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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.

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.


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

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