Is the iPhone 5 About to Disappear?

Since the introduction of the iPhone in 2007, Apple (NASDAQ: AAPL  ) has reliably updated the device once a year. For the past several iterations, beginning with the release of the iPhone 3GS in 2009, Apple has dropped the price of the previous model by $100 to provide a lower-cost option for price-sensitive customers. Thus, the typical price structure for the current iPhone options in the U.S. -- assuming a two-year contract and a carrier subsidy -- is the following:

Standard U.S. iPhone Pricing

Model

Price

iPhone 5

$199

iPhone 4S

$99

iPhone 4

Free

Last week, The Wall Street Journal reported that the next-generation iPhone, thought to be called the "iPhone 5S," will enter production this quarter. Analysts believe that time frame puts Apple on track to release the iPhone 5S in June or July. But I don't think Apple will follow its previous custom by dropping the iPhone 5 subsidized price to $99 this summer.

The iPhone 5. Source: Apple.

Instead, the company may choose to discontinue the iPhone 5 when its replacement arrives. That would line up with the strategy Apple followed for the most recent iPad update: The fourth-generation iPad replaced the third-generation iPad as the high-end model, with the iPad 2 remaining in production as a cheaper alternative.

New iPhone coming
The main rationale for a new high-end iPhone is to keep the pressure up on Apple's competitors. BlackBerry (NASDAQ: BBRY  ) finally released its new Z10 all-touch smartphone in the U.S. last month, and CEO Thorsten Heins has publicly called the iPhone "outdated." Meanwhile, major Google (NASDAQ: GOOGL  ) Android vendors such as Samsung and HTC are releasing new flagship phones this spring. Last year, Samsung used the gap between its spring release of the Galaxy SIII and the iPhone 5's fall debut to pick up significant market share.

Apple needs to update the iPhone sooner rather than later to keep its products in the spotlight and bolster its position vis-a-vis Android phone vendors. However, it needs to do so without putting further pressure on its profitability, which has become a concern recently.

Gross margin is the key
The introduction of the iPhone 5 dented Apple's gross margin, which dropped 610 basis points year over year, from 44.7% to 38.6%, in the fall quarter. Some of these increased costs relative to the 4S were temporary, as the iPhone 5 required a new manufacturing process, new equipment, and other upfront costs. However, while those initial cost headwinds may be subsiding, the iPhone 5 still includes more expensive components than the iPhone 4S -- better screen, LTE modem, and the like.

In the fall quarter, Apple was able to make up for the lower-margin profile of the iPhone 5 and other products by boosting revenue. In contrast, the company is expected to post a significant year-over-year decline in profit this quarter. To restart earnings growth, Apple needs to halt or (preferably) reverse its gross-margin decline.

Most Apple followers don't expect the iPhone 5S to boast any life-changing upgrades: It will be faster than previous models and may have a built-in fingerprint reader, but otherwise it's likely to resemble the iPhone 5. If Apple were to drop the iPhone 5 price by $100, many customers would take the discount rather than buy a similar, if slightly more powerful, iPhone 5S. That would reduce the iPhone's average selling price and pressure gross margin even more.

No need to keep the iPhone 5
By contrast, a lineup consisting of the iPhone 5S, 4S, and 4 would make more sense for Apple. There would be clear differentiation between the products. The iPhone 4 provides the base iPhone experience, the iPhone 4S is faster and adds Siri voice-recognition software, and the iPhone 5S would be even faster and include LTE support, a larger screen, and -- potentially -- a fingerprint reader.

The continuing popularity of the older models proves that there's no need to upgrade the lower end of Apple's iPhone lineup. In fact, Apple CEO Tim Cook noted that demand for the iPhone 4 outstripped supply in the fall quarter. This makes sense, insofar as customers who are willing to take an older model to save money are by nature more concerned with price than with having the most powerful device.

Foolish conclusion
There's a good chance that Apple will simply replace the iPhone 5 with the 5S at the top of its smartphone lineup this summer, rather than dropping the iPhone 5's price and keeping it in production. This move would be positive for Apple's gross margin and would probably help Apple return to solid profit growth beginning this summer.

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Read/Post Comments (20) | Recommend This Article (9)

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 April 09, 2013, at 12:11 AM, jordanwi wrote:

    Nope.

  • Report this Comment On April 09, 2013, at 1:03 AM, TimKnows wrote:

    They have huge unsold inventory of that dog of a phone. They have to dump that loser and move on. Trouble is, they also have the oldest OS in the world and man is it boring. Apple is in big trouble.

  • Report this Comment On April 09, 2013, at 1:20 AM, Rockthebest wrote:

    Who cares about the rest.

    Blackberry z10 in da houze.

  • Report this Comment On April 09, 2013, at 2:28 AM, ariesmah wrote:

    impossible...

  • Report this Comment On April 09, 2013, at 3:09 AM, Godzilla23 wrote:

    iPhone 5 has been THE MOST popular Smartphone EVER. Apple broke all Smartphone sales records with it, EVEN WITH it being sold out for months. It absolutely crushed the overrated, overhyped POS plastic Galaxy S3, even while being off the shelves for months as demand outstripped supply.

    If it bows out, it sure will gracefully. Fortunately its gorgeous exterior and hardware quality will live on with the evolutionary update from it. iOS is still by far the best OS out there, however Jony Ive's revolutionary upgrade of it will be very exciting to see and use.

  • Report this Comment On April 09, 2013, at 3:12 AM, sbmhome2 wrote:

    This article is flawed.

    Yes the iPad 3 was replaced with the iPad 4 after about 7 months, but its ONLY to bring it in line with the rest of the iProducts to use the new lighting cable. They took that opportunity to also speed it up, but the main reason is the lighting cable.

    There is no reason the keep the iPhone 4, as it is getting to the point of being too slow for modern apps.

    Also, I'm sure they want to start getting people off the 3.5 screen.

    So I say they MAY get rid of both the 4S AND the 4.

    iPhone 5S $199

    iPhone 5 $99

    and possibly introduce a cheaper polycarbonate w iPhone with the 4" screen for free OR just keep the 4S for free.

  • Report this Comment On April 09, 2013, at 3:18 AM, sbmhome2 wrote:

    I agree with GodZilla. IOS is by far the best OS. Sure Apple puts more limitations than Android. But I'll take that over malware, buggy, choppy (yes even with jellybean and quad core processors android is still not buttery smooth like iOS).

    I've owned android phones in the past and EVERY one of them would require reboots every day or two and towards the end of its life multiple times a day.

    I've rebooted my 4S maybe TWICE in one year!

    My five I've rebooted about 4 times since I got it in JAN.

  • Report this Comment On April 09, 2013, at 3:34 AM, killinit wrote:

    OR, they can just price the 5 at $149

  • Report this Comment On April 09, 2013, at 4:14 AM, rhegde wrote:

    Blackberry Z10 .. bwahahahaha ... that was a sorry ass launch. Anyways Blackberry is cooked .. and done. And changing the company from RIM to Blackberry... was like putting lipstick on a pig.

    iPhone 5S will be the final nail in blackberry's coffin.

  • Report this Comment On April 09, 2013, at 8:53 AM, Michelinanana wrote:

    Some of these apple fan boys are just so arrogant, to a point it is laughable. iOS the best OS? Ahahahahahahahahahahahahahahahahahahaha

  • Report this Comment On April 09, 2013, at 9:04 AM, WaxRevenge wrote:

    sbmhome2; you should have a play with the Windows phone if you appreciate smooth OS's. It's easily on par if not better than iOS in my opinion since it's also hardware accelerated like the iPhone (something Android is not)

  • Report this Comment On April 09, 2013, at 9:05 AM, TMFGemHunter wrote:

    @sbmhome2: I don't quite understand your logic. The iPad2 and iPhone 4/4S were left on the market despite the fact that they don't use the lightning connector. Why did Apple keep the iPad2 around instead of dropping the price of the third generation iPad to $399?

    The only explanation that makes sense to me is the cost of goods sold. iPad3 was not going to be very profitable at a $399 price point, while cannibalization of the fourth generation product would have hurt a lot. I don't have any inside sources telling me what Apple is going to do with the iPhone 5, but to me the situation seems analogous.

  • Report this Comment On April 09, 2013, at 9:22 AM, zepdetox wrote:

    That's the right decision, keep 4 and 4S with no 4G and replace the 5 with 5S...right..talk about business stupid!! Here's an idea get rid of 4 and 4S, make 5 your entry level and release a new phone...oh and one more thing, drop the price.

  • Report this Comment On April 09, 2013, at 9:35 AM, newbietech wrote:

    "don't expect the iPhone 5S to boast any life-changing upgrades"

    The one life changing upgrade I keep hoping for iPhone to get is drastically longer battery life.

    In terms of battery life, the iPhone is already one of the best but now they need to do better.

    It is long past time for Apple to go 'pro' and change that 8 hour promised Internet use time to 12 or 15 hours, if not more.

  • Report this Comment On April 09, 2013, at 11:56 AM, TMFGemHunter wrote:

    @zepdetox: There's no way it would make business sense for Apple to drop the iPhone's price. That would devastate Apple's profit margins, and could only be justified if it would allow Apple to relatively quickly double its market share. I don't think that making the iPhone 5 available for $400-$500 would boost sales to that extent.

    While Apple didn't give a full breakdown, most estimates are that Apple sold about 20 million units combined of the iPhone 4 and 4S in the fall quarter. Why would you want to discontinue phones that are still selling well?

    Adam

    P.S. Another reason to keep at least the 4S around for a long time is that some people actually prefer the smaller form factor.

  • Report this Comment On April 09, 2013, at 1:03 PM, WillT82 wrote:

    This is NOT GOING TO HAPPEN

  • Report this Comment On April 09, 2013, at 2:02 PM, stp47 wrote:

    Everybody keeps speculating on and predicting the demise of Apple and/or one of its products and also keeps overlooking the number one reason Apple refuses to comply: Their devices just work better! Trouble free for years! No tweaks or fiddling required! Turn it on and go! And YES, people are willing to pay a little more for that luxury.

  • Report this Comment On April 09, 2013, at 2:31 PM, mxc357 wrote:

    You guys are all noobs iPhones were developed for the computer illiterate. iPhone sales are weak. Samsung S3 dug the hole and now Samsung S4 is going to bury Apple. For those comments of rebooting your Android are lies had my S3 since launch and still not a reboot. One thing about iPhones is the iPhone3 and the iPhone5 are no different. Same Crapple different day.

    Samsung = Innovation

  • Report this Comment On April 09, 2013, at 6:01 PM, TMFGemHunter wrote:

    @mxc357: 1) Yes, iPhones were developed for the non-computer literate. 2) No, iPhone sales are not weak. 3) S4 will have little to no impact on iPhone market share.

    Samsung makes great products. I don't have any beef with you on that. But you're just as wrong as the extreme Apple fans in your inability to see the merits of other device makers/platforms.

    Adam

  • Report this Comment On April 10, 2013, at 3:33 PM, BlackBerryGreat wrote:

    Now that the SUPERIOR Z10 is out, the iPhone 5 is history. It is a total piece of crap as it is. Everything Apple makes is a ripoff. The Z10 runs circles around it. Blackberry is the new Apple. Blackberry is ready for the future, and Apple is a blip in the rear view mirror.

    @InfoThatHelp: You are a total moron. Everyone is laughing at you. The reality is, Blackberry is destined for greatness, and Apple is going away. The Z10 IS BY FAR THE BEST PHONE AROUND. It blows away the iToy, and the S4. You know nothing about technology. You have absolutely no clue at all. Everyone comments on how stupid you are. It's no wonder you are unemployed. No one wants to hire an imbecile like you. You have no friends, no job, no life, no future. Give it up and go away. You are not wanted here or anywhere loser!! Blackberry will be at $100 within a year, and I will be even richer than I am know. And you will still be broke. LOLOL

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