iPhone SE: Cheapest iPhone Ever May Help Apple's Declining Smartphone Sales

Labeling a business that generated over $155 billion in revenue over the last 12 months as struggling might be overstating things somewhat, but with sales of iPhones dropping for the first time ever in the final quarter of 2015, Apple’s smartphone business is facing a challenging 2016. The company’s first response to the decline was revealed Monday, with the 4-inch iPhone SE, Apple’s cheapest ever new smartphone. At $399 it is $250 cheaper than the flagship iPhone 6s, but despite its appealing price, can a 4-inch smartphone really sell in big enough numbers to boost Apple's sales figures?

On Monday, Apple’s vice president Greg Joswiak said the smaller iPhone was an “important part” of the company’s lineup because some people “simply love smaller phones.” He revealed that in 2015, Apple had sold 30 million 4-inch iPhones and while that pales in comparison to the 230 million units Apple sold in total, it is still a significant number.

The iPhone SE retains an almost identical design to the iPhone 5s, which starts at $449, unlocked, from AT&T. The SE replaces the 5s in Apple's line-up but gains significant upgrades on the inside, notably the same A9 chip that powers Apple’s flagship iPhone 6s and a 12 megapixel camera which supports 4K video and Apple’s Live Photos feature.

The iPhone SE will therefore be a major attraction to those customers who like a 4-inch screen but want something more powerful — as well as those who have previously felt the iPhone was out of their reach financially. “This phone is designed to appeal both to existing owners of 4-inch iPhones and to people who are new to iPhone,” Jan Dawson, chief analyst at Jackdaw Research, told International Business Times. “The $400 price makes it particularly attractive to those who haven’t been able to afford a new iPhone before, as it’s $150 less than any previous brand new iPhone.”

The sub-$400 price point is a significant move by Apple to enter the mid-range, something it previously tried and failed to do with the iPhone 5c, a colorful version of the iPhone 5s which can now be had from some carriers starting at $349, without contract. Where the ‘C’ in iPhone 5c was seen to stand for cheap, SE stands for “special edition”, as Apple seeks to set the new phone out as something different from its flagships but still offering a premium iPhone experience.

The iPhone 5c failed partly because it was not cheap enough, but also because it was launched alongside the iPhone 5s, meaning it was lost among the hype surrounding the flagship model. Apple quietly removed the iPhone 5c from its line-up within two years of launch.

The iPhone SE however is being launched midway between the iPhone 6s and iPhone 7, getting all the attention and therefore being advertised as an alternative to the bigger models and as an iPhone which is finally affordable to those in mature markets.

“I think the price point will definitely help in mature markets for consumers who have not made the jump from feature phones and for Android users who are in the Android ecosystem because of price, and not love for the ecosystem itself,” Carolina Milanesi, head of research at Kantar WorldPanel ComTech, told IBT.

The problem for Apple is that getting those who like smaller phones to upgrade is not going to be enough to see iPhone sales grow again. According to figures from CounterPoint Research, just 10 percent of all smartphones sold in December 2015 were 4-inch, down significantly from 17 percent a year previously. For the iPhone SE to be a real success Apple needs it to work in developing countries and in particular the hugely important markets of China and India.

In India, the new lower price may be more appealing to customers, but the small screen won’t be. “Emerging markets often gravitate toward the larger-screened phones because those customers are less likely to buy both a tablet and a phone,” Dawson said. “So some customers will have to make a tradeoff between price and size.”

Another problem in India, as with most other markets outside the U.S., is that Apple has priced the iPhone SE much higher than $399. In India the new smartphone will cost 39,000 rupees ($584) which is “just too expensive for a 4-inch device” Neil Shah from CounterPoint Research told IBT.

“In a mobile-first country like India, this is beyond the reach of the average smartphone user,” Shah said, adding that you can get a 5.5-inch OnePlus flagship smartphone with 64GB of storage for around $350.

In China, the situation is somewhat different. In what is Apple’s second biggest market, the iconic brand holds sway among consumers. An iPhone is seen as a status symbol as much as it is a smartphone. That means shoppers are willing to pay more for the Apple logo despite dozens of imitation smartphones which look almost identical to the iPhone being available from Chinese manufacturers for much less money.

The iPhone 5c was seen by some as an attempt by Apple to crack the Chinese market, and while some analysts believe the iPhone SE could have a similar fate, there are indications that it will have a much better chance of success.

In China, unlike other almost all other smartphone markets around the world, the average selling price of smartphones is going up and not down, according to figures from Canalys. “Consumers are losing their appetite for ultra-low-cost devices, as expectations increase in line with spending power and, combined with rising market saturation, this is resulting in a major shift to devices that provide better user experience,” Canalys analyst Jingwen Wang said in a release.

With its mid-cycle release the iPhone SE will still be seen as a premium Apple device and the very latest on the market from the Cupertino company, something the iPhone 5c could never claim. Therefore Chinese customers who place such importance on the cachet of a premium Apple smartphone will view the iPhone SE as a viable option — and one which is significantly cheaper than the iPhone 6s.