This past week Apple launched the iPhone SE as well as an updated version of the iPad Pro. Both devices are interesting in their design and construction – the iPhone SE has the smaller design of the iPhone 5 (4″ screen) with the components of the 6S whilst the new iPad has a smaller 9.7” display compared to its predecessor (12.3”), half the RAM and a smaller processor (probably for cost reasons). Design choices aside, the strategic rationale for both devices in particular the iPhone SE was not clear from the launch event. This post will explore the strategic rationale (where to play and how to win choices) and what it tells us about Apple’s approach to the global smartphone market.

Apple has previously launched ‘scaled down’ and cheaper versions of its iPhone – the iPhone 5C is a case in point. It is tempting to compare the SE to the 5C but it is different…subtle as it may seem on first appearances. The SE is a high-end phone in a slimmed down design for a cheaper price whilst the 5C was an old design (unapologetically plastic) with year-old components for a cheaper price. In fact, Apple published this quote on its website to distinguish the SE from its other smartphones:

“To create it [the iPhone SE], we started with a beloved design, then reinvented it from the inside out.”

This description is important to have in mind when making sense of the strategic rationale and the SE’s place in the global smartphone market.

Today’s global smartphone market

If you were following the news from the Mobile World Congress recently you would have seen and heard about a number of smartphone manufacturers developing relatively sophisticated devices at a very competitive prices. Xioami’s Mi5 ($550 AUD), targeted at the Chinese domestic market, uses commoditised components to achieve a lower price point for the millions buying a smartphone for the first time. Similarly, UK smartphone startup Wileyfox is offering affordable smartphones for ~$500 AUD reducing the upfront cost for a device which in turn allows consumers to avoid the need for a 2-year lock-in contract with their carrier. These are the offerings defining the ‘low-end‘ of the smartphone market…which is growing and innovating.

At the ‘high-end‘, Samsung and Apple enjoy healthy competition in almost every major market in the world. In Australia, over 70% of smartphones are either Apple (41%) or Samsung (32%) – this is a very large market for high-end phones driven by carrier subsidies and lock-in contract models. Globally, what sets these two giants apart however is status. Apple, particularly as the brand relates to China’s growing middle-class, is considered a luxury brand (along the same lines as Hermes, LV, Chanel etc.). To own an Apple is on par with owning a $2000 LV handbag (better value if you ask me :)). But what about the ‘mid-market’?

Extending the high-end

A misconception that people will have about the iPhone SE is that is targeted at the ‘mid-market’. However, if you believe status is a major driver, particularly in emerging markets such as China and India, then it is better to think of the SE as an extension of the high-end. The quote (above) from the Apple website gives some clues as to Apple’s intentions – ‘a beloved design’ (it looks like an Apple phone people know and love) ‘reinvented from the inside out’ (with the latest technology features). Unlike the 5C the SE is objectively a high-end smartphone with a price tag of $399 USD – an extension of the high-end.

So who is the market for the iPhone SE?

The smaller 4″ screen will attract some smartphone users, although I suspect there are many who people who are now used to the larger screen size of the 6 and 6S. I don’t believe this is Apple’s target market – why give away margin to people who are likely to buy an iPhone anyway? Conversely, I think the market for the SE is two-fold:

1) Late-stage adopters in developed markets: People in developed markets who are buying their first smartphone or their first Apple device. This market is concerned with their device ‘just working’ (much more that early adopters – who will forgive glitches for the latest technology) and almost certainly more price sensitive than early-adopters. The cheaper an iPhone is, the more people there will be willing to pay for it.

2) Tech enthusiasts in developing countries: Probably a larger market than the first category, this comprises of people who simply don’t have the funds to purchase a 6 or 6S…but want the latest Apple smartphone. This group also doesn’t want hand-me-down phones, they want the best, they just need to be able to afford it.

The iPhone SE with its attractive price, industrial design and top-of-the line components is aimed squarely at the tech-savvy in China and India. It is still expensive and will not compete with the Xiaomi or Micromax models, but it is an iPhone and one that is likely to expand Apple’s presence in these huge markets.

As Apple extends its ‘high-end’, the response in developing markets from the ‘low-end’ device manufacturers will be something to keep an eye on  – the question is how far will either side go to capture the markets that are buying their first smartphone?