The Problem With $200 iPhones

Cheaper iPhones may create new headaches at Apple.

Rick Munarriz
Rick Munarriz
Jun 3, 2008 at 12:00AM

We're now a week away from the announcement that will surprise no one. Steve Jobs will step up to deliver the keynote address at this year's Worldwide Developers Conference, and the chances of Apple's (NASDAQ:AAPL) not spilling the beans on the new iPhone are about the same as Big Brown finishing last in its next horse race.

The specs spec -- that's specifications speculation, for those who don't want to bother with my shorthand -- is that the new features will be great. 3G phones would have the ability to surf the Web faster. Greater storage will allow owners to load up on more of their music, and especially video clips. A longer battery life would be great. However, the real clincher here is the persistent rumor that the new iPhones will sell for as little as $200.

$200 for an iPhone? Keep in mind that the rumored $200 iPhone may be an entry-level model. That’s still a third of what the original phones were fetching last summer, and folks were lining up.

If it’s true -- and everyone has been repeating that price since unnamed sources relayed it to Fortune last month -- fence-sitting iPhone watchers are going to jump off for joy. The new devices will sell like, well, Apple pancakes. In fact, they'll sell like iPhones.

Do not touch
Consumers will love it. If exclusive domestic wireless provider AT&T (NYSE:T) takes on the bulk of the subsidized hit, Apple investors may love it.

I get the euphoria, but shouldn't shareholders also begin wondering about the fate of the iPod touch?

If $400 iPhones become superior $200 iPhones, what becomes of the $300 iPod touch? Can Apple realistically expect to sell a device that is essentially an iPhone without handset connectivity and an internal speaker at a higher price point?

It can't, but there is no company willing to subsidize a $200 hit the way AT&T can, because it makes it up through two-year contracts written on flypaper.

One can argue that the iPod touch is a small part of the iPod family. Look up the best-seller list of consumer electronics on (NASDAQ:AMZN), and several iPod classic and nano models are selling more briskly than Apple's Touch.

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However, even some of the chunky classic iPods will be commanding thicker ransoms than $200 iPhones. This is the kind of move that will send ripples through Apple's entire portable media player line, save perhaps for its entry-level devices.

The problem is that Apple doesn't have a problem
It's easy to see why Apple is taking bold pricing steps. Coming through with a pair of $200 price cuts in a product's freshman year may seem desperate, but Apple needs to ramp up quickly. Research In Motion (NASDAQ:RIMM) is no dummy. It's not just watching over a larger subscriber base of 14 million CrackBerry addicts. The new BlackBerry Bold is a smartphone that combines many of iPhone’s top draws -- including iTunes compatibility and a built-in two-megapixel camera -- with the convenience of BlackBerry's finger-jockey keyboard. Nokia's (NYSE:NOK) N81 offers many iPhone features, and has beaten Apple to the 3G punch.

So not only does Apple risk losing its iPod loyalists and alienating the millions that have apparently overpaid for their existing phones, but it’s also laying it all on the line in a very competitive market with some very aggressive rivals.

Is Apple doomed?

Are you crazy? Of course not! If Apple replaces an iPod touch buyer with an iPhone subscriber, Apple will be raking in a monthly bounty from AT&T as well as the usual ear-candy winnings from iTunes it would be getting on the iPod side. You can't be seriously asking if Apple wouldn't want to make as much money as possible from every possible iTunes account.

If this is the end of the iPod touch as we know it, so be it. It served its purpose as a gateway drug to even cheaper iPhone handsets. iPod sales growth was beginning to stall anyway. It's in the company's best interest to grow its base of higher-margin iPhone subscribers.

Apple investors will always be grateful for the iPod. It made the company's computers popular with the mainstream again. Now it is laying itself down for the benefit of handsets. It's not every revolution that gives you the chance to thrill two birds with one stone -- or a $200 iPhone.

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