The Problem With $200 iPhones

We're now a week away from the announcement that will surprise no one. Steve Jobs will step up to deliver the keynote address at this year's Worldwide Developers Conference, and the chances of Apple's (Nasdaq: AAPL  ) not spilling the beans on the new iPhone are about the same as Big Brown finishing last in its next horse race.

The specs spec -- that's specifications speculation, for those who don't want to bother with my shorthand -- is that the new features will be great. 3G phones would have the ability to surf the Web faster. Greater storage will allow owners to load up on more of their music, and especially video clips. A longer battery life would be great. However, the real clincher here is the persistent rumor that the new iPhones will sell for as little as $200.

$200 for an iPhone? Keep in mind that the rumored $200 iPhone may be an entry-level model. That’s still a third of what the original phones were fetching last summer, and folks were lining up.

If it’s true -- and everyone has been repeating that price since unnamed sources relayed it to Fortune last month -- fence-sitting iPhone watchers are going to jump off for joy. The new devices will sell like, well, Apple pancakes. In fact, they'll sell like iPhones.

Do not touch
Consumers will love it. If exclusive domestic wireless provider AT&T (NYSE: T  ) takes on the bulk of the subsidized hit, Apple investors may love it.

I get the euphoria, but shouldn't shareholders also begin wondering about the fate of the iPod touch?

If $400 iPhones become superior $200 iPhones, what becomes of the $300 iPod touch? Can Apple realistically expect to sell a device that is essentially an iPhone without handset connectivity and an internal speaker at a higher price point?

It can't, but there is no company willing to subsidize a $200 hit the way AT&T can, because it makes it up through two-year contracts written on flypaper.

One can argue that the iPod touch is a small part of the iPod family. Look up the best-seller list of consumer electronics on Amazon.com (Nasdaq: AMZN  ) , and several iPod classic and nano models are selling more briskly than Apple's Touch.

However, even some of the chunky classic iPods will be commanding thicker ransoms than $200 iPhones. This is the kind of move that will send ripples through Apple's entire portable media player line, save perhaps for its entry-level devices.

The problem is that Apple doesn't have a problem
It's easy to see why Apple is taking bold pricing steps. Coming through with a pair of $200 price cuts in a product's freshman year may seem desperate, but Apple needs to ramp up quickly. Research In Motion (Nasdaq: RIMM  ) is no dummy. It's not just watching over a larger subscriber base of 14 million CrackBerry addicts. The new BlackBerry Bold is a smartphone that combines many of iPhone’s top draws -- including iTunes compatibility and a built-in two-megapixel camera -- with the convenience of BlackBerry's finger-jockey keyboard. Nokia's (NYSE: NOK  ) N81 offers many iPhone features, and has beaten Apple to the 3G punch.

So not only does Apple risk losing its iPod loyalists and alienating the millions that have apparently overpaid for their existing phones, but it’s also laying it all on the line in a very competitive market with some very aggressive rivals.

Is Apple doomed?

Are you crazy? Of course not! If Apple replaces an iPod touch buyer with an iPhone subscriber, Apple will be raking in a monthly bounty from AT&T as well as the usual ear-candy winnings from iTunes it would be getting on the iPod side. You can't be seriously asking if Apple wouldn't want to make as much money as possible from every possible iTunes account.

If this is the end of the iPod touch as we know it, so be it. It served its purpose as a gateway drug to even cheaper iPhone handsets. iPod sales growth was beginning to stall anyway. It's in the company's best interest to grow its base of higher-margin iPhone subscribers.

Apple investors will always be grateful for the iPod. It made the company's computers popular with the mainstream again. Now it is laying itself down for the benefit of handsets. It's not every revolution that gives you the chance to thrill two birds with one stone -- or a $200 iPhone.

Touchscreen this Foolishness:

Apple and Amazon.com are active recommendations for readers of the Motley Fool Stock Advisor newsletter service. If you want to get in ahead of those bandwagons, hop on to a 30-day free subscription offer.

Longtime Fool contributor Rick Munarriz is starting to see more Apple products creep into his home lately, but he does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy that’s finding the perfect widget.


Read/Post Comments (11) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 03, 2008, at 1:15 PM, pinkpanther8314 wrote:

    As a shareholder, I like this move, I never understood the touch anyway. What I would really like to see is Apple/ATT come up with power packed family plan. Think about this: media focused iphones for the tweens/teens at a lower price point, feature/app rich phones at a higher price point for Mom and Dad including corporate email sync all for one monthly price. Family of 4, $1000-$1200 in iphone revenue, and $150-$200 a month in recurring revenue for 24 months.

    Currently you cannot purchase an iphone as part of a family plan...

  • Report this Comment On June 03, 2008, at 6:37 PM, tidewind wrote:

    It's a pretty good article. But I STRONGLY recommend that you visit the Web site of MacDailyNews for a counterpoint. You can see their take on this article here - and be sure to read some of the comments below it:

    http://macdailynews.com/index.php/weblog/comments/17443/

    It's not that Rick Munarriz got it wrong, but relying on Scott Moritz, a pal of Jim Cramer, and a likely short and FUDster, might be the wrong thing to do. By setting the bar so high in Moritz's report, he is setting the street up to slam Apple stock if reality does not meet expectations.

    If you recall when the iPhone was first launched a year ago, Moritz and Cramer gushed over it. Shortly afterward, they led a chorus to short Apple stock. Since then, I have completely stopped listening to Cramer's noise, in the sincere belief that he is playing little guys and helping his hedge fund buddies. I have the same sentiment for Moritz.

    I urge you to look to other, non-Wall St. sources for greater insight on what will actually be announced next week by Steve Jobs. Failure to do so could set you up for a nasty surprise.

    On average, there is a 4 percent run-up in Apple stock price around a Steve Jobs presentation. After getting body slammed by hedge funds shorting Apple stock artificially to make up for their losses elsewhere, the hedge funds have now turned around and driven Apple's stock price up. But then, Apple has earned it - sales of the Mac remain strong, and the iPod, while not selling at the torrid pace of the past, continues to grow well. Adoption of the Mac and Apple products continues to grow by consumers, students and increasingly, businesses. And next week, Apple will trot out a number of telcos worldwide ready to sell the iPhone. In addition, developers are coming out of the woodwork to roll out software for the iPhone and iPod Touch. It looks very promising.

    I remain confident that Apple will do well. But please be wary of bottom feeders like Moritz and Cramer. Despite what they might say, I have come to believe their they do not have our best interests at heart, and will do their damnedest to play all of us as fools. And not the Motley Fools I deeply respect here.

    Thank you for an interesting article, Rick! Please do look at the counterpoint above. Together, I think you will have a better perspective on what could take place.

  • Report this Comment On June 03, 2008, at 7:01 PM, bruttiumlv wrote:

    Good article .

    You staded "Consumers will love it. If exclusive domestic wireless provider AT

  • Report this Comment On June 03, 2008, at 7:48 PM, callingshotgun wrote:

    Even though the article explicitly states that the "$200 iphone" would be a lighter on the features, it goes on to treat the two models as interchangeable- that wouldn't really be the case. The Ipod Nano isn't an Ipod classic for half the price. It's an ipod with about 1/10 the capacity and 1/4 the size, for half the price. It appeals to an entirely different group - One is for people who plug it in to listen to music at work and want to back up their entire music collection. The other is for people who like to go jogging with music and not worry about a pound of metal strapped to their arm throwing off their equilibrium. I know a lot of ipod owners of all capacities and models- All of them knew instinctively which kind of ipod was for them. The other models were simply ignored.

    Ditto this hypothetical iphone nano (for lack of a better term). It'll appeal to a different audience then its big brother, because that's the way Apple rolls. It won't pose any threat to the ipod touch as long as there's a real difference in disk capacity, because those of us who don't want a phone won't think "Oh, I'll just pay for the phone now and activate it later, when I want to switch to AT

  • Report this Comment On June 04, 2008, at 1:52 AM, TwinCities wrote:

    It was originally published that AT

  • Report this Comment On June 04, 2008, at 1:53 AM, TwinCities wrote:

    It was originally published that AT+T would offer $200 subsidies of the $400 iPhone to customers whom sign up for a 24-month cellphone plan. Other carriers may follow suit.

    How you arrive at the speculation of a $200 iPhone model for sale, WITHOUT an accompanying contract, is really reaching into the rumor mill. Try trotting it out again after a couple product line refreshes.

    Meanwhile, there is still a suitable market niche for the $300 (or reduced) iTouch as the go-between device between the iPod and iPhone lines.

  • Report this Comment On June 04, 2008, at 9:04 AM, LukeVaxhacker wrote:

    The iPod Touch serves people who want the features of an iPhone but do not want to pay $60 to change their phone service. I ran a program this spring where each of thirty recipients could get a free 8 GB Nano, pay $100 for an 8 GB iPod Touch, or pay $200 for either an 8 GB iPhone or a 16 GB iPod Touch.

    A couple upgraded from that 8 GB Nano to the 8 GB Touch. A couple more thought about the 8 GB iPhone, but got the 16 GB iPod Touch because of the added $60 they would be paying for phone service, plus more, because as jovenes they text a lot. They were both members of their family's family plans.

  • Report this Comment On June 05, 2008, at 8:18 AM, TMFBreakerRick wrote:

    Thanks for all of the great comments, everyone.

    Pink, I've had three iPhones on the AT&T Family Plan since March. It can be done, though the power combo you suggest would be awesome.

    Tidewind, thanks for that. I checked it out. Tough crowd. The author picks at me for now lowercasing iPod touch. Some of the comments call the "selling like pancakes" a typo, with their own typo. I never wrote that. I wrote Apple pancakes, hence the play on hotcakes, hence fully intentional and cognizant that hotcakes is the norm. Still, it's a good read and great comments on Cramer/Moritz by you.

    Luke, the iPod touch doesn't come with a monthly bill, but it doesn't take away from the fact that the iPhone just got materially cheaper and the touch will have to respond.

    callingshotgun, yes, not every iPod is the same. However, having so many new iPhones -- and now BlackBerry Bolds -- that are iTunes-compatible, will make it less likely that folks will want to carry around more than one digital music gadget.

    Twin, as for the contract requirement, I did refer to that in pointing out that AT&T would take the subsidizing hit. With the exception of unlocked iPhones, today's stateside consumers are tied to AT&T anyway, so it is a material price difference.

  • Report this Comment On June 06, 2008, at 3:29 PM, PayItBackward wrote:

    Rick,

    As an investor in AAPL, one thing I've always admired since they released the first iPod is that Steve Jobs & Co. are absolutely BRILLIANT with setting the right pricing tiers for their products.

    They consistently price things in a way where a consumer thinks, "Gee, I'll just get the cheapest iThing." And they gradually move up the ladder as they compare feature to feature in the higher priced versions. The way Apple sets the pricing tiers, you end up trying to talk yourself out of the higher priced model by the time you're ready to push the "Buy" button, rather than the other way around.

    In short, if there is a $199 iPhone model, expect there to also be a $299, a $399, etc., and the features will be lined up so that you are going to most likely buy the top level device.

  • Report this Comment On June 08, 2008, at 4:52 PM, saurabhprasad wrote:

    The way Steve Jobs has repeatedly pumped Touch as a wi-fi device, I don't think Apple will abandon it.

    Even if iPhone is a $200 device, and the Touch a $300 one, in the short term, a higher price of Touch will make users want to switch to the iPhone where the Apple can make money in more than one way.

    In the long-term, I think Apple will have strategies..

    (1) Get iPhone on more networks - if the phone becomes available on 3+ networks, there'll be no need for iPod touch as a device.

    (2) If they lose money by diluting their subscriber base, they'll improve iPod Touch so much that they're desirable as a wi-fi and entertainment device by itself.

    I think, how they treat Touch will be an indication of how they're moving wrt iPhone's carriers.

  • Report this Comment On June 09, 2008, at 7:45 PM, fluffysheap wrote:

    Big Brown finished last.

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