Is the "Cheap iPhone" Rumor Dead?


There's a lot of buzz flying around how Apple is set to release a lower-cost iPhone destined for developing markets, where carrier subsidies don't help with the sticker shock. On the surface, the move seems logical when you consider Apple's past trajectory. Historically, Apple has released one device and then built a family around it. The iPod family is the classic example, which started out as just the with the iPod classic, and has now grown into three more models. The same thing seems to already be happening with the iPad, given the arrival of the iPad Mini. Investors have turned to the iPhone as the final bachelor to start its family line of products. However, if senior VP Phil Schiller is right, the rumor mill (and some investors) will be likely disappointed.

Not the future of Apple products
According to Schiller, the direction that a cheaper iPhone takes the company "will never be the future of Apple products." He elaborated, "Every product that Apple creates, we consider using only the best technology available." In other words, Apple is happy to remain a premium-products company, one that doesn't want to sacrifice on quality. Schiller also dropped this bomb, "Although Apple's market share of smartphones is just 20%, we own 75% of the profit." If I had to put my money on it, that comment takes direct aim at Google's 75% market share.

Not a race-to-the-bottom kind of company
Apple doesn't sit in its position of power because it beat out competitors on price. The entry-level iPad Mini is the perfect example of how Apple does business in the seemingly lower-end market. It's priced $129 higher than both Google's Nexus 7 and Amazon's Kindle Fire HD, yet it still managed to see its initial usage grow 50% faster than when the Kindle Fire line debuted the previous year. Best of all, Apple sells the iPad Mini at a ridiculous 43% profit margin compared to Google and Amazon. According to iSuppli, the 16 GB Nexus 7 costs Google $166.75 to build, and the 16 GB Kindle Fire HD costs Amazon $174, leaving slim profits.

Just drop the price
If Apple wanted to get aggressive about expanding its market share in emerging markets, all it would have to do is lower the unlocked price of the iPhone 4/4S, which currently sell for $450 and $549, respectively, in the U.S. Considering the iPhone 5's bill of materials rings in at $207 including manufacturing, previous generations naturally cost less to produce. Back in 2010, the iPhone 4 cost $187.51 to produce, making the case for a $300-something unlocked iPhone 4 when the future iPhone 5S comes out. This will allow Apple to keep its premium image, its high profitability, and a chance to increase market share.

But is it really necessary?
I take one look at worldwide Mac penetration and wonder if this is even necessary. Apple is the company that can get away with selling $1,000 computers without blinking twice. And guess what? No one's complaining they're not subsidized. Apple has established itself as the premium computing company. People know their products are expensive compared to the competition. Considering how Apple is among the most profitable companies on the planet, this hasn't been a major detractor to the bottom line. If it were struggling to sell its products, it'd be another story.

However, if we're talking about addressing emerging market concerns, it's a no-brainer for Apple to extend the life cycles of its products. As new products are introduced, previous generations become more affordable, which in the end could become the way Apple dominates emerging markets without anyone even noticing.

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Fool contributor Steve Heller owns shares of Apple and Google. The Motley Fool recommends, Apple, and Google. The Motley Fool owns shares of, Apple, and Google. 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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