Thursday, March 24, 2016

For a small phone, the iPhone SE is a bigger deal than most realize

Yesterday, Apple announced the 4-inch iPhone SE, which is essentially an iPhone 5S with 6S specs and a new low price of $399. For many people, that alone will be sufficient reason to be excited, but the iPhone SE has significance that stretches far beyond its modest dimensions. This phone will lead Apple's charge into the fastest-growing markets of India and China, realign the company's strategy for how it sells its flagship product, and also create a unique new proposition that Android has no direct answer to.

The most important thing about the new iPhone SE is its price, which starts at $399 in the United States. This is the cheapest launch price for any new iPhone model, outdoing even the supposedly budget iPhone 5C, which began life at $549 or $99 on contract. The iPhone SE can be had for free with a two-year commitment. Apple's event was taglined with the words "let us loop you in" and the iPhone SE is the instrument of that action. There's little equivocation about Apple's motivation: it's chasing a greater market share and doing it by lowering prices while keeping the specs high.

The two critical markets for the iPhone's continuing sales growth are India and China, both of which are increasing in demand at a time when the global smartphone market is stagnating. Apple can't afford to be deaf to the desires of those potential buyers, and part of its motivation for introducing the iPhone Plus models was to tap into the enthusiasm for phablet devices across Asia. In his presentation today, Apple's Greg Joswiak explicitly called out China as a place where small phones are valued. Even so, the Chinese and Indian consumer is even more sensitive to price than size, and Apple's biggest hurdle to overcome in both countries has been the high cost of the iPhone.

The SE is Apple's best compromise: it has the flagship specs, but because it's smaller and doesn't carry the latest industrial design, it's distinct from the flagship and therefore justifiably cheaper. To get more aggressive, Apple might also set country-specific pricing that's cheaper for India — as it did with Apple Music last year. There's also the possibility of an 8GB iPhone SE sold exclusively in developing markets. Apple introduced such a model of the iPhone 5C two years ago, and now it's keeping to the same cadence of launching a new, lower-budget iPhone option in March.

The Apple that used to build one phone, one tablet, and a very narrow range of laptop and desktop computers is now long gone. Today's Cupertino company is much more conscious of giving people what they want, offering a diversity of Apple Watch sizes and styles, a multiplicity of iPads to choose from, and now a trifecta of iPhones with the latest specs. The big difference isn't that Apple has a cheaper iPhone, it's that the cheaper iPhone is a model in its own right. Expanding on what the iPhone 5C started, Apple is selling deliberately affordable gear — the cheaper SE is not an accident or an effort to sell off old stock, as Apple has been doing with former flagships. It's cheaper by design.

In 2015, Apple sold an impressive 30 million 4-inch iPhones. Those were all outdated, superseded models that nevertheless found an audience due to a combination of habit, Apple loyalty, and a preference for small, truly compact phones. All of those strengths remain valid for the iPhone SE, which has the same dimensions as the iPhone 5 and 5S (meaning it should also be compatible with any cases people already own). It's safe to assume, therefore, that with a lower price and better components, the iPhone SE stands a good shot at selling significantly more than 30 million units in the year ahead.

It's important to note that, even as Apple is inching its way deeper into the smartphone price war that it's been avoiding for so long, the iPhone maker remains highly distinct. There's no 4-inch Android handset that can rival the iPhone SE's capabilities. This is Apple's best processor, best camera (admittedly without the benefit of optical image stabilization), and, naturally, its best software, all crammed into the confines of a tiny phone. There's obviously a demographic of smartphone users who value size efficiency, just like there are people who don't mind the extra bulk of a phone that can do more and last longer, and Apple is now ideally positioned to get those people aboard the iOS bandwagon. Many don't want to buy the hand-me-down, older-generation iPhone, but plenty of people will be intrigued by a cheaper and smaller iPhone.

For a lot of people, as Apple explained during its keynote, the 4-inch iPhone is their first iPhone, and the new SE model brings another significant change by supporting Apple Pay. That's one of the major missing pieces from the iPhone 5S that it replaces as Apple's entry-level device, meaning that every new iPhone customer it attracts will also be a likely Apple Pay user. The synergy of expanding the user base of services like Apple Pay and Apple Music via the availability of more affordable devices should not be underestimated.

"Many, many customers have asked for this," said Apple CEO Tim Cook during Apple's launch event. "And I think they're going to love it." The continued success and growth of the iPhone will depend on Cook being right. The iPhone SE is Apple's cheapest phone to date, and it's also one of its most important.

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