The Cheap iPhone Vs. the Cheaper iPhone

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With all of the hype that Apple (NASDAQ: AAPL  ) has gotten surrounding the potential release of a "cheap" iPhone, it's easy to overlook the fact that older versions of the current iPhone -- the iPhone 4 and iPhone 4S -- are available at reduced prices.

When The Wall Street Journal reported that the company would release a less costly version of the iPhone -- likely to have a plastic shell and be available in multiple colors -- the concession to drop a portion of its premium image and compete in the emerging markets was widely applauded. More concretely, Verizon (NYSE: VZ  ) reported that it sold roughly 2 million older-model iPhones. Ultimately, having both options could be a big win for Apple, even though the two devices serve very different purposes.

Source: Apple.

The Verizon numbers
At its last earnings release, Verizon reported that of the 7.2 million smartphones activating in the first quarter, 4 million were iPhones. Of the Apple smartphones activated, half were iPhone 5s and half were older models. The numbers look favorable for Apple, depending on your perspective. In one sense, on a year-over-year basis, Verizon saw a 25% increase in first quarter iPhone activations -- in the first quarter of 2012, Verizon activated 3.2 million iPhones.

The less promising news is that the decline on a sequential basis -- 6 million iPhones in the fourth quarter of 2012 to 4 million -- was larger than expected. While last quarter saw the release of the iPhone 5, the most popular iPhone yet, many had hoped the numbers would have been stronger into this year. Furthermore, the ratio of iPhone 5 activations versus older versions remained fairly constant across both quarters.

The cheaper iPhone is coming
According to Piper Jaffray's Gene Munster, when Apple CEO Tim Cook said new products would come online in the fall, the "low-cost iPhone" will be among those products released. This should prove to be a critical device for the company, because it will allow Apple to become more competitive in China and emerging markets. Currently, Google's (NASDAQ: GOOGL  ) Android is the dominant operating system -- largely through Samsung hardware -- but Nokia (NYSE: NOK  ) Lumias running Microsoft (NASDAQ: MSFT  ) Windows are starting to gain traction.

In its most recent release, Nokia reported a 27% increase in sales of its Lumia WPs. IDC's Francisco Jeronimo said: "They are trying to compete on the segment where consumers are moving from feature phones to smartphones, but they want cheap smartphones." While IDC places Google's global market share at 70.1%, the growth that Nokia is achieving is coming largely in markets that Apple has left untapped. The new, cheaper iPhone will target this segment and give Apple a potential new source of growth.

Cheap versus cheaper
A distinction commonly missed when making this comparison -- many in the blogosphere have commented that older iPhones are the lower-cost smartphones Apple needs -- is that older versions of the iPhone are only inexpensive in the United States. Given the significant subsidies American wireless providers offer, older iPhone models are often $99 or even free with a qualifying service contract. Overseas, this is not the case, and older models of the iPhone may still be well beyond the affordability range of many consumers. These are the subscribers at whom the new cheaper iPhone is aimed.

If your reaction is "well, duh," the importance of this distinction should not be minimized. Given the reality that most users may prefer the premium look and feel of an iPhone 4S to a plastic iPhone, Apple should be able to maintain its premium image at home. There will be no need to limit the sale of the cheaper iPhone to emerging markets, because demand should take care of that distinction. You should expect to see the cheaper iPhone on U.S. shelves -- the multiple colors and "newness" may appeal to some consumers -- but why buy a plastic iPhone when a 4S is available?

What about LTE?
One point of differentiation that may draw U.S. users to the new iPhone Lite is that it will presumably offer LTE connectivity. While this is a likelihood, it is not a certainty, as much of the consumer base that Apple is chasing in still on 2G and LTE is not available. Of course, as soon as Apple releases the iPhone 5S -- as is expected -- the iPhone 5, which has LTE, will fall in price. The approach Apple takes to pricing both the new iPhones and older versions will shed light on the company's strategy. Overall, these developments should be considered positive developments for Apple and favor an investment at current levels.

There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, 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.

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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 April 30, 2013, at 2:18 PM, tychicum wrote:

    I paid more for on oil change last month than I did for my last iPhone. Me thinks who ever can't afford an iphone get an Obama phone ...

  • Report this Comment On May 02, 2013, at 6:21 PM, RadarTheKat wrote:

    "Given the reality that most users may prefer the premium look and feel of an iPhone 4S to a plastic iPhone, Apple should be able to maintain its premium image at home. "

    Not sure this factors into the equation. Most folks slap a case on their iPhone 4/4S to protect it from shattering the glass which is on both front and rear, so they are covering up that premium look and feel as far as the shell is concerned. The real premium look and feel people are looking for, and find with any iPhone, is the user experience that comes with interacting with the phone (I.e. the stability and attractiveness of the OS, availability of apps and content, etc). That same experience will be available in a less expensive, plastic package, should this be the direction Apple goes.

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