Plus, some people just don't like the bigger phones. I have a hard time seeing Apple writing them off entirely.
When the iPod touch was announced this morning, I had an interesting exchange on Twitter with someone who wondered about the price disparity between the new iPod touch and the iPhone.
The new iPod touch costs $199 for a 16GB model. In contrast, the iPhone 5s costs $549 without a contract. That's a $350 difference for a device with the same screen and storage, albeit with support for Touch ID and cellular data. Apple currently charges a $130 premium for the cellular-capable model of the iPad, and while that's not a perfect comparison--iPads are data-only devices and are rarely subsidized--let's use it for a back-of-the-envelope calculation and assume we've still got $220 to account for.
This is the trick with guessing what Apple products "should" cost. It's not all about the cost of the parts, or even the R&D--sometimes it's about the market for the product. The iPod touch isn't a cellular device. It can't be used as a phone. If you want to roam with an iOS device you can fit in your pocket, you need an iPhone. (This is undoubtedly why there's no cellular model of iPod touch as there is for the iPad--if you could get a cheaper, data-only iPod touch, why get an iPhone?)
The demand for smartphones is vastly greater than the demand for iPods. People are willing to pay more for smartphones because they're incredibly useful. The price of smartphones is also hidden, at least in the U.S., by the subsidies offered by carriers. If you just look at the price tag and don't consider the monthly fees, the 16GB iPod touch and the 16GB iPhone 6 cost the same: $199. That doesn't accurately reflect the total cost of owning those two devices, which is drastically different, but who ever said that consumer buying psychology ever made sense?
My guess is that there will be a new 4-inch iPhone this fall. It might look more like a small iPhone 6, or it might take a cue from the new iPod touch and remain exactly the same on the outside, while being completely different internally. But will it be a "cheap iPhone?" I doubt it. More likely, it'll be outfitted with last year's iPhone 6 technology and fill the slot that's one step down from whatever replaces the iPhone 6. In the U.S., that would be $99 for 16GB with contract, or $549 unlocked. Cheaper than the other new iPhones, yes--but not cheap.
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