Don't Do It, Apple


There never seems to be a shortage of sources proclaiming what Apple will do next.

It's not just the inevitable full-blown HDTV, either. Reports have tied Apple to everything from wristwatches to automobiles.

As the mother of all aspirational brands, if it's something electronic that can be sold at a premium, it's just a matter of time before speculators get going.

However, yesterday's report about Apple considering a cheaper iPhone didn't come from a blog or bubble up in a Mac user forum. The Wall Street Journal is reporting that the world's most valuable tech company is working on a cheaper iPhone that may roll out as soon as later this year.

The financial daily is leaning on more than just one person briefed on the matter.

Plastic posturing
How does Apple go about making a cheaper iPhone? Well, Apple can always sacrifice margins to match industry markups, but where's the fun in that? The stock would get crushed if Apple decided to desperately slash prices.

A possibility being considered -- according to the Journal's sources -- would be to replace the costly aluminum housing with significantly cheaper polycarbonate plastic.

This would be a big mistake. Apple's brand would take a hit if it was putting out inferior products. It also wouldn't make that much of a pricing difference.

Apple doesn't necessarily have a pricing problem here. Wireless carriers pay hundreds to Apple for every iPhone that they sell, knowing that they can make that back over the course of a two-year contract. A new iPhone at $199 isn't a deal breaker. However, though most of the world, where unsubsidized iPhones approach $1,000 apiece, price is a factor.

This wouldn't matter if Apple was gaining market share, but it's not. Google's Android -- led by Samsung -- is cornering the market. Apple will get a bounce once the holiday quarter numbers are out, but industry tracker IDC reports that Apple's smartphone market share peaked at 23% early last year. Its worldwide reach was down to just 14.6% during last year's third calendar quarter, though Apple's popular iPhone 5 hit the market at the tail end of the reporting period.

Despite Microsoft throwing billions to get Windows Phone off the ground and buzz building for Research In Motion's BB10 rolling out later this month, they aren't threats to Apple. Android is the biggest nemesis to any mobile operating system maker, and the platform's open-source ways makes it too magnetic to developers that can put out aggressively priced handsets without having to shell out stiff licensing fees.

Cheap is a state of mind
Apple has more to lose than gain if it tries to dent Android on price.

For starters, its devices will never be as cheap as comparably equipped handsets. Apple can't afford to squeeze its margins at a time when several analysts have been lowering their price targets on the stock, fearing that the class act of Cupertino will do exactly that.

What if Apple is able to put out a plastic phone? What if it decides to price it aggressively? What if customers gravitate to it in lieu of the higher-margin traditional Apple smartphones? Apple loses.

If the cheaper iPhone is a hit, the move also unlocks the survival instincts of its hungrier competitors. Microsoft knows how important it is to make a difference in mobile. It will write Nokia a blank check to keep dirt-cheap Lumia devices coming. RIM is even more desperate. Keep in mind that this is the same company that slashed the price of its $499 Playbook tablet by 60% when it wasn't selling. Nobody wants a price war, but everyone has a history of packing heat.

There's another scenario, of course. Let's call it the iPad Mini tightrope act. Apple was able to put out a smaller iPad at $329 late last year, apparently without cannibalizing the full-sized and full-priced $499 iPad. Shrinking component costs and scaling back on some features made it work. What if the plastic iPhone is more along the lines of an iPhone 4 or even a 4S?

Well, Apple would lose there, too. It would be a credibility hit. The perceived quality of Apple products would take a hit. We also have to keep in mind that Apple was able to pull off the iPad Mini because the iPad remains the tablet of choice. Samsung is selling a lot more smartphones worldwide than Apple is these days.

Taking the high road
There's nothing wrong with sticking to its knitting. Who cares if Apple never wins back more than 20% of the smartphone market. As long as it reaches the affluent 20% -- the folks that actually buy apps and are attractive to marketers -- Apple doesn't need to be the smartphone for the masses.

In fact, it's better if that never happens.

Apple became the country's most valuable company with a sliver of the smartphone market and an even smaller slice of the computing market. Apple isn't broken, though the same probably can't be said about that polycarbonate plastic shell the next time the iCheap drops.

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Longtime Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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