Did Apple Just Shoot Down the Cheap iPhone Talk?

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There's been a lot of talk lately about lower-cost iPhones meant to target lower price points and give Apple (NASDAQ: AAPL  ) some traction in emerging markets. I think it's about time to start an iPhone family with a wider range of choices and price points. Did Apple marketing chief Phil Schiller just squash my dreams?

Yes, and no
Schiller and Tim Cook are in China making the rounds, and in an interview with the Shanghai Evening News (via The Next Web) Schiller addressed some of the recent speculation that Apple would introduce a cheaper model. He acknowledged that the Chinese market has shifted from feature phones to cheap smartphones. Schiller added, "Despite the popularity of cheap smartphones, this will never be the future of Apple's products."

There's a lot of leeway in his comments though, and it all comes down to semantics. Is a "lower-cost iPhone" the same is a "cheap iPhone?" As part of the rumblings, Bloomberg speculated that Apple was targeting a retail price point of $99 to $149. A device of that caliber would unarguably be quite "cheap" indeed, and investors can immediately dismiss the possibility of an unsubsidized iPhone selling for $100.

That would compare to Apple's current retail pricing structure of $649 to $849 for an unlocked iPhone 5. iSuppli estimates that the entry-level iPhone 5 carries a gross margin of 68% with component and manufacturing costs of $207, before software development, licensing, royalties, and other expenditures. Even if we use Bloomberg's high-end $149 estimate and assume Apple is willing to accept a gross margin of "just" 50%, it would only have a $75 budget. Not even Apple can build a compelling smartphone for that cheap.

However, there's quite a bit of space for the "lower-cost" argument, which could fall anywhere above the "cheap" retail price points of around $200 and below the $450 retail price of the 2-year-old iPhone 4. That gives Apple some room to work with and utilize its unrivaled supply chain skills to secure favorable component pricing and build a decent iPhone.

It's OK to change your mind
It's also not as if Apple's never backtracked on public statements before. The iPad Mini is perhaps the most obvious example of the company changing its tune, after Steve Jobs famously called 7-inch tablets "dead on arrival" several years ago.

A more recent example is when Schiller downplayed some features in rival devices like near-field communications or wireless charging. The latter is a headline feature of Nokia's (NYSE: NOK  ) new Lumia 920, which charges when placed on an inductive charging plate.

Source: Nokia.

After Apple unveiled the iPhone 5, Schiller said it's questionable how much convenience wireless charging adds, since users still have to carry around a separate item that still needs to be plugged in with a wire anyway.

Then a couple months later a patent application from Apple was publicly published regarding -- you guessed it -- wireless charging! Apple had originally filed the application back in November 2010, and instead of using inductive charging it explores using a near-field magnetic resonance power supply with a range of about a meter. It's a different method, but it's just another example of Apple's actions not lining up with an Apple exec's public comments.

Two rights don't make a cheap iPhone
It's true that Apple has historically shied away from lowering prices just for the sake of growing market share. Schiller notes, "In fact, although Apple's market share of smartphones is just about 20%, we own the 75% of the profit." That statement lines up with the 71% of the industry's operating profit that Apple was estimated to have garnered in 2011.

At the same time, Apple has also demonstrated a willingness to expand product families in the past before in order to meet a wider range of customer preferences, even if that happens to include lower prices. Look no farther than the iPod or iPad families for proof of that.

Schiller and I can both be right. Apple can release an iPhone that costs less than current models and still not be "cheap."

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  • Report this Comment On January 12, 2013, at 6:34 PM, jrogowsk wrote:

    I keep reading about how Apple should make an iPhone mini. However as I watch my 4 year old play with the old iPhone 3S we gave him after my wife upgraded, I can't help but think it is all ready here. There is a smaller form factor. The apps work fine. There is a polycarbonate backing. Plus, the phone is tough as nails, or rather it seems that Lucas uses it to drive nails as I hear him drop it while running to show me his latest achievement against the the alligator in the Water app. So my logic is that Apple needs to use the prior iPhone versions, with upgraded inners, as various price points. With this there will be no perceived down graded, or cheeping of the iPhone line. Why does Apple need to stop at the iPhone 3S, or iPhone 4S? There is a market for old iPhones on eBay, the used iPhone 3GS is selling for about $60. Perhaps continue these prior lines as price points and form factors. Apple does this with their Mac line; Mac mini, Macbook Air, Macbook Pro, iMac, MacPro.

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