Rumors that Apple is working on a cheaper version of the iPhone — dubbed the iPhone mini — got a bit of a boost last week when Morgan Stanley analyst Katy Huberty commented how a lower-priced iPhone made sense.
At the core of Huberty's argument is the fact that Apple wants to expand into China, and Chinese consumers want access to the latest version of the iPhone at a lower price, rather than discounted older generation hardware. Huberty believes that an iPhone mini would help Apple gain a stronger foothold in China.
While an iPhone mini would have lower gross margins, and certainly cannibalize iPhone sales to a certain, albeit unknown, degree, it would boost the company's revenues and profits.
But how much cheaper could Apple make an iPhone mini? Let's take a look at a few options open to Apple.
Cut profit margin on existing hardware
The iPhone commands a huge profit margin, estimated to be anywhere between 35 and 50 percent. I find it unlikely that Apple sell the iPhone cheaper in China than anywhere else in the world.
Release an iPhone mini based built using last-generation technology
While Huberty said that Chinese consumers want the latest version of the iPhone at a lower price, rather than discounted older generation hardware, repackaged older tech might fit the bill. After all, Apple doesn't focus that much on hardware spec, so old-tech packaged in a new shell could pass for new tech.
A new, cheaper iPhone 5
Another possibility would be to for Apple to come up with a cheaper iPhone 5. An IHS teardown of the handset from September 2012 suggested that a 16GB iPhone 5 with a price tag of $649 cost Apple $207 to make.
That was a few months ago, so chances are the iPhone 5 now costs Apple less to make, thanks to falling component prices.
It's also possible that Apple could shave a few bucks off certain components. Processor, the display and touchscreen assembly, and wireless chipsets could all see few bucks shaved off the price.
Stick cellular capability into the iPod touch
The iPod touch retails for $299 for the 32GB model. This could be an ideal platform from which Apple could build a cheaper iPhone.
So, Apple has options open to it. But no matter what route the company takes in China, if it decides to come out with a cheaper iPhone then it will need to carefully address the issue of cannibalization. A cheaper iPhone will need to be inferior in some way to the full-priced iPhone. Either that, or Apple could limit availability of the iPhone mini to certain territories.
An iPhone mini would certainly be disruptive, but Apple would need to be careful not to disrupt its already profitable business in order to expand, and potentially pull in more money.