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As anticipated, Apple Inc (AAPL - Analyst Report) launched two versions of iPhone, one an upgrade to its existing iPhone 5 and a new low cost phone to target the medium and low-end consumers of the smartphone market.

In an event held on Sep 10, Apple unveiled iPhone 5S priced at $199 (with a contract) and available in three colors, dark gray, silver and gold. iPhone 5S features a faster processor (64-bit A7 processor), a new fingerprint scanner (Touch ID) and a smarter 8-megapixel camera, which can capture 10 frames a second in “burst” mode.

iPhone 5S also features a new chip that tracks movement as customers carry the phone around. The M7 Motion co-processor helps to better track sports and fitness related user activity.

The upgraded iPhone will be available from Sep 20 onward in various countries including the U.S., the U.K. and for the first time simultaneously in China, reflecting the country’s growing importance as well as Apple’s strategy to curb smuggling.

For the medium and low-end consumers of the smartphone market, Apple unveiled iPhone 5C priced at $99 (with a contract) and available in five colors – blue, green, pink, yellow and white. The devices come with a polycarbonate cover instead of aluminum. iPhone 5C features most of iPhone 5’s technology and will be available from Sep 13 onward.

However, without a contract, iPhone 5C is priced around $549 in the U.S. and $733 in China, much higher for a so-called low cost smartphone when compared to devices offered by Samsung, Huawei, Lenovo, ZTE and Xiaomi.

According to Bloomberg, Apple is offering the new phones in China through two relatively small wireless carriers, China Unicom Ltd and China Telecom Corp. However, they are yet to announce any subsidy on the devices.

As per projections made by the Wall Street Journal, even a subsidy from these operators will not make the new iPhone 5C affordable for urban Chinese customers. On the other hand, Apple is yet to reach a partnership agreement with China Mobile Ltd (CHL - Snapshot Report), the nation’s largest operator, which may act as a significant headwind.

Apple’s pricing policy is quite baffling. The introduction of a low cost iPhone was supposed to help the company penetrate the low and middle-income group of customers in China, India and South East Asia. However, it appears that Apple is more concerned about maintaining a higher gross margin as it has come down sharply over the last few quarters.

In such a scenario, we believe that Apple’s strategy will not help it to gain market share in the region, where devices powered by Google’s Android operating system continue to dominate.

Nevertheless, we believe that the new iPhones will boost Apple’s unit sales in the upcoming holiday season. Additionally, Apple announced that it will offer iWork, iPhoto and iMovie mobile productivity applications absolutely free. The move will help Apple to gain some traction in the enterprise market from Microsoft (MSFT - Analyst Report) going forward.  

Currently, Apple has a Zacks Rank #3 (Hold).

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