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Don't Do It, Apple

There never seems to be a shortage of sources proclaiming what Apple (NASDAQ: AAPL  ) will do next.

It's not just the inevitable full-blown HDTV, either. Reports have tied Apple to everything from wristwatches to automobiles.

As the mother of all aspirational brands, if it's something electronic that can be sold at a premium, it's just a matter of time before speculators get going.

However, yesterday's report about Apple considering a cheaper iPhone didn't come from a blog or bubble up in a Mac user forum. The Wall Street Journal is reporting that the world's most valuable tech company is working on a cheaper iPhone that may roll out as soon as later this year.

The financial daily is leaning on more than just one person briefed on the matter.

Plastic posturing
How does Apple go about making a cheaper iPhone? Well, Apple can always sacrifice margins to match industry markups, but where's the fun in that? The stock would get crushed if Apple decided to desperately slash prices.

A possibility being considered -- according to the Journal's sources -- would be to replace the costly aluminum housing with significantly cheaper polycarbonate plastic.

This would be a big mistake. Apple's brand would take a hit if it was putting out inferior products. It also wouldn't make that much of a pricing difference.

Apple doesn't necessarily have a pricing problem here. Wireless carriers pay hundreds to Apple for every iPhone that they sell, knowing that they can make that back over the course of a two-year contract. A new iPhone at $199 isn't a deal breaker. However, though most of the world, where unsubsidized iPhones approach $1,000 apiece, price is a factor.

This wouldn't matter if Apple was gaining market share, but it's not. Google's (NASDAQ: GOOGL  ) Android -- led by Samsung -- is cornering the market. Apple will get a bounce once the holiday quarter numbers are out, but industry tracker IDC reports that Apple's smartphone market share peaked at 23% early last year. Its worldwide reach was down to just 14.6% during last year's third calendar quarter, though Apple's popular iPhone 5 hit the market at the tail end of the reporting period.

Despite Microsoft (NASDAQ: MSFT  ) throwing billions to get Windows Phone off the ground and buzz building for Research In Motion's (NASDAQ: BBRY  ) BB10 rolling out later this month, they aren't threats to Apple. Android is the biggest nemesis to any mobile operating system maker, and the platform's open-source ways makes it too magnetic to developers that can put out aggressively priced handsets without having to shell out stiff licensing fees.

Cheap is a state of mind
Apple has more to lose than gain if it tries to dent Android on price.

For starters, its devices will never be as cheap as comparably equipped handsets. Apple can't afford to squeeze its margins at a time when several analysts have been lowering their price targets on the stock, fearing that the class act of Cupertino will do exactly that.

What if Apple is able to put out a plastic phone? What if it decides to price it aggressively? What if customers gravitate to it in lieu of the higher-margin traditional Apple smartphones? Apple loses.

If the cheaper iPhone is a hit, the move also unlocks the survival instincts of its hungrier competitors. Microsoft knows how important it is to make a difference in mobile. It will write Nokia (NYSE: NOK  ) a blank check to keep dirt-cheap Lumia devices coming. RIM is even more desperate. Keep in mind that this is the same company that slashed the price of its $499 Playbook tablet by 60% when it wasn't selling. Nobody wants a price war, but everyone has a history of packing heat.

There's another scenario, of course. Let's call it the iPad Mini tightrope act. Apple was able to put out a smaller iPad at $329 late last year, apparently without cannibalizing the full-sized and full-priced $499 iPad. Shrinking component costs and scaling back on some features made it work. What if the plastic iPhone is more along the lines of an iPhone 4 or even a 4S?

Well, Apple would lose there, too. It would be a credibility hit. The perceived quality of Apple products would take a hit. We also have to keep in mind that Apple was able to pull off the iPad Mini because the iPad remains the tablet of choice. Samsung is selling a lot more smartphones worldwide than Apple is these days.

Taking the high road
There's nothing wrong with sticking to its knitting. Who cares if Apple never wins back more than 20% of the smartphone market. As long as it reaches the affluent 20% -- the folks that actually buy apps and are attractive to marketers -- Apple doesn't need to be the smartphone for the masses.

In fact, it's better if that never happens.

Apple became the country's most valuable company with a sliver of the smartphone market and an even smaller slice of the computing market. Apple isn't broken, though the same probably can't be said about that polycarbonate plastic shell the next time the iCheap drops.

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Read/Post Comments (13) | Recommend This Article (8)

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 January 10, 2013, at 12:43 AM, Zendwell wrote:

    I trust apple much more than I trust you, brosef.

  • Report this Comment On January 10, 2013, at 1:51 AM, marv08 wrote:

    Well, Apple was making plastic notebooks until just a few years ago, and half a decade ago they were still making plastic desktops. Those devices actually caused Apple's revival, not its downfall.

    While I do prefer aluminum, and indeed paid $1,022 for my unlocked 32 GB iPhone 5 where I am (but device-free contracts here are much cheaper than in the US and networks are much better, so in the end I do not pay more in total and enjoy download speeds in the 60 Mbps region), I do not think that a plastic device would necessarily be a bad device. The complaints I am hearing about the Galaxys, Lumias and even lower-level junk, are not mainly about the material of the case. They are mainly about lack of updates, or missing or low quality apps. A cheap iPhone would still have access to the AppStore and the iTunes Store, to iCloud, to Apple's market leading support, to frequent updates on day one etc.

    If Apple can address these markets with a decent device, even if it is not retina, not aluminum, and maybe not featuring the latest chipset... they can still make a device that is better than the alternatives in this price range.

    Did the iPod take a "credibility" hit when the iPod Mini was released? No, it sold more. Did the iMac take a credibility hit when the Mac Mini was released? No, it sold more. Did the iPad Mini cause a credibility hit on the iPad? Certainly not, and thanks to the growing tablet market, in the end it will sell better.

    Apple does not need the money and can happily only cater to the top segment, I agree. But the risk here is marginalization. At some point, developers would have to think Android first. This point is reached when ad-sponsored apps on Android and AppStore apps on iOS create similar revenues. If Apple wants to avoid this, a lower-cost model will be required at some point. This may not be now, but we will see.

  • Report this Comment On January 10, 2013, at 2:50 AM, dwilh51183 wrote:

    You clowns that write all these articles every day... all you did was bitch and wine for six months that Apple needed to make a cheaper iPhone. Now they are still going to have their quality iPhones, but they're going to have a cheaper iPhone for the poor people. that's the same thing that Samsung does,only they have cheaper components inside.AGAIN, YOU NUCKLEHEAD WRITERS ARE MISSING WHAT'S MOST IMPORTANT..."MARKET SHARE DOESN'T MEAN CRAP!!" All that matter's is the pie(number of people buying smartphones)is growing by leaps and bounds, if AAPL SOLD 10 MILLION phones in 2009, and in 2012 in 1 quarter , they sell 62 Million phones, and 3 years from now they sell 125 million phones per quarter...IT'S THE QUANTITY OF PHONES AND IPAD'S THAT MATTERS, YOU STUPID LOSERS. All that matters is how much cash you are making .CASH

  • Report this Comment On January 10, 2013, at 3:22 AM, haysdb wrote:

    "Android -- led by Samsung -- is cornering the market"

    Baloney. Tell me, what percentage of phones sold by AT&T and Verizon were Android?

  • Report this Comment On January 10, 2013, at 6:43 AM, Appleisdead wrote:

    Apple is dead.... iOS is complete garbage and functions well for the basic retarded folk. Every apple iPad and every iPhone is complete trash and old. Apple is now scrambling for new products to make because they are going downhill . BB10 is now the future and leaves apple in the dust. Apple at one time had amazing products because the basic iPhone and MacBook kept amazing resale value because it was an exclusive product.. But now that they release a new iPhone and iPad every 6 months .. What's the point of wasting money!????? Apple is a rotting apple. DEATH TO APPLE because now it sucks balls!!!

  • Report this Comment On January 10, 2013, at 7:05 AM, Arthur1111 wrote:

    No need for Apple to work on a cheap phone. IpHoNE 5 or 6 will be the cheap phone once BB10 is released.

  • Report this Comment On January 10, 2013, at 7:41 AM, jdmeck wrote:

    Overall profits are much more important than market share. Apple should not cut prices to get a larger piece of the pie.

  • Report this Comment On January 10, 2013, at 7:43 AM, jdmeck wrote:

    RIM - Not holding my breath. Already too late.

  • Report this Comment On January 10, 2013, at 10:39 AM, TimKnows wrote:

    You need to do the opposite of whatever InfoThatSucks says, in this case, sell your Apple stock and buy RIM. He is always wrong and dumb.

    Apple is too lazy to think for themselves so expect them to start making several phones until someone says they like it. A plastic one, one with keys, one that makes you carry a car battery, they are that useless at innovation.

    RIM is going to kill them this year.

  • Report this Comment On January 10, 2013, at 11:16 AM, DavesHere wrote:

    In the book "Up the Organization," Bob Townsend relates the story, from his time running Avis, of the idea to open a cut-rate car rental subsidiary. The idea circulated and met with general enthusiasm until, one day, he asked an outlet manager what he thought of the idea. The manager's response was on the order of "That's what we Poles call peeing in your own soup." Townsend should be required reading.

  • Report this Comment On January 10, 2013, at 1:09 PM, constructive wrote:

    "Nobody wants a price war, but everyone has a history of packing heat."

    This is such an absurd concept, that the company with $100B cash and the highest margins in the industry is vulnerable to a price war with flailing nobodies like Nokia and RIM. Sure, RIM can "win" a price war, until they go bankrupt.

  • Report this Comment On January 10, 2013, at 1:21 PM, StopPrintinMoney wrote:

    The AAPL margins have been decreasing QOQ and now they're telling us they will come up with the budget phone with even lower margins???? Nice job.

  • Report this Comment On January 10, 2013, at 10:29 PM, TMFBreakerRick wrote:

    "Tell me, what percentage of phones sold by AT&T and Verizon were Android?"

    Haysdb, outside of the U.S., roughly zero. Samsung's global market share is now north of 30% in the smartphone market.

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