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Of Smartphones and Saturation

As some tech and financial pundits exhort Apple to sell cheaper versions of the iPhone, it does appear that demand for the mobile handsets may be slipping around the world. Well, at least if you look at the latest financials for ARM Holdings, which licenses chips to most of the handset makers, including Apple and Samsung.

Based on quarterly financials that indicated slowing growth, ARM’s stock price fell by nearly 5% on Tuesday. So does this mean the glory days are gone? In passing, Apple’s stock price dipped by a similar percentage because iPhone sales weren’t quite as high as analysts expected. Amazon’s stock price also similarly dipped because of failing to meet analyst hopes and dreams.

It’s not that ARM was necessarily on the losing end when sales are considered. ARM, you see, licenses the technology. In addition to cell phones, you’ll also find chips containing ARM technology in cars, TVs, medical devices and loads of other products. But the company doesn’t build its own chips. Licensed chip makers handle the fabrication, and royalty revenue increased 7% in the last quarter of 2013 compared to the previous year. But analysts wanted more.

Lower than expected demand may indicate that handset makers are potentially building fewer products, and thus don’t need to use as many chips. I realize that slowdowns in other industries may be, in part, responsible, but I’ll focus on cell phones. At least some of this slow growth might reflect the fact that, at least in the developed portions of the world, an increasing percentage of customers have smartphones. So it would seem that saturation is inevitable, and perhaps ARM appears to be suffering as a result.

And Apple is a major ARM licensee.

But that doesn’t mean there should be a doom and gloom reaction to Apple’s sales, even though this quarter’s guidance calls for somewhat lower sales. Apple plays in the premium smartphone space, where it continues to dominate. Don’t forget that Samsung sold a mere nine million Galaxy S4s in the last quarter, compared to 51 million iPhones. Since Apple doesn’t do a model breakdown, it’s hard to guess how many sales went to the iPhone 5s, the iPhone 5c, and the iPhone 4s. But one estimate pegged iPhone 5s sales at over 30 million — with the rest divided between the iPhone 5c and the iPhone 4s. That’s quite a bit better than what Samsung managed.

Samsung, however, does better with cheap gear, which is where a lot of the industry’s growth is centered, particularly in poorer countries where high-priced stuff doesn’t sell quite as well. Indeed, there’s a published report that Apple has resumed production of the 2010 iPhone 4 in an effort to address this need without actually cheapening the product.

But does this mean that Apple will switch from a two-year to three-year cycle for smartphone sales? What I mean is that, with the arrival of the iPhone 6, or whatever it’s called, the iPhone 4s, the iPhone 5s, and perhaps the controversial iPhone 5c, will remain in the lineup. But Apple might restrict the older model to developing countries where there is a higher population that cannot afford more expensive gear. That, and cheap extended payment plans, might make a difference.

You see, selling older iPhones, where development costs have been amortized, and production is cheaper, will still mean decent profits. For many people saddled with the cheap junk from other handset makers, even an older iPhone may seem to be an aspirational product, a luxury. After all, the iPhone 4 can actually run iOS 7, even if performance isn’t exactly stellar and some features aren’t available. Compare that to a cheap Android smartphone, where only the fastest hardware can run the OS fluidly.

Now I suppose Apple could update the iPhone 4 series with plastic cases and minor hardware updates and keep the price low. That’s the tact taken with the iPhone 5c and, despite claims that it was an abject failure, the estimates I’ve seen argue against that conclusion. Indeed, it’s quite possible the plastic-cased model fared noticeably better than the iPhone 5 would have fared had it remained in the lineup.

So you’re seeing here the possible solution to the low-end iPhone problem in a way that doesn’t hurt profits. Sure, I suppose the critics will find reason to denigrate the policy of keeping older stuff, with older hardware, in the lineup. But that won’t matter to customers who can have a genuine iPhone, rather than some no-name brand or a cheap Samsung.

Don’t think it makes a difference? Consider the clear failure of the Galaxy S4. Samsung may do better than Apple in overall quantity, but surely not quality.

Now some of Apple’s critics will continue to ignore the company’s approach. What I propose here simply represents a policy that recognizes reality, which is to keep even older iPhones in the product lineup. The customers who buy that gear won’t care a whit about LTE, or perhaps don’t live in countries where the faster wireless standard exists or is fully deployed.

Besides, Apple has said time and time again over the years that they won’t build cheap gear. Even if Apple’s growth curve is slower than the companies that do, if profits remain high, and employees and customers are happy, why complain?