Apple's Low-Cost iPhone Market Opportunity

When it comes to the high-end smartphone market, Apple (NASDAQ: AAPL  ) is the king. Developed economies where wireless carriers subsidize smartphone purchases in exchange for service contracts vote overwhelmingly in favor of the iPhone. Just this month, investors have seen reports that Apple has become the No. 1 smartphone vendor in important countries like the U.S. and Japan, but there remain plenty of untapped opportunities within the global smartphone market.

Specifically, unsubsidized and emerging markets are practically blank slates where Apple can tap low- and mid-range market segments for future growth. How big of a market opportunity are we talking about?

Very big
According to recent estimates from Piper Jaffray analyst Gene Munster, we're talking about a total low-end addressable market opportunity of $135 billion this year. That's a huge segment of the smartphone market that Apple has mostly neglected thus far. Sure, the company progressively reduces the price of older-generation models each year as new ones are released, but even the iPhone 4 that was launched in 2010 is still priced at a premium relative to current low-end devices.

In the U.S., the iPhone 4 still carries an unsubsidized retail price point of $450 for an 8 GB model. Munster went through pricing data from six international markets (Germany, the U.K., France, China, Brazil, and India) and found that the iPhone 4 is still over twice the average price of a low-end smartphone. In fact, that model is even pricier than even the average mid-range smartphone.

Within important regions like China and India, which are the two most populous nations in the world, low-end smartphone average selling prices, or ASPs, are between $138 and $140, making the iPhone premium much higher in that market segment.

Munster estimates that the low-end segment will comprise 60% of the smartphone market this year, with 540 million units selling at an ASP of $250. This is why the analyst believes that Apple will launch a $199 iPhone later this year, which will promptly see sales skyrocket to 170 million units by 2015.

A second opinion
Just yesterday, Morgan Stanley analyst Katy Huberty similarly weighed in on affordable iPhone prospects. Specifically in China, Huberty believes that a 2,000 yuan (about $330) iPhone could pose a major competitive threat to flagship devices from local rivals like Lenovo, Huawei, ZTE, and Coolpad, many which are seeing success on the low end. Huawei and ZTE in particular have ridden that sector to rank within the top 5 smartphone vendors in the world. In the fourth quarter, Huawei and ZTE ranked No. 3 and No. 5, respectively.

Even if a third flagship iPhone sales are cannibalized by a lower-end device, the net result will still be overwhelmingly positive as Apple could potentially triple its addressable market in China.

A Foolish opinion
Munster's expectation that Apple will launch the device at a $199 price point seems too aggressive, considering Apple's historical pricing strategies. Apple has always maintained premium price points, even when it moves downmarket, and I think a price point closer to $250 to $300 makes more sense in order to preserve margins and the premium branding.

An affordable iPhone would still carry lower gross margins relative to the flagship model, but considering the sheer size of the market opportunity we're talking about, Apple will make up for margin contraction with unit sales growth that should significantly boost gross profits in dollar terms.

At the recent Goldman Sachs conference, Tim Cook reiterated his belief that eventually all phones will be smartphones, and that represents incredible opportunities for Apple. The implication there is that in order for Apple to truly tap its full potential in the booming smartphone market, it will need to eventually broaden the segments it addresses -- and Tim Cook knows that.

There is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (4) | Recommend This Article (2)

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 February 20, 2013, at 10:25 PM, dwilh51183 wrote:

    What is taking Tim COOK so long to get 2-3 lower cost quality AAPL AIR-PHONES available for the under developed nations? C'MON Mr. Cook...Start demanding your AAPL EXEC'S and managers start producing products. You are the leader chosen by STEVE JOBS! Start leading! START BUYING YOUR COMPANY STOCK BACK! YOU GUYS HAVE THE CASH ...SO START BUYING AAPL STOCK BACK

    And you need to change your company policy of NOT ACCEPTING OUTSIDE SUBMISSIONS FOR NEW PRODUCTS. I have a great product that would sell BILLIONS

  • Report this Comment On February 21, 2013, at 9:50 AM, rlcato wrote:

    'Mercedes' Low-Cost Auto Market Opportunity.'

    See what I did there?

  • Report this Comment On February 21, 2013, at 11:37 AM, rlcato wrote:

    You and Tim Brugger are such dreamers. I mean really. The both of you preach the same thing and it makes totally-no-logical-sense. There are 3 kinds of consumers: those that can afford, those that 'think' they can afford, and those that can't but they'll try. If Apple made a low-priced iPhone for those regions, the 'can affords' will buy the lot and sell them on the black market (like China does), the ''think' they can afford' will buy what's left -at a premium, and those that can't, can't! Apple won't see ANY of that cash due to the inability of keeping up with demand. The standard 'iPhone' will collapse in a void.

    See, all your hairy-fairy, pie-in-the-sky financial analytical ideas are nothing more than rainbows w/pots of gold, blue skies and unicorns when it boils down to logic. Apple is about to start a new market in South Am. And the same 3 kinds of consumers are there waiting.

    And your 2nd opinion: The majority of those phones you mentioned are 'battery-replaceable', sim-card wanna-be's. How many are there; 160 different models - 45% average running the same OS; Android 2.3? Some two-year old phones receiving 15-month-old updates. That's just dead money.

    To sum up, you either get a smart phone or you get an iPhone. Is that pretentious or what?

  • Report this Comment On February 21, 2013, at 8:15 PM, TMFDanielSparks wrote:

    Excellent analysis. Thanks for your hard work on this article.

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