Apple IPhone Route To Middle America

Posted: Apr 30 2014, 3:42am CDT | by , Updated: Apr 30 2014, 3:46am CDT, in Apple


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Apple iPhone Route To Middle America

This heat map recently went viral across the web, confirming a vaguely-held stereotype about the kinds of phones that Americans buy. While iPhone users (marked in red) were concentrated in wealthier, metropolitan areas, Android users (the superimposed green dots — look closely) could be found further afield in suburbs and the less-affluent neighborhoods that make up what’s sometimes referred to as Middle America, according to the survey by MapBox.

Apple needs to reach out to the latter, because the market for expensive devices like the iPhone is getting saturated. One route might be through nontraditional carriers like FreedomPop, which piggyback larger peers to offer dirt cheap VoIP calls and texts. FreedomPop confirmed Tuesday that it’ll start selling refurbished iPhones for the first time, having till now only offered Android devices like the HTC Evo.

LA-based FreedomPop started out by selling lowly WiFi dongles, but as smartphones started glutting the market it’s been able to move up to the high-end. FreedomPop now has “thousands” of iPhone 5 handsets, Apple’s next-to-latest model, in stock for $349 on its website.

These phones come with a FreedomPop SIM card rented from Sprint’s LTE network, meaning the startup can offer 500 texts, 200 minutes in calls and 500 MB in data per month for free. Around half of FreedomPop’s users tend to go over that limit, says its CEO Stephen Stokols, paying the extra fees that effectively subsidize the “freeloaders.”

“We’re going after mass,” says Stokols. “People who might not be able to afford an iPhone now.”

While the global smartphone market is still booming, the growth is primarily driven from here on out by cheaper devices. Recent research shows Samsung and Apple are already losing market share to mid-tier Chinese vendors like Huawei and Lenovo.

Samsung can face the slowdown with a broad portfolio of Android devices that include cheaper, mid-tier smartphones like the Galaxy Premier or Galaxy S4 Mini. But Apple, which has tried peddling the cheaper iPhones 5C, still carries a relatively high price tag leading to challenging sales in both developed and developing markets.

One result: Apple’s share of the U.S. smartphone market is shrinking, by 7.8% in the three months to March 2014, while Android’s has grown by 8.3% according to numbers released Monday by Kantar World Panel.

Apple is under immense pressure to maintain profits at its all-important iPhone business, which accounts for half Apple’s value and was the only Apple business whose sales did not decline in its first quarter.

One answer may be look beyond handset prices, and work with those trying to cut the price of connectivity.

FreedomPop is not only selling refurbished iPhones, but courting current users on pre-paid calling plans with AT&T, Verizon or T-Mobile, the cheapest of which tend to be $50 a month. Its pitch to these people: opt for data-only plans at $20-30 a month, then use FreedomPop’s free service to call other phones.

That’s similar to free-calling apps Skype or Viber, and other upstart carriers Republic Wireless and TracFone which offer the iPhone, too — but FreedomPop has some extra cards up its sleeve.

For one, it’s currently seeking access to the instruction set, or API, that unlocks the iPhone’s native phone dialer. And around a year from now when Sprint’s LTE network has built up a broader presence in the U.S., FreedomPop wants to start mailing its own, free SIM chips to people who already use its app. “You just need a SIM chip to cut the carrier,” says Stokols.

He expects to sell tens of thousand of refurbished iPhones over the next year to bring the iPhone to “a wider base of people,” and beyond the one in four adult Americans estimated to own iPhones.

FreedomPop is just one of a growing number of non-traditional phone carriers known as MVNOs, short for mobile virtual network operators, looking to upend the traditional carrier model. MVNOs buy wholesale access to the airwaves of Sprint or AT&T and resell it as low-priced minutes to their own customers. They sell their own assortment of phones and cheap introductory data plans.

Apple’s mobile executives may worry that encouraging lower-entry points for the iPhone will taint its high-quality brand, or worse, hurt its relationships with AT&T or Verizon, who shift most of America’s iPhones. But there’s no escaping the need to go after a mid-tier market. “[Apple is] absolutely aware that being a niche, high-end product is unlikely to succeed in a mobile computing era,” says Rajeev Chand, research head at investment banking boutique Rutberg & Co.

Stokols claims other MVNO peers still require financial hoops for consumers to jump through for the iPhone, like credit checks or plans that cost around $40 a month. It’s extremely hard for carriers generally to break their dependence on revenues from SMS and voice calls, hence why most iPhone plans won’t go below the $50 or $40 mark.

The iPhone’s current buyers are “generally of a higher socioeconomic demographic,” says Stokols. “We’re trying to broaden the iPhone to a much more mass market. Apple sees that… It’s not that people don’t want an iPhone. It’s that they can’t afford it.”

So how does Apple benefit from a small carrier selling second-hand iPhones?

For now it doesn’t, but Stokols hopes to eventually buy iPhones directly from Apple, once he gets scale by using the older iPhone 5 as a “gateway drug” to a broader base of loyal customers.

“Ultimately Apple is a company that likes innovation on their devices, and making the devices more accessible,” he adds. “This is a way into the demographic that Android is winning in.”

Follow me on Twitter: @Parmy

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