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Apple faces tough choice on cheaper iPhone

Gregg Keizer | Jan. 11, 2013
Renewed talk of a cheaper iPhone shuffled into view this week, with sources as varied as the spotty DigiTimes to the more mainstream Wall Street Journal and Bloomberg claiming Apple will enter the low-price fray this year.

Gold argued that Apple needs lower-priced new smartphones to stay competitive, to protect its decreasing share of the smartphone market, and to sustain its high rate of both sales and revenue growth.

"Apple needs to be more competitive with [rivals'] low-cost devices, particularly in emerging markets," Gold said. "They haven't done nearly as well from a market share perspective in emerging markets."

Apple and other smartphone makers have been able to keep out-of-pocket prices relatively low -- the iPhone 5 starts at $199 -- by convincing mobile carriers to heavily subsidize the hardware. A non-subsidized iPhone 5, for example, costs $649.

Neither Gold or Gottheil believed that large subsidies are sustainable over the long run, another reason why a less-expensive iPhone is not only smart, but eventually a necessity.

The subsidy wall already has one crack: In the U.S., T-Mobile plans to start selling the iPhone this year, but will not subsidize the phone. Instead, T-Mobile will tempt buyers with no-contract, unlimited data plans. A less-expensive iPhone would make T-Mobile's job that much easier.

Gottheil's biggest objection to a quick appearance of a low-priced iPhone didn't stem from a vastly different read of the landscape, but because he doesn't believe Apple could crank out more phones than it does now.

"I think Apple does want to have a larger share of the smartphone market," Gottheil said. "They don't want to be a specialized niche player. That almost killed them in personal computers. But I don't think they're ready to [introduce low-priced iPhones] now. They would have to have an entirely new supply chain with higher capacity."

Apple only recently managed to reach a balance between supply and demand for the iPhone 5, which went on sale in late September. Gottheil reasoned that a lower-priced iPhone, whose success would rely in large part on volume sales, would be beyond Apple's current production capacity.

Bloomberg said its source had pegged the retail price of a cheaper iPhone at between $99 and $149, but analysts dismissed that range as too low.

Brian Marshall, a Wall Street analyst with ISI, said Apple would be much more likely to price a new iPhone for emerging markets at an average sales price (ASP) of $300. "Basically half of current iPhone ASP," said Marshall. "The key is maintaining 40-45% gross margin, versus 50-55% gross margin on the iPhone 5."

Gottheil named the same $300 price point, but Gold figured if Apple went in for a penny, it would for a pound. "They have to hit all the price points," Gold said, noting three ranges: under $100, between $100 and $250, and above $250. "They could reduce the [manufacturing cost] by using a small display with lower resolution and lower memory," Gold added. "But there would be compromises."


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