Why Apple doesn't need a cheaper iPhone

Why Apple doesn't need a cheaper iPhone

Summary: Rumors are circulating that Apple has a cheaper iPhone in the pipeline that is based on older technology. But does Apple really need to start slashing prices in order to keep Android at bay?

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Smaller iPhone. Larger iPhone. Cheaper iPhone.

I don't know if it's the time or year or the absence of real news, but there's been a flurry of iPhone related rumors over the past few days. The debate over the smaller/larger iPhone has, in my opinion, been answered by the 4-inch screen of the iPhone 5, but speculation that Apple could be working on a cheaper iPhone is interesting. But, can Apple develop a cheaper iPhone and still pull in huge profit margins the company is used to?

The rumor that Apple has a cheaper iPhone in the pipeline started life on DigiTimes, a site that has been patchy with regards to the accuracy of its reporting over the years, but which does seem to have decent supply chain sources. The rumor was then given more credibility when it was later picked up by the Wall Street Journal.

Citing "people briefed on the matter," the Journal suggests that Apple could manufacture a cheaper iPhone by using a shell made of polycarbonate plastic as opposed to aluminum.

Is this really plausible? To try to answer this question, let's take a look at some bill or materials estimates for iOS devices. Let's start by taking a look at the iPhone 5.

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According to analytics provider IHS, an iPhone 5 that has an off-contract price tag of $649 costs Apple $207 to make. Based on these figures, the cost of the aluminum case falls under the "Mechanical/Electro-Mechanical" category, which comes to a total of $33. Given that this includes not just the case but cabling and ancillary components, switches, buttons and so on, the cost of the case itself can't be that much.

This means that substituting polycarbonate for aluminum won't shave much off the overall price tag, because it doesn't cost much in the first place. Apple could probably save more money by not including a charger with the iPhone and getting users to charge the device from spare USB ports.

Another suggestion I've seen paraded as a possibility is that Apple could shrink the iPhone, and that this would result in a shrinking of the price tag. Let's take a look at the IHS teardowns for the iPad 3 -- which is close enough to the iPad 4 for our purposes here -- and the iPad mini. A 16GB Wi-Fi iPad 3 which retails for $499 cost Apple $316 to make. Compare this to the 16GB iPad mini, which has a $329 price tag, costs Apple $198 to make.

Put another way, shrinking the iPad from 9.7-inch to 7.9-inch saved Apple $118. A significant saving, partly accomplished by reusing parts such as the processor from other products, but the price tag still means the iPad mini is still a premium brand product.

So, by shrinking the iPhone, and recycling components from earlier devices, Apple could make a cheaper iPhone.

But Apple is already manufacturing -- and selling -- smaller iPhones based on older technology. It's called the iPhone 4, which is free with a service plan, or $450 without, or the iPhone 4S, which is $99 with a service plan, or $549 without.

These older device are already Apple's answer to those who want a smaller, cheaper iPhone.

Given that the iPhone continues to sell really well -- we'll see how good sales were over the last quarter come the next earnings report due January 24 -- it's hard to see a real justification for a cheaper iPhone. A radically cheaper iPhone would undoubtedly cannibalize sales from the higher priced (and higher profit margin) handsets. Analysts are already speculating that the iPad mini is cannibalizing sales of the full-sized iPad, despite the petite tablet being a premium product with a premium price tag.

Throwing a significantly cheaper iPhone into the market could be good for sales, but if Apple tries to boost market share at the expense of profit margins, then it could be interpreted as the Cupertino giant blinking in the face of competition from Android and manufacturers such as Samsung and HTC.

What has happened to the PC market and the associated PC OEMs shows what happens when prices are slashed in favor of market share. This is not a road that Apple wants to start going down. 

Topics: Apple, iOS, iPhone, iPad, Smartphones

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261 comments
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  • Apple already has a lower cost iPhone.

    It's known as the "iPhone 5". All they need to do to make it less expensive is reduce the price and accept lower profit margins.
    ye
    • Yeah, like that's going to happen.

      Besides, that's why Apple still makes the iPhone 4 and iPhone 4S, and the iPad 2, and the iPod Touch 4 - "You can't afford the latest and greatest? No biggie, try this out instead."
      Champ_Kind
      • Doubt it.

        Closer to... "We have some day-old bread we would like to get rid of..."
        hanglide
    • Why?

      Obviously people are willing to pay for it at it's current price point so from abusiness standpoint your sugestion makes little sense. Personally I'd love to see a less expensive iPhone with the latest and greatest come out - but it's not going to happen.
      athynz
      • Quite right

        Why would they? They're selling like hotcakes currently, why devalue the brand and margins when you don't need to.
        Little Old Man
    • Your probably right in so many ways.

      If one is to consider development costs.

      If one is to consider the economy of scale supply benifits.

      If one is to consider the canniblization effect of a single producer making one cheap and one elite product.

      If one is to consider the already stellar reputation of the current iPhone.

      It could easily be that the easiest and by far most profitable path for Apple to increase their market share is to just sell the current iPhone for less.

      No real development costs.
      Improved economy of scale supply costs (if over all sales do increase)
      The canniblization effect can be more easily managed, all you have to reasonably project is sales of the one product for pricing, not two products and predictions of canniblization offsets.

      I could be wrong but this seems like a no brainer. It also avoids the appearance of Apple begining to wander down the road of cheapo products.

      What it does do is put Apple on the road to very good pricing. For some companies going down that road isnt nessesarily the image they want to project either.

      Whats better; a "cheap" product or "cheap" prices. You guess. The public knows, if Apple does or not.
      Cayble
    • Apple is not a brand for ordinary people on earth...

      ...but it's an American religion.
      Matsi66
    • apple phones

      The iphone being expensive helps android out and windows, because they all are around 100$ of each other. Personally if I was in the market for a less expensive phone, I would go to all the in windows phones because Nokia, and htc make really nice midrange phones, and the will only get better. Apple will lose the midrange fight every time. Apple will drag the iphone 5 as long as they can with that price, but there days are running short, I already switched to windows phone and tablet and soon I will get those 20inch phabelts or whatever there called
      gevabar
  • History Repeats Itself

    I remember the early 1990s, when Apple still held some vestige of the technical superiority it enjoyed in the 1980s. It was already losing market share with the popularity of Windows 3.x, but Apple fans kept saying this was no big deal, as long as the company remained profitable.

    But the competition kept getting cheaper and cheaper as it benefited from economies of scale that Apple simply couldn't match. So those fat profit margins gradually became not so fat. And suddenly the company started actually losing money. Make no mistake, Apple was on its last legs, and only a miracle could save it. And one duly appeared, in the form of one Mr Steve Jobs.

    The company is heading back to the same situation again: still profitable, but losing market share. And those profit margins are now starting to be squeezed by the much better price/performance being offered by Android.

    Who will play the part of Steve Jobs this time?
    ldo17
    • Only a fool sees this parallel.

      Given the iPhone market share in handsets has been growing steadily quater after quater. Likewise, Android's market share in the US (one of the most lucrative markets) is in a full blown implosion mode while he iPhone is exploding.
      Bruizer
      • Android market share is imploding?

        I think we've identified who is the fool here.
        ye
        • Yep. Imploding in the US

          http://www.engadget.com/2012/12/21/kantar-iphone-5-boosts-apples-us-smartphone-share-to-53-3-perc/

          As indicated.
          Bruizer
          • I saw nothing about Android imploding.

            Even in the US.
            ye
          • You don't see a significant % drop in market share...

            As imploding? I do. A loss of 10% in YoY is imploding and given the center of Software innovation is heavily US centric, that is a bad market to implode.

            Note: YoY negates the iPhone release dream of the Android cheerleaders.
            Bruizer
          • They picked a 3 month period

            pretty much coinciding with the i5 launch.

            YoY or not, that's pretty selective to be waving the figures around proclaiming implosion of android.

            Nice try though.
            Little Old Man
          • iphone sales this quarter projected to be down 30%

            AAPL really shot themselves in the foot by releasing generations so close together.

            If you don't buy the latest iphone within a few weeks of its launch, do you really want to buy something that's going to be obsolete (or at least nowhere near as cool) within a few months?

            So of course the AAPL fanboys will buy it as soon as it comes out, leading to 1 big quarter, but then sales plummet until the next version.

            BTW, you can't even order a Nexus 4 phone, they were so swamped they just put up a "Sold Out" sign at Google Play. Lucky I got mine the first time around, barely 1/2 the price of an unlocked iphone 5.
            Adam econ Smith
          • Did you just come out of a 6 year comma or something?

            Based on your post you either had to be in a comma, your head in the sand or are absolutely completely clueless. So which is it?

            iPhone projected sales down 30%? Are these your projections or somebody that has been conscious the past few years?

            Apple's new version releases are too close with the iPhone? Are you kidding, they are currently on annual releases though that might change. I think maybe you were thinking of the Android OEMs that release new devices almost weekly.

            So it's only Apple fanboys that buy? That's strange since sales of each new version sets a new record. Guess the fanboy club is growing, bet that really chaps your @ss.

            So the Nexus 4 is sold out, what exactly do you think that means? The only thing it means is they sold what they produced which could be 10 million for 1,000.
            non-biased
          • Seen you do it many times

            Are you saying somebody can only be selective with their figures when they are anti Apple?
            non-biased
          • umm

            That's for a quarter, not overall ownership
            notrozer
          • Different data source, different results

            Bruizer,

            If you read,

            http://www.comscore.com/Insights/Press_Releases/2013/1/comScore_Reports_November_2012_U.S._Mobile_Subscriber_Market_Share

            You'll see different results.

            A second rate marketing firm like Kantar isn't exactly going to move the stock market with its data.

            When the actual sales data comes out, it may get interesting.
            REBERY