Is the "Cheap iPhone" Rumor Dead?

There's a lot of buzz flying around how Apple (NASDAQ: AAPL  ) is set to release a lower-cost iPhone destined for developing markets, where carrier subsidies don't help with the sticker shock. On the surface, the move seems logical when you consider Apple's past trajectory. Historically, Apple has released one device and then built a family around it. The iPod family is the classic example, which started out as just the with the iPod classic, and has now grown into three more models. The same thing seems to already be happening with the iPad, given the arrival of the iPad Mini. Investors have turned to the iPhone as the final bachelor to start its family line of products. However, if senior VP Phil Schiller is right, the rumor mill (and some investors) will be likely disappointed.

Not the future of Apple products
According to Schiller, the direction that a cheaper iPhone takes the company "will never be the future of Apple products." He elaborated, "Every product that Apple creates, we consider using only the best technology available." In other words, Apple is happy to remain a premium-products company, one that doesn't want to sacrifice on quality. Schiller also dropped this bomb, "Although Apple's market share of smartphones is just 20%, we own 75% of the profit." If I had to put my money on it, that comment takes direct aim at Google's (NASDAQ: GOOGL  ) 75% market share.

Not a race-to-the-bottom kind of company
Apple doesn't sit in its position of power because it beat out competitors on price. The entry-level iPad Mini is the perfect example of how Apple does business in the seemingly lower-end market. It's priced $129 higher than both Google's Nexus 7 and Amazon's Kindle Fire HD, yet it still managed to see its initial usage grow 50% faster than when the Kindle Fire line debuted the previous year. Best of all, Apple sells the iPad Mini at a ridiculous 43% profit margin compared to Google and Amazon. According to iSuppli, the 16 GB Nexus 7 costs Google $166.75 to build, and the 16 GB Kindle Fire HD costs Amazon $174, leaving slim profits.

Just drop the price
If Apple wanted to get aggressive about expanding its market share in emerging markets, all it would have to do is lower the unlocked price of the iPhone 4/4S, which currently sell for $450 and $549, respectively, in the U.S. Considering the iPhone 5's bill of materials rings in at $207 including manufacturing, previous generations naturally cost less to produce. Back in 2010, the iPhone 4 cost $187.51 to produce, making the case for a $300-something unlocked iPhone 4 when the future iPhone 5S comes out. This will allow Apple to keep its premium image, its high profitability, and a chance to increase market share.

But is it really necessary?
I take one look at worldwide Mac penetration and wonder if this is even necessary. Apple is the company that can get away with selling $1,000 computers without blinking twice. And guess what? No one's complaining they're not subsidized. Apple has established itself as the premium computing company. People know their products are expensive compared to the competition. Considering how Apple is among the most profitable companies on the planet, this hasn't been a major detractor to the bottom line. If it were struggling to sell its products, it'd be another story.

However, if we're talking about addressing emerging market concerns, it's a no-brainer for Apple to extend the life cycles of its products. As new products are introduced, previous generations become more affordable, which in the end could become the way Apple dominates emerging markets without anyone even noticing.

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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 11, 2013, at 10:18 PM, TimKnows wrote:

    I couldn't agree more, Apple already makes cheap products, they just have to price them right.

  • Report this Comment On January 11, 2013, at 11:00 PM, dwilh51183 wrote:

    Apple only makes quality products so when they're ready they will develop a lower-cost phone for those who can't afford the iPhone five and six. Apple only builds quality. Building crappy- plastic phones with crappy cheaper chips... that honor goes to Samsung

  • Report this Comment On January 11, 2013, at 11:00 PM, dwilh51183 wrote:

    Investors are waiting to see AAPL's numbers. If they beat the sky -high expectations ,( or the way overblown expectations of increasing earnings by another 50% ) then the stock will be up, up and away. It doesn't seem fair that after all the analysts price cuts and all the CNBC BASHERS that this company is still expected to go from $9.32 a share in earnings to $13.34 a share in earnings. Do they do this to GOOG? AMAZON? FFIV? CSCO? FB? NOPE! As long as these other tech companies make 12% more money, their shares just skyrocket, while their P.E.'S go up to 75 -3400. YES, AMZN HAS A P.E HIGHER THAN HEAVEN, but JEFF BEZOS buys with every dollar he has right after they announce earnings. AAPL stock is being manipulated by all the RICH , CROOKED WEALTHY PEOPLE AND journalists. They are trying to scare all investors into thinking AAPL IS NO LONGER A GREAT COMPANY. But we all know that AAPL has great growth now and for next 2-3 years just as they are.if they come out with new products, then the stock will head much higher. DON'T SELL YOUR AAPL STOCK ANYMORE. YOU PEOPLE MUST HAVE ROCKS FOR BRAINS. AAPL deserves to trade at a premium to the whole market...NOT a HUGE, HUGE DISCOUNT.AAPL'S PE IS freakin 10.

  • Report this Comment On January 11, 2013, at 11:02 PM, H3D wrote:

    They do price then right.

    That's why they make so much money.

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