It's Time to Start an iPhone Family

It was always bound to happen. The iPhone family was always destined to expand. It couldn't be a one-product-per-year family forever. Is Apple (NASDAQ: AAPL  ) preparing to launch a low-cost iPhone like The Wall Street Journal suggests?

Keep in mind this isn't the first time that WSJ has reported such talk, as it ran a similar article nearly two years ago in February 2011. In fairness, both reports likely have legs to them and Apple has undoubtedly been prototyping and testing cheaper iPhones for years. The real question is whether or not it would pull the trigger and release such a device to the masses.

What to expect when you're expecting a low-cost iPhone
One way of making the iPhone cheaper could entail using a polycarbonate shell. While some may see that as threatening the premium brand image that Apple enjoys with the iPhone, it's not as if people aren't used to buying plastic flagship smartphones from other manufacturers.

In fact, nearly all of Samsung's phones are housed in cheap plastic, and that hasn't hurt Galaxy S3 sales much. Samsung is even casually known as the "King of Plastic" among Google (NASDAQ: GOOGL  ) Android loyalists. In a brief departure from the South Korean conglomerate's plastic practices, Samsung's new ATIV S running Microsoft (NASDAQ: MSFT  ) Windows Phone features an aluminum casing.

Besides, the iPhone 3G and iPhone 3GS were both made out of polycarbonate, and those models sold just fine.

Apple could also put older parts in the device to lower the cost. The older A4 or A5 chips would fit the bill quite nicely. The company's also taken to using older 5-megapixel image sensors from OmniVision Technologies (NASDAQ: OVTI  ) in other products. That was the same backside-illuminated sensor originally found in the iPhone 4 in 2010, but is now found in the iPad. Maybe OmniVision could get an iPhone seat back, even if it's not the flagship.

Family portrait
The WSJ makes it sound as if an expanded iPhone family is now only possible because of Tim Cook, saying that Steve Jobs "prioritiz[ed] profits over scale and offered a relatively small number of products mostly targeted at the high end." That's only partially true. Apple's always been known for its focus on product depth, but at the same time look at what happened to the iPod as it matured: it expanded.

Source: SEC filings.

This chart starts with the launch of the original iPod and ends right before the iPhone and iPod Touch were launched. As the iPod became increasingly important to the overall business, Apple introduced new models: the Mini, Shuffle, and Nano.

More importantly, these offspring were moves downmarket to target lower price points. This was all under Jobs' tenure, so clearly expanding an important product family isn't unique to Cook. The iPhone has been a once-per-year affair for six generations, longer than other families, but now is the perfect time to multiply. Apple just did this exact thing with the iPad Mini, and now the iPad family has two distinct devices for different market segments.

In doing so, Apple will also address one of its biggest risks: its concentrated product portfolio. A major risk with the one-model strategy has been if the device flops, it would be catastrophic to Apple's business. With a multimodel strategy, hopefully there will be something for everyone.

54 models and counting
Like any stock investor, diversifying reduces risk. Also like in stocks, the marginal benefit of diversification is very large initially but decreases as the number of positions increases. For example, going from a one-stock portfolio to a two-stock portfolio brings major diversification benefits in risk reduction, but going from a 30-stock portfolio to a 31-stock portfolio doesn't reduce risk by nearly as much.

Don't ever expect Apple to offer 54 different models, like Samsung currently does between its Android and Windows Phone offerings, but it's very likely Apple could eventually transition to a three- to five-product family with the iPhone. I expect Apple to move both downmarket and upmarket with a lower-cost iPhone as well as a larger iPhone, in addition to the standard model.

Are we there yet?
Tim Cook has talked before about pricing umbrellas, saying Apple doesn't want to leave much room for competitors to invade from below. Moving to a lower-cost iPhone plays perfectly into those comments and would do wonders for Apple abroad. The company is already dominating the domestic market, but emerging markets (and even some developed ones) are tough to crack without carrier subsidies.

Naturally, some will fret over cannibalization, which is a bit curious since Apple itself doesn't worry about the idea. Instead, it focuses on offering products that people will line up to pay premiums for relative to competing gadgets, and trusts that the bottom line will take care of itself. So far, it has.

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Read/Post Comments (15) | Recommend This Article (25)

Comments from our Foolish Readers

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  • Report this Comment On January 09, 2013, at 10:22 PM, mjrkong wrote:

    Great piece. Now would be a great time for Apple to expand "the family", as you say. Watching the world go insane with dozens of smartphone variants- Samsung 57, HTC 18, LG 24, Nokia 9, etc - Apple could bring to market a couple of new editions and still be outnumbered 30 to 1 by the competition, a competition which could eventually implode by their own excesses. When I read about Lenovo showing off a 27 inch 22 lb 'tablet' at CES I could not help but laugh. They even had a picture of a smiling female model lugging the thing around the living room. 'Fun for the whole family!' Try putting that in your pants pockets. Crazy. Hopefully, Apple will keep their heads and stay out of the asylum.

  • Report this Comment On January 10, 2013, at 7:39 AM, jdmeck wrote:

    Mr market does not like your ideas as demonstrated by apple going down again yesterday after hearing they might and I say MIGHT release a cheaper phone.

  • Report this Comment On January 10, 2013, at 1:15 PM, MartinSamuelson wrote:

    The thing with the iPods is that Apple released different products, not just cheaper products.

    I'm wondering if Apple might be looking more towards building a feature phone. Perhaps it would be similar in size and scope to the new iPod mini... something very basic without the standard iOS apps, but still made with the design and detail of the typical Apple product.

  • Report this Comment On January 10, 2013, at 1:16 PM, MartinSamuelson wrote:

    ** I meant to say iPod nano

  • Report this Comment On January 10, 2013, at 6:34 PM, Jurobi wrote:

    Don't care. I will never buy another Apple product, as I don't trust the company.

  • Report this Comment On January 10, 2013, at 7:04 PM, SoBe305 wrote:

    Apple can also add to the family with some specialized iPhones without hurting their margins. Imagine how many parents would line up to pay extra for a tough & water resistant iPhone 4S or 5. How about an iPhone 5 which is slightly ticker but with a longer lasting battery. On the other hand the main reason iPhone has been successful is the simplicity of the product line. I am technically savvy customer but I cannot keep up with the versions of Android and which version works with which phone yet alone it is almost impossible to figure out the differences between all different models of Samsung or other Android phones. I have an ipHone and S III. Compared to IOS, Android allows me a lot of customization but iPhone works meanwhile Android is confusing and inconsistent.

  • Report this Comment On January 11, 2013, at 12:16 AM, dwilh51183 wrote:

    AAPL is the real deal. The iPhone is the most amazing phone to ever be made. It's a technological revolution. And you can sell it a year or 2 later FOR TRIPLE WHAT YOU PAID FOR IT! You can't do that with those plastic Samsuck phones or those HEM-Droids. The iPhone and iPads have by far the best components than any other wannabe

  • Report this Comment On January 11, 2013, at 9:40 AM, jkenyan wrote:

    Your point about Iphone resale is a good one. I have been reselling my old iphones for a lot more money than it costs to buy a new subsidized phone since 07'.

    This is a huge market. People that want an Iphone but don't necessarily want the expensive contract so are willing to buy an older model.

    If Apple could create this product and sell it without the contract it would be huge. Right now you can get a "free" iphone if your willing to give the carrier a two year committment.

  • Report this Comment On January 11, 2013, at 10:32 AM, mikecart1 wrote:

    Apple releasing a cheaper product is a waste. What is not considered is that most iPhone users didn't pay FULL PRICE for their phones. Getting them with contract and most people got their iPhones for under $200 and some for nearly free.

  • Report this Comment On January 11, 2013, at 3:00 PM, EquityBull wrote:

    Apple needs to fill out the product line without too much choice and stick to the upper middle to high end and leave the bottom to the bottom feeders.

    1) Smaller iphone less expensive for middle tier but high quality. Perhaps the iPhone 4 is the bottom model

    2) iPhone 5 as the low end of the upper tier

    3) iPhone Grande - Larger screen about S3 size

    4) iPhone Phablet - Prepare for large phone/tablet size if this market takes off rather than cede it to competitors like they did with the larger S3 size phones

    No need for anything smaller than iphone 4 or much cheaper either. Apple should not tarnish its reputation for building the best products. If they cost a little more for their base model so be it. If someone cannot afford it buy a Samsung or HTC phone and deal with that OS which is a growing fragmentation nightmare

    You will see Samsung start to fork with their own Tizen (partner with Intel) version of Android to further splinter Android OS lines. Eventually you will have many Android forks and flavors. a nightmare for developers. Best thing for apple

  • Report this Comment On January 11, 2013, at 3:48 PM, jm7700229 wrote:

    Hi, do you guys follow anyone besides AAPL? I don't invest in high flyers or low dividend payers.

  • Report this Comment On January 11, 2013, at 6:04 PM, WineHouse wrote:

    The impression I got was that the presumptive "little iPhone" might be under development for the non-first-world market (i.e., for people living in economically less-developed countries). In the "developing" economies, it makes sense to get people hooked on the iPhone so that as the country's economy grows, the people stick with what they know and just "upgrade" to the more bells-and-whistles models. This "get'em hooked" model worked quite well with cigarettes; why shouldn't it work with iPhones?

  • Report this Comment On January 12, 2013, at 9:04 PM, benednet wrote:

    I don't understand the USA centric thinking on this board. I am on assignment in Shanghai and I see how samsung is exploding here because Apple is a "no show" with a decent price point. Apple must build an iPhone exclusively for the emerging markets. The potential far outweighs the risk.

    For example, my employees lust for an iphone, but it is beyond their economic reach. They all are buying samsungs as an alternative. I asked if they would buy an Iphone "Nano" style, and they said they would throw their samsungs away.

    Mercedes Benz and Volkswagon have done the same here and have been brilliant in its execution.

    Think global.

  • Report this Comment On January 13, 2013, at 9:09 PM, CHill8008 wrote:

    I enjoy my apple products, but I am no fanboy. I have owned an Android phone and it was the worst year of my life;-P. I find Apple's quality control impeccable both in hardware and software... the things just work every time. I am a little concerned over a cheaper iPhone, but if done well it may be what the company needs, both here and in developing markets and won't tarnish their image. I imagine, and this is a lot of speculation, but such a device would basically recycle the guts of the previous generation in a case that is similar to the flagship model, to have a single design language across the product range while wringing a few more years on parts that are basically proven and paid for. Think an iPhone 4s that looks like an iPhone 5, and maybe with fewer options as to things like color or memory. The Apple unibody construction, while it is expensive, does allow for a great deal of flexibility and modularity among products, so resources can easily be diverted among lines.

  • Report this Comment On January 18, 2013, at 4:03 PM, ayaghsizian wrote:

    I agree with benednet. An iPhone of high quality and lower price made exclusively for emerging markets like India, China and Brazil. Lower margins but huge sales numbers due to affordability will increase the bottom line.

    Americans can afford the iPhone 6 and don't need too many choices. We like having THE iPhone.

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