Apple's Brilliant iPhone Surrender

Earlier this week, the Wall Street Journal reported that -- based on the activity of Apple's (NASDAQ: AAPL  ) Asian suppliers -- the company is expected to release two new iPhones later this year. The first will be a yawn-inspiring refresh of the iPhone 5 that is expected to be even less notable than the bump from the iPhone 4S. The updated version will include very few changes and follow the company's recent release pattern. The second release, unfortunately scheduled for later in the year, will bring a less expensive iPhone to market. This multi colored, non-metal version may attract non-premium U.S. users to Apple, but is expected to finally get Apple into the fight with Google (NASDAQ: GOOGL  ) Android in the emerging markets.

The iPhone 5S
This summer's expected release of the slightly upgraded iPhone 5 -- likely to follow the 'S' naming convention -- is not expected to shake things up in any significant way. The next iPhone iteration is not expected to change size -- for both philosophical and financial reasons -- meaning another entire generation of iPhones that will not compete with larger Android options. For investors, this is something of a mixed story; the release of the iPhone 5 was hardly noteworthy from a technology perspective, yet the device sold nearly 50 million units very quickly. While a market-disrupting advance would be welcome, achieving economies of scale by leaving the next iteration alone may be the better option for shareholders.

The iPhone Jr.
Whatever Apple decides to name the new cheaper iPhone, its availability is a brilliant move of surrender by Cupertino. Earlier this year, Phil Schiller, Apple's senior vice president of marketing, gave a very different sense in an interview: "Despite the popularity of cheap smartphones, this will never be the future of Apple's products. In fact, although Apple's market share of smartphones is just about 20%, we own the 75% of the profit." In the context of the rest of his remarks, Schiller was likely playing off the word cheap, stating that, "We consider using only the best technology available."

The new version of the iconic smartphone may be more affordable, but it will never be cheap. Apple does not do cheap, which will be an important distinction to make when the device finally debuts. Still, surrendering to pressure to release a new device with a much lower price point has the potential to allow Apple to compete in new and important ways.

As Schiller notes, the company's global market share is only 20%. This has been driven by the fact that inexpensive Android devices are so readily available. Where Apple will gain a significant advantage over Google is that, while Android is free to other manufacturers, Apple will be profiting from the sales of the devices themselves, as well as back-end ecosystem revenues. If the new device can both penetrate emerging markets and attract domestic consumers that might not otherwise opt for a premium iPhone, this could be an important catalyst.

The risk, of course, is that some users may trade down in order to save a few bucks. The iPhone cache, however, provides significant insulation against this risk, as having the latest and greatest is an appeal for many iPhone users. As news of the cheaper iPhone launch solidifies, an Apple allocation becomes more important.

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Read/Post Comments (15) | Recommend This Article (19)

Comments from our Foolish Readers

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  • Report this Comment On April 04, 2013, at 10:14 PM, PatSmith10 wrote:

    have they announced a cheaper iphone? or is this just speculation?

  • Report this Comment On April 04, 2013, at 11:40 PM, G44ca wrote:

    @PatSmith

    Clearly, it's the worst kind of speculation. Speculation masquerading as news from a "reputable" company.

    Come on TMF – get your act together! This article is garbage. Your writer has no idea what Apple is going to announce. If I'm wrong about that have him post his sources.

  • Report this Comment On April 04, 2013, at 11:44 PM, G44ca wrote:

    @TMF

    Yes, I know, the source is the WSJ. That doesn't make this newsworthy. Garbage.

  • Report this Comment On April 05, 2013, at 1:50 AM, Drevno wrote:

    "Where Apple will gain a significant advantage over Google is that, while Android is free to other manufacturers, Apple will be profiting from the sales of the devices themselves"

    As the article states google doesn't make money from Android, that doesn't put that at a disadvantage to apple though, they aren't trying to make money by selling you a phone, they're trying to make money by showing you ad's

    apple wants to sell you a phone, google wants to show you an ad...

  • Report this Comment On April 05, 2013, at 1:55 AM, singaporenick wrote:

    This is such a poor article.Maybe this guy is short on Apple,it's the only reason I can think of for writing such nonsense.

    How does he know the next iPhone will not have outstanding features?

    Who says the iPhone 5 has not been successful? Sales and profit figures point to exactly the opposite conclusion.

    As for larger size phones,actually so far the market for these is quite small and shows no sign of being more than just a passing fad.

    It's a shame-Motley Fool has some good writers,but Ehrman is terrible!

  • Report this Comment On April 05, 2013, at 2:52 AM, DecadeMan wrote:

    They should call it the iPhone 5zzz.

    User: "Siri, what's the difference between the iPhone 5s and the iphone 5zzz?"

    Siri: "I found 8 locations near you for scones"

  • Report this Comment On April 05, 2013, at 3:14 AM, kevins71 wrote:

    Yet another speculation article.

    "Nobody" and I mean nobody knows what Apple is working on except Apple. So please, STOP with the speculation articles already. I don't see speculation articles on any other companies products but Apple's. I mean nobody really cares what the other guys are doing any ways because they just copy Apple. But seriously, stop speculating for the sack of an article.

  • Report this Comment On April 05, 2013, at 3:40 AM, milkman867 wrote:

    Let's call a spade a spade here.

    This has nothing to do with news. This is not an article. This is blogvertising at it's finest.

    It's obvious this writer has excellent writing skills but that his knowledge of Apple, mobile and the ecosystem in general are superficial at best.

    They aren't speculating, they are trolling with the largest net on the planet - thanks Yahoo, MSN, AOL and others.

    I gave these chumps an email that I never check and now know that I never need to pay attention to anything that is related to fool.com, ever.

  • Report this Comment On April 05, 2013, at 3:43 AM, VikiMichaelis wrote:

    Nothing wrong with speculation, it gets the mind working.

    There haven't been many great changes or advances with the iPhone series, and Apple doesn't need to make any. Small changes in design, better software, nothing beyond that.

    The reasoning is simple, it's all in the name. 50 million sold simply because people wanted to be able to say they have the new iPhone, not because of its functions or design, just because it is new, and this is the biggest selling point Apple has.

    Viki

  • Report this Comment On April 05, 2013, at 3:53 AM, rlcato wrote:

    Hey, April fool's day was 4 days ago. Give it a rest.

  • Report this Comment On April 05, 2013, at 4:12 AM, dogmatica wrote:

    Hi,

    Viki: your deduction on why Apple has been and still is successful is amazingly shallow, and I congratulate you for having the courage to run with such a low-grade observation. Whether it's quality, reliability, security, ease-of-use, malware, etc, Apple leads the field...by a mile! That might have something to do with Apple's success.

    (Don't believe me on the stats? Look them up! Start with JP Powers and go from there.)

  • Report this Comment On April 05, 2013, at 4:33 AM, singaporenick wrote:

    The writer of this article is described as a "hedge fund trader".

    His articles should be treated with,at best,caution as he just seems to be trying to write articles to bolster his position in certain stocks.

    Caveat emptor with this guy!

  • Report this Comment On April 05, 2013, at 7:36 AM, today01 wrote:

    apple walking/heading down the path of motorola... got a great product, think you're untouchable; believe you're the best of the best and won't make affordable phones for the public... your arrogance will be your doom!!!....

  • Report this Comment On April 05, 2013, at 11:04 AM, rhealth wrote:

    @Decademan Ah! the unintentional hilarity of SIRI

  • Report this Comment On April 05, 2013, at 12:29 PM, sept2749 wrote:

    I think they gotta do better then another iphone similar to whats out now. Come on guys do your thing and WOW us! I need some money!

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