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Apple's Brilliant iPhone Surrender

By Doug Ehrman - Apr 4, 2013 at 10:00PM

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This move by Apple has the potential to shake up the global smartphone market and significantly benefit shareholders.

Earlier this week, the Wall Street Journal reported that -- based on the activity of Apple's (AAPL 4.01%) 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 (GOOGL 2.37%) 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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