Indian Institute Of Management, Amritsar

Managerial Economics Assignment 2

Prof. Prashant Poddar

Case: ‘Apple’s Iphone in India: Ringing in new

Submitted By: G6
Ravi Ranjan Choudhari MBA/08/104
Mahek Manyal MBA/08/091
Nitin Kumar Singh MBA/08/098
Ashita Bansal MBA/08/078
Tushar Goyal MBA/08/121
Rohit Ninaia MBA/08/107
1. What is Apple's monopoly power in the global smartphones market and how has it
changed between 2014 and 2016?

A monopoly happens when a business and its products dominate a particular industry. Although
Apple is the only company offering the iOS premium, neither the Indian nor the global smartphone
markets are dominated by the company. However, the business has a monopoly in the IOS segment
and the Apple App Store. Also, Apple Inc. maintains its market shares in the premium smartphones
segment due to entry obstacles that make it expensive or impossible for other competitors to enter.

With the release of the iPhone 6 and 6 Plus in Q4 of 2014, the Apple market had jumped ahead to
take the lead in the smartphone industry., But it fell in fiscal year (FY) 2016 With a 14.4% market
share, next to the Samsung Group's 2016 market share of 20.5% for smartphones.

Sales of iPhones have decreased in China and the US, Apple's two biggest markets, due to a variety
of causes.

The smartphone markets of North America, Western Europe, Japan, and the Asia-Pacific region were
saturated, with a penetration of about 90%. At the same time, there was a lackluster demand for
replacement products in these areas, leading even high-end customers to decide against upgrading.

Another major reason was that The Chinese economy, one of the world's major smartphone markets,
saw a significant slowdown. Also, Apple's market share in China suffered due to Oppo and Vivo's
increased competition through value pricing. Apple was additionally dealing with serious issues with
intellectual property in China.

These factors forced apple to focus on India, the world’s third-largest smartphone market, to thrive in
the competitive smartphone market.

2. What are likely constraints on Apple's monopoly power in Indian smartphones market?

Likely constraints on Apple's monopoly power in the Indian smartphone market:

● Low barriers to entry allows for easy entry and exit of firms, making the market perfectly
competitive.
● High competition from other brands creates a price taker market not a price maker market.
● Lower priced Chinese OEMs, such as Xiaomi, Realme, Oppo, Vivo, Oneplus. These brands
vastly undercut prices (sometimes almost at cost) to gain market share leading to artificially
created lower prices.
● Low per capita Income and high price sensitivity, results in alienating the majority of customers
in the market.
 ● Low internet penetration and limited availability of advanced LTE, 5G to fully utilise I
phones potential.
● Preference for android phones - More features at lower cost.
● g.Government Policies affecting smartphones prices (Tariffs on imported parts leads to
increased prices of imported/ assembled phones such as I phone).

3. Does greater pricing for iPhones guarantee higher profits?

Right pricing is the most important factor for a firm to either sail through or drown in the competitive
markets. The firm's price has the ability to boost or shrink the volume of its sales. A greater pricing
strategy may pull the firms' profits up, but at the same time it may also act as a de-motivator for price-
sensitive buyers (both present and potential).

This cycle of events can be explained via Apple's Iphone in India case. Apple has always adopted a
premium pricing strategy for its products. This is because the company reaps on its brand name. But such
a strategy didn't come to fruition in 2016 for price-sensitive majority in India. In September 2016, Apple
launched the iPhone 7 and iPhone 7 Plus. Along with $5 of assembly costs, the overall cost of the iPhone
7, which was priced at $649 in the United States, worked out to $224.80. On October 7, 2016, Apple
planned to launch the iPhone 7 and iPhone 7 Plus in India. It announced the price of its base model (the
32 GB version) at ₹60,000, which (at an exchange rate of ₹66.62 per US$1 in October 2016) worked out
to over $900 per unit for the base model. Being a price -sensitive market, the average selling price of a
smartphone in India was $120 or less at that time. As a result of such a pricing strategy, Apple's revenue,
net profit and net margins had seen a dip. This fall can be largely attributed to a decrease in its sales
and revenue. Apple's net profit had fallen from US $22.8 bn in 2015 to US $21.19 bn in 2016 while
revenues declined from US $233.7 bn in 2015 to US $215.6 bn in the next year. This was the first time in
15 years that the company's annual profits had seen a fall due to a fall in its product's sales. The company
could sell only 211.8 mn units in 2016. The year-on-year growth of both iPhone revenue (-11.8%) and
units sold (-8.4%) had also fallen drastically in 2016. iPhone sales in the price-sensitive Indian market
had dipped by 33 per cent year-on-year. This drop was against a 28 per cent annual growth in Android
phone sales in India. Hence, greater pricing for iPhones did not guarantee higher profits for the company.

4. What explains Apple's high profitability in the global market?

In the smartphone industry, Apple has been the leading profit and revenue producer. Apple has put in
place a sizable corporate plan to reduce its reliance on hardware products with lower margins, which are
seeing diminishing growth, and to accelerate the growth of its services sector, which has higher margins
and a more reliable, recurring revenue stream.

The reasons for high profitability of Apple in global market are:

1. Pricing Power - Apple’s Pricing power relies on its product differentiation as the Apple
products are unique and attractive to it’s customers. Also the brand loyalty allows the company to
have power over its pricing. Apple's pricing policy is not designed to
 maximise the average sales price of a particular product, but to maximise the enterprise
earnings of Apple as a firm.
2. Expanding Profit Margins - The 32GB iPhone 7 incorporated components costing
$219.80 but the overall cost of iPhone 7 was priced at $649 in the United states which results in
more profit margins. Also, it generates more profit out of it’s business by getting buyers of its
iPhone and iPads to spend more money on services like iTunes, Apple Music, Apple Pay and
Apple store purchases.

The entire markup on products sold by Apple in the third quarter of 2022 was
35.89% higher than the cost of such products.

3. Improved Cash Flows - The majority of the cash flow is generated through Operating
Activities and the main use of its cash flow is through Investing Activities such as capital
expenditures and product development.

Apple brings in a significant amount of cash from hardware sales. The company instead of
owning factories invests in equipment and machinery located in other companies’ factories which
results in less capital expenditure as a percent of revenue. This means that a significant portion of
Apple’s Operating Cash flow ends up as free cash flow and can be considered as extra cash.

These help drive the stock price higher while also allowing Apple to return Capital to stakeholders.

5. What should be the pricing strategy of Apple's smartphone in India?

Apple is well-known for its use of the Price Skimming strategy, which generates robust sales and high
profit margins. This pricing strategy is only employed by premium brands that price their products quite
high with higher profits so that fewer sales generate the desired amount of revenue. Initially, the
company employs the same pricing strategy in India. However, India has a great deal of competition, and
Apple products are too expensive for the Indian market.
Additionally, Chinese brands such as Xiaomi, Vivo, and Oppo, among others, dominate the market. The
company must therefore adopt an aggressive pricing strategy. Existing brands, such as Samsung, and new
entrants, such as OnePlus, compete fiercely in the premium market segment. Indian Smartphone is quite
narrower at the top where a few brands exist. A pricing strategy that is aggressive will generate the
necessary sales volume, but it may harm Apple's brand image. Apple should therefore strike a balance
between aggressive pricing and brand integrity.