A Bullish Case for the So-Called iPhone 5C

Lately, rumors of a low-cost iPhone seem to surface daily. It even has a rumored name: the "iPhone 5C," according to Nowhereelse.fr. As the once scant rumors suddenly take the shape of a rising wave, pondering its potential existence is time well spent for long-term shareholders. After all, a low-cost iPhone seems like a definite departure from Apple's (NASDAQ: AAPL  ) typical product strategy. How will it affect the company?

The rumors
Most of the rumors are photo leaks containing pictures of a plastic-backed iPhone with multiple colors for customers to choose from. One recent rumor, however, took a different form. Recently, a Pegatron employee described a day at work in a China Labor Watch report, saying he or she was working on an iPhone's plastic back that "will soon be released on the market by Apple." His or her descriptions are surprisingly detailed, echoing the description of the rumored low-cost iPhone. It was this detailed description from an official labor watch report in China that has me finally accepting the idea that Apple may soon introduce a low-cost iPhone.

The typical photo leaks contain plastic-backed iPhones like the ones in this photo from Nowherelese.fr that MacRumors highlighted:

Alleged low-cost plastic iPhone. Source: Nowhereelse.fr.

Why?
Though the low-cost iPhone is still nothing but a rumor, Apple CEO Tim Cook seemed to indirectly address the reasoning behind its potential future existence in the company's most recent earnings call.

In Seeking Alpha's transcript of the earnings call, Cook elaborated on the benefits of the more affordable pricing the iPhone 4 allows Apple to offer customers:

[W]hat we have seen is that the number of first-time smartphone buyers that the iPhone 4 is attracting is very, very impressive. And we want to attract as many of these buyers as we can. ... I have referenced on last quarter's call, and we did that on a wider-spread basis, offered the more affordable pricing on a wider-scale basis this quarter and continued to be very happy with what we saw. ... [W]e are really happy to provide an incredible high-quality product with iPhone 4 running iOS 6 to as many first-time smartphone buyers as we can. And I think it's proven to be exactly a great product for that buyer.

Cook & Co. seem very impressed with the first-time smartphone buyers a low-cost option is able to attract. And Cook never fails to remind critics of company's halo effect and its customer retention that often creates loyal, lifetime customers out of its first-time buyers: "[I]t's a great way for a buyer to get into the iOS ecosystem and the customer set ratings that we have with iOS 6 and the stickiness of the platform is huge."

New, lifelong customers -- a lot of them. That's Apple's goal. That's why I think Apple would introduce a low-cost smartphone to its product lineup.

Frankly, I think it's an excellent idea. I don't expect my opinion to be greeted by a cheery consensus, but customers have spoken: The iPhone experience, the iOS ecosystem, and Apple's plush line of complimentary Apple products keep customers coming back.

Retention is Apple's strongest weapon. The sooner it can persuade new customers to join its loyal following, the longer it has to profit from them. Why not? Customers love the iPhone. Apple should give it to the world and reward shareholders while it's at it.

But won't margins plummet? Not necessarily. "[W]e are laser-focused and working hard on some amazing new products that we will introduce in the fall and across 2014," Cook said in the company's third-quarter earnings release. Yet it predicts no sequential margin decline whatsoever this quarter.

Morgan Stanley analyst Katy Huberty seemed surprised: "[A]s you mentioned in the press release today, new products will ship this fall, and historically, gross margins do come down in a product transition quarter, but that's not reflected in your outlook."

The low-cost iPhone must not be planned to launch during the quarter then, right? Not necessarily.

Maybe Katy wasn't surprised. Maybe she was trying to prove a point. In a June report she asserted that a low-cost iPhone could actually boost the company's overall gross margin. How? Even if the low-cost iPhone offers a lower gross profit margin than its premium-priced counterpart, its gross margin is likely to be higher than the company's overall gross margin. In other words, the iPhone is by far Apple's most profitable product; if it can sell more iPhones that have a higher average gross profit margin than Apple's other product lines, the company's overall gross profit margin could benefit.

Bring it on
As an Apple shareholder, I'm ready for Apple to introduce a low-cost iPhone.

What do you think? Are the rumors true? If so, do you think it will help or hinder Apple?

Though a low-cost iPhone could certainly boost Apple's revenue and maybe its EPS, it will take a new category to launch the company back into game-changing territory. If you're interested in Apple, why not read about the future of Apple in The Motley Fool's free report, "Apple Will Destroy Its Greatest Product"?


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  • Report this Comment On July 31, 2013, at 10:48 PM, Thompr97 wrote:

    You said:

    "After all, a low-cost iPhone seems like a definite departure from Apple's (NASDAQ: AAPL ) typical product strategy."

    Why do people keep saying this!?!?

    iMac: lower cost Mac

    iPod Nano: lower cost iPod

    iPad Mini: lower cost iPad

    Now if people had called this a departure from Apple's current iPhone strategy, that would be true. But it would be right in line with Apple's "typical" product strategy. In this regard, it is the iPhone that has an "atypical" Apple product strategy. Time to correct that and bring in more revenue overall. (Margin as percentage can go down, as long as net goes up. That's really what matters at the end of the day.)

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