iPhone 5c and 5s: Apple Still Focused on Jobs That Need Done

Apple's success is driven by its ability to:  (1) recognize existing products that don't get the job done, in terms of functionality, reliability, design, convenience/accessibility, affordability, customization, and/or ease if use; and (2) come up with an innovative solution.  And Apple's been willing to cannibalize its own products in pursuit of this mission.  The iPad was a functional improvement over existing tablets in the marketplace, but for some customers it wasn't an affordable option, so it failed to accomplish the job of being accessible and affordable to a wide range of customers.  To make the product more accessible and affordable, Apple released the iPad Mini (even though it cannibalized the iPad). Integrated companies like Apple are well-positioned to come up with innovative, superior solutions to jobs that still need done.  Some of these solutions, like the first iPhone and the first iPad, address product categories where the functionality of existing products is weak.  Some of these solutions, like the iPad Mini, the Apple TV, and the iPod Shuffle, address and improve affordability and accessibility.  In all these cases, Apple's vertical integration helps it efficiently design, engineer, and manufacture an innovative solution that:  (1) breaks through technological barriers; and (2) is designed/customized for the specific job that needs done (whether this job is improving functionality or ease of use or affordability/accessibility).

Apple just released the iPhone 5c and iPhone 5s, and these products are again focused on unmet jobs that need done.  The existing iPhone 5 is a great product, but unmet jobs still include:  a better camera; sufficient enterprise security; more convenient yet secure access for users; and better customization options for users.  So for demanding customers who believe the iPhone 5 is not yet good enough, Apple introduces the iPhone 5s, which offers better functionality through a fingerprint reader, a faster chip, and a better camera.  The fingerprint reader also improves accessibility and convenience by:  allowing enterprises to easily deploy a secure phone to employees (as noted by Ben Thompson at stratechery.com); making it easier for users to access a secure phone; and making it easier for users to make secure purchases through iTunes and possibly through third party vendors.  And by offering the iPhone 5s in silver, gold, and gray, in addition to offering proprietary, colored leather cases, Apple makes the iPhone 5s more customizable than the iPhone 5.

In releasing the iPhone 5c, Apple is going after mid-range customers who are functionally overserved by the iPhone 5s.  When products start overserving and becoming good enough, Christensen recommends making products more affordable and customizable.  The lower price point and range of colors for the 5c (including different colored, proprietary Apple cases) are consistent with Christensen's recommendations.  A lower priced iPhone also makes it more difficult for low end challengers to improve margins by moving upmarket.  See Concepts page and discussion of Clayton Christensen.  And to its credit, Apple released the 5c even though it may cannibalize sales of the 5s.

A big benefit of selling two new iPhone models each year (instead of Apple's prior approach of selling just one new model a year) is that it allows Apple to target different jobs that need done.  The 5c can be used to improve customization and affordability for functionally overserved customers, which helps prevent low end disruption (covering Apple's backside).  The 5s can be used to improve functionality, ease of use, and convenience for customers who still value improvements in these areas.  Most importantly, the 5s gives Apple the freedom to pursue innovative functional breakthroughs that change customer expectations of what's good enough.  See Concepts page and discussion of Clayton Christensen.  These breakthroughs benefit Apple's brand, and can often be incorporated throughout Apple's product lineup (including the iPhone 5c).  And Apple, as a vertically integrated company, is uniquely well-positioned to continue creating important innovations.

There is some question about whether Apple made the iPhone 5c affordable enough -- at $549 unlocked, it's still quite expensive on an unsubsidized basis.   Apple seems to be counting on carrier subsidies to help drive sales of the 5c.  International subsidies or the lack thereof will be something to watch (especially in China and India), and international sales of the 5c should be revealing.  As Horace Dediu at asymco.com notes, carriers are motivated to subsidize the iPhone because:  (1) iPhone use drives up carrier data charges; and (2) carriers recapture part of their subsidy costs through service contracts and monthly customer billing.  Dediu calls the iPhone a salesperson for the carriers.

Apple is addressing affordability in unsubsidized markets by continuing to sell iPhones from two and three years ago (the iPhone 4s and iPhone 4), and they'll probably follow a similar strategy with the 5c.  Because the 5c already targets the mid-range market, it may allow Apple to discontinue older models a little earlier, keeping their product lineup fresher.  After a year or two of price declines on the 5c, its unsubsidized price will look more attractive to international markets.  

While its initial unsubsidized price appears high, the 5c still shows Apple's willingness to address jobs that need done (like customization and affordability) as the original product becomes functionally good enough.  What Apple is not willing to do is sacrifice the quality and design aesthetics of its products (especially when carriers will subsidize a unique product that drives data charges), which may explain why the 5c still carries a high unsubsidized price.

As long as Apple keeps focusing on jobs that still need done, and is willing to cannibalize its own products to address affordability and functionally overserving products, it should be difficult for challengers to disrupt Apple (put them out of business) through a low end, Christensen-style strategy.

The author owns stock shares of Apple Inc.