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TheStreet Open House

Apple Favors Profit Margins over Emerging Markets Boom

NEW YORK ( TheStreet) -- Apple (AAPL) may be poised for a groundbreaking deal with Chinese wireless carrier China Mobile (CM), however, the company's release of its new line of smartphones indicates sales could be tepid.

Apple's newest line of smartphones -- the iPhone 5S and the iPhone 5c -- and their respective unsubsidized prices of $549 and $649 indicates the company has chosen to protect its profit margins over a rapid emerging market expansion. Analysts, who have stressed for over a year about Apple's narrowing profit margins, are disappointed.

Some had expected the iPhone 5s to command Apple's standard premium price to the overall smartphone market, but that the iPhone 5c would be priced in a manner where it could grow rapidly in emerging markets such as China. Instead, the pricing gap between the iPhone 5s and 5c is just $100 and as analysts await a formal announcement of a smartphone carriage agreement between Apple and China Mobile, they are dramatically reducing sales estimates.

Bank of America Merrill Lynch analyst Scott Craig expects that a higher-priced iPhone 5C will mean Apple's annual unit sales on China Mobile's network may fall about 96% short of previous estimates. Craig now forecasts 6 million annual iPhone 5C sales through China Mobile, down from a previous estimate of 170 million, the analyst wrote in a Wednesday report that downgraded Apple shares to a neutral rating.

At a price of $549, Apple's iPhone 5c will be competing with Google (GOOG) Android, Xiaomi and Windows devices priced at $300 and below. Apple continues to resist a "true 'lower end' iPhone," Craig wrote. The analyst also characterized both the iPhone 5C and iPhone 5s as "evolutionary not revolutionary."

Apple on Tuesday said its iPhone 5s will have a fingerprint scanner, an upgraded camera and a faster 64-bit processor. The iPhone 5c, Craig said, is comparable to the iPhone 5 and will offer plastic casings in colors such as green, white, blue, red/pink and yellow.

" We are downgrading Apple from Buy to Neutral on the concern that Apple's pricing strategy will hamper the company's ability to be competitive in key growth areas in the smartphone market, particularly in China," Steven Milunovich, a UBS analyst, wrote in a report downgrading Apple's shares.

Even if Apple secures a partnership with China Mobile -- signs indicate a deal is imminent -- Milunovich said Apple will have tough time competing with comparable Android devices priced 40-50% lower than the iPhone 5c. He did characterize Apple's addition of NTT DoCoMo as a carrier and the specs of the iPhone 5s as impressive.

Reaction to Apple's newest smartphone product launch is predictably hysterical; however, Tuesday's announcement may reveal a turning point for the tech titan. Apple appears to be betting it still offers a premium handset product and operating system to its competitors such as Google and Microsoft. Consequently, the company is in no rush to destroy profit margins that are comparable to few other products in the history of Corporate America.

Had Apple offered a $99 iPhone 5c, presumably, analysts and tech junkies would be tripping over themselves to explain the company's exponential growth in emerging markets such as China. It would also be a turning point for the company.

Apple would be telling its stable of customers and investors that the company no longer delivers a premium product.

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