Apple Doesn't Need a Cheaper iPhone

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You can't deny the smashing success Apple (Nasdaq: AAPL  ) has had with the iconic iPhone. Since it was launched in 2007, more than 100 million iPhones have been sold and the revolutionary device now accounts for about 40% of Apple's sales. But Google (Nasdaq: GOOG  ) has caught and passed Apple in the number of cell phones running its operating system and is adding 500,000 devices per day to its ranks. That has some Apple watchers calling for a cheaper iPhone to compete with free (with a contract) Android phones. Should Apple listen?

Above the fray
Apple's history of sticking with the premium product is mixed. In the 1980s, adhering to a closed system and high margins let Microsoft (Nasdaq: MSFT  ) and IBM (NYSE: IBM  ) get the upper hand in the PC race. But recently, the premium product is what has differentiated Mac in the PC market and has led to its success. Likewise, when netbooks were all the rage, Apple stayed away from the price-sensitive products and instead worked on the iPad, which revolutionized the industry.

With the iPod, Apple expanded a successful product into the Shuffle, Mini, Nano, and Touch varieties that cover any price range consumers may need. That's the model Apple would probably follow if it wanted to reach beyond its current base.

But the answer of what to do with the iPhone depends on how Apple could make the product less expensive without ruining the experience. You can’t just shrink an iPhone, reduce the size of the screen, and have a hit the way Apple did with the iPod Mini. The iPhone is all about a superior experience, and any "dumbing down" may bring in more buyers, but they may not be happy with their experience.

Of course, Apple already sells the iPhone 3G for $49 with a contract through AT&T (NYSE: T  ) . Verizon (NYSE: VZ  ) doesn't have that option because the 3GS doesn't work on its network, although newer models could be made available at reduced costs.

But remember that one of the reasons the iPod model worked was that Apple essentially replaced the iPod with the iPhone, so it never became a commodity business based primarily on price. Apple gets on a slippery slope if it starts trying to make every consumer price point happy with iPhones.

Increasing sales volume has never been the only goal of Steve Jobs or Apple; instead, they've had success sticking with "delighting their customers." Unless Apple has some magic trick up its sleeve (and it might), I hope it doesn't stoop to making a dumbed-down iPhone.

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Fool contributor Travis Hoium has no position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Apple, Microsoft, Google, and IBM. Motley Fool newsletter services have recommended buying shares of Microsoft, AT&T, Apple, and Google, creating a bull call spread position in Apple, and creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On July 01, 2011, at 12:59 PM, dunkmaster wrote:

    or in fewer words...

    Apple has always done well WITHOUT worrying about market share...why change a formula that works?

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