3 reasons Apple would make a new cheap iPhone

(MoneyWatch) The latest Apple (AAPL) rumor is of a new low-end iPhone that would look like other models but have a cheaper body. Of course, Apple has a de facto line of inexpensive iPhones; the iPhone 4 is being given away by carriers, while the 4S starts at $99. But this would be a low-cost current version rather than giving a price break on a phone that is one or two models back.

Rather than some brilliant forward-looking strategy that no one had ever considered (price competition is an old standby competitive tactic), Apple is reacting to the combination of Android competitors, the market in China, and the threat to carrier hardware subsidies that threaten the iPhone, the cornerstone of its profitability and market power.

• Apple stock spanked for low iPhone 5 sales
• More iPhone 5 problems: Scuffed out of the box
• iPhone 5: Not that innovative, but hot, hot, hot
• Also-ran T-Mobile gambles on new strategy

The most obvious factor that threatens the iPhone is the bevy of Android models available. Some estimates put Samsung's unit smartphone sales far ahead of Apple's, at 62 million versus 45 million. And although Samsung seems to be the leader in Android phone sales, it's hardly the only vendor. As a result, three out of every four smartphones sold in the third quarter of 2012 was based on Android.

China

The problem for Apple is that people are increasingly turning away from iPhones, and not just because of price. Carriers offer top Android phones for about the same price as Apple products. However, there is a broader range of Android smartphones, many of which cost significantly less than iPhones. That is particularly important in emerging markets, where consumers are often significantly more price sensitive than in the U.S. or Europe. Without a way to address such markets, Apple will continue to fall behind.

This is particularly true in the giant market of China. Yes, there's been good adoption of Apple products in that country, and yet the potential market is much larger. If the company doesn't take appropriate steps, which means a relatively inexpensive model phone that doesn't seem like someone else's leftovers, it will lose an important chance to sustain the growth that maintains its stock price.

Death of the carrier subsidy

Wireless carriers have been visibly unhappy over subsidizing handset sales to consumers, particularly when having to pay a premium for the iPhone. T-Mobile has announced that it would end subsidies. Now AT&T (T) and Verizon Wireless are considering the idea.

Even if they don't completely abandon subsidies, it would only take a decision to limit the total they pay to throw a big wrench into Apple's well functioning money printing press. Either consumers would suddenly see a big difference in price that was never obvious to them in the past, or Apple would have to significantly cut price, and profit, to stay competitive. A new model might offset the problem, particularly if Apple could cut prices on the new model and still make the same amount of profit.

Image: Flickr user Yutaka Tsutano

[Marc Jellinek]

Steve Jobs must be rolling in his grave. I guess this is what Apple is going to be like under Tim Cook.

If Jobs were still alive, he'd remind Cook (and Wall Street) that the last time Apple tried going the high-volume, low-price route (under Scully, Spindler, Amelio), it nearly destroyed the company.

He'd point out that other great American brands that have gone this route (Sears, JC Penny) are currently in search of a brand identity and profitability.

Jobs made a career out of defying (not listening to) Wall St.

A music player in a market saturated by cheap MP3 players and struggling with bad relationships with publishers due to massive piracy? Bad move.

A handheld computer/"smart phone" where the market is already owned and saturated by a well funded, highly profitable competitor (RIM) with deep carrier relationships? Add in failures by Compaq/HP and Palm (oddly enough, now all owned by HP), souring VCs interests in the market. Insanity.

Buying a marginally profitable computer animation house (computer graphics division of LucasFilm) when the largest consumer of animation (Disney) has repeatedly passed on computer animated films? Quit sniffing your own fumes! (Oddly enough, Disney, would bought Pixar, now owns the rest of LusasFilm)

Opening retail outlets when the largest reseller (Circuit City) is bleeding money and on the edge of bankruptcy while website that sell technology (amazon.com, cdw.com) are exploding? While even vendors like HP, Dell and IBM are moving to online sales/e-commerce models? Are you smoking crack?

CEOs start listening to Wall Street when they run out of ideas of their own. This does not bode well for Apple.

[eriksherman]

I think Apple is caught by the expectation and demand (externally and internally) of constant growth. Eventually markets get saturated, which is a big driver of globalization. But the realities of consumer spending in Asia are far different, and you can't necessarily use the same strategies that worked in the U.S.

[sailjammer]

The washed sophisticated upper class people are the exact ones who are killing the US economy. Its because the greed for profits and lack of respect for the worlds ecosystems we will continue to decline as a race globally.

[yutubenut]

To be fair Steve Jobs was never interested in selling to the poor, unwashed masses. His market is the upper 15% who have the good taste, intellect, and most importantly money to appreciate his genius (yes sarcasm). He sells Rolls-Royce's not KIAs. His attitude was if you're sophisticated enough to "get it" you can afford, and don't mind paying for quality. If you don't like Apple products Jobs didn't try to lure you in with a cheap entry level device and price. His thinking was you would, after trying the others, see things HIS way and join the Applverse. If not, no loss, good riddance. Apple's continued growth depends not on a bigger slice of the pie but a bigger pie. The world market is growing, China 1.3B people, India 1.2B, almost 35% of the world's population between those two countries and apple has barely started into those markets. All of the Americas and Europe, just 1.3B. The rapidly rising economy of China and India is a market that will dwarf the rest of the world.
The hardware side of smart phones are becoming ubiquitous, all smart phones can do the same thing. What will sell phones is software related, simple, easy to use, and useful. As long as some people perceive a desirable difference they will pay a premium. If Apple's fat profit margin is such a negative; would more phones at razor thin margins, be a positive?

[eriksherman]

I absolutely agree that Apple was interested in upscale marketing. However, the problem is how publicly-held firms deal with Wall Street. In high tech, it almost always means a focus on growth.

Selling cheaper phones at thin margins would be bad for Apple's long-term strategy. However, if Apple could bring down the cost enough, it might not lose much margin and could still show the growth that investors expected.