Why did Apple launch an 8GB version of the iPhone 5c (really)?

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Well, the rumor was true: Apple really has taken what was seemingly a less popular phone than expected, and made it worse. Even more surprisingly, the company confirmed to Fortune that the 8GB version of the iPhone 5C will be sold in only five markets: U.K., France, Germany, Australia and China.

I could understand Apple keeping the 8GB iPhone 4S in the line-up for those who want a new iPhone but are really strapped for cash. With apps the size they are today, an 8GB phone is going to be a pretty horrible experience: by the time you’ve loaded up a few apps and taken a few photos, you can forget about using it as an iPod, and don’t expect to use it as a camcorder either. But from Apple’s perspective, it gives some people who otherwise couldn’t afford an iPhone a first step into the Apple ecosystem, and hopefully they’ll upgrade a little further down the line.

But a 8GB version of the iPhone 5c, and one only sold in five markets? That got me scratching my head …

Let’s take the UK as an example. When discussing pricing, I’m going to compare full retail prices, as that makes sense in the UK. If you care why, the italicised section below will explain. If you don’t, you can skip it. For convenience, I’m going to convert all prices to U.S. dollars based on the exchange rate at the time of writing.

To understand why I’m comparing full retail prices, there are a couple of differences between the UK and U.S. that I should explain.

First, the USA is a what the carriers call a subsidized market (the term is misleading, but it’s the one they use). When you buy an iPhone, you may not even know what the full retail price is, because no-one ever pays it. You just pay a relatively small up-front cost, and the balance is absorbed into the cost of the airtime tariff (or, with more recent un-carrier style contracts, paid off in monthly instalments).

The UK is different. You can buy an iPhone in that way if you wish, and many do, but it’s usually a better deal to buy the phone outright for full retail. The reason? You can then get much cheaper airtime tariffs. The total outlay over the two years of a typical contact will usually be significantly less than going the subsidized route. If you can afford the up-front price of the phone, it’s a no-brainer.

Second, all UK networks are are compatible. The iPhone that works on Vodafone will also work on O2, EE or Three. So if you start out with Vodafone and then three months later O2 offers a better tariff, owning your phone outright allows you to switch carrier on one month’s notice, taking your existing phone number with you, without penalty.

So, with that understood, let’s get to it …

The 16GB iPhone 5c in the UK costs $780. All the evidence suggests that a lot of the people Apple expected to buy that instead opted to spend $133 more to get the iPhone 5s. Which makes perfect sense to me: that relatively modest bump in price gets you a lot more phone for your money.

But, sure, that will still be too high for some, so there’s the iPhone 4S still available – only the 8GB model – at $580. That’s $200 less, so you can understand that the more budget-minded would opt for that.

So, this new 8GB iPhone 5c. That costs $713. That’s just $67 less than the 16GB model, but still $133 more than the 4S. So I asked myself a couple of questions …

First, who would buy this new model? If you’re hard-pressed for cash, and want to buy a brand new iPhone at the lowest possible cost, you’re still going to buy the 4S. If you can afford to spend $133 more on a 5c, wouldn’t you then save just that tiny bit longer for the additional $67 it will cost you to get a usable 16GB model?

Ok, so maybe someone new to iPhones doesn’t know that 8GB will be nearly unusable. Maybe they buy it in blissful ignorance, and only discover the reality a month or two down the line, once they’ve started adding music and shooting video. But Apple knows this is going to happen. So that was my second question.

Why would Apple want someone’s first experience of a new model to be so frustrating? With the 4S, at least it can turn around and say, hey, it’s an out-dated model, you knew that when you bought it. With the 5c, the customer is going to rightly wonder why their brand new model, out this week, is not fit for purpose.

But Apple isn’t stupid, so if it makes what appears to be a dumb move, there has to be some method in the apparent madness. We now know part of it. An Apple spokesperson told Re/code that it’s about offering an affordable LTE model in markets where LTE is just taking off (the 4S is 3G-only).

“The mid-tier iPhone segment is growing year-over-year and the 8GB model provides a more affordable option for markets where LTE is becoming more established,” an Apple representative told Re/code. The iPhone 5c, unlike the iPhone 4s, which is also still sold, supports LTE networks.

The carriers in particular want to get everyone onto LTE as that enables them to sell more data.

But that doesn’t explain an 8GB model: the difference in manufacturing cost to Apple between an 8GB and 16G model is a couple of bucks. So here’s the only explanation I’ve been able to come up with, based on Apple knowing a lot more about its customer segments than any of us do …

Perhaps there is a segment of the market that just wants a new model iPhone, but won’t do very much with it. Maybe a new-model iPhone is a status symbol to them. Maybe they like the ease of use of iOS. But either way, they have very modest needs: they stick with the on-board apps, load up a few music albums, take a modest number of photos. Maybe for them, 8GB is enough.

If so, it’s a brilliant move by Apple. No other segments are going to downsize their purchase plans to 8GB because they know that, for most of us, it would be unworkable. But a market segment that doesn’t need more than 8GB because it does so little with the phone will see the shiny new model, compare it with the now-elderly 4S and decide the difference in price is worth it to have the something immediately recognisable as a current model.

In that scenario, Apple makes more money than it would have done from the 4S, and hastens the day that it can lose the last of the 30-pin devices into the bargain. Smart, not dumb.

Is my theory right? Or do you have a better one? As ever, let us know in the comments.

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