expecting Apple to come truly downmarket with the iPhone 5C was fooling themselves,” said Tony Cripps, principal device analyst at Ovum. “The day that happens is the day the company signals that it has run out of headroom for expansion.

“It does though indicate an acceptance that the consumers in the upper reaches of the smartphone mid-market are increasingly looking to distinctive devices of their own, and are not happy to accept castoffs or dumbed-down versions of former flagships.”

Moving downmarket, even if necessitated by the state of the industry, is not without risks. Traditionally, Apple has generated far more profits from its smartphones than its competitors have in large part because it sells those phones at a premium price.

“The pricing on the 5C is not as aggressive as it could have been,” said Forrester analyst Sarah Rotman Epps. “Apple is walking a tightrope between growth and profitability.”

The 5S is meant to help the company keep its balance. The new phone features a new, high-end processor, a greatly improved camera and fingerprint recognition hardware. Although the device looks somewhat similar to previous iPhones, its more powerful technical specifications are likely to make it the most powerful smartphone in the world when it lands in about a dozen countries (including Canada) Sept. 20. The phone’s new 64-bit architecture – the first of its kind for a smartphone – give it the ability to process graphics at a speed several times faster than previous iPhones.

Together, the two devices position Apple to take advantage of the lucrative holiday shopping season. However the success or failure of the mid-tier 5C will go a long way toward determining whether Apple can regain its marketplace dominance as the smartphone industry faces rapid commoditization, and dozens of cheap devices powered by Google’s Android operating system flood the market.

“Apple’s hypothesis is that some consumers bought Android phones, but don’t really like them,” said Ms. Rotman Epps. “The 5C is the phone for them.”

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