Apple may be able to build a cut-rate iPhone for $144, which would let it price the device between $299 and $349, hundreds less than the unsubsidized price tag of its flagship smartphone, an analyst said today.
A lower-cost iPhone would be a major strategic shift by Apple, which has rigorously held the price line, and may signal that it believes real growth will be found only in emerging markets, said Sameer Singh, who covers the mobile industry at his Tech-Thoughts blog.
"I think the primary driver would be their position in emerging markets," said Singh in a Thursday email reply to questions.
In a Jan. 14 post, Singh assembled a rough estimate of what it might cost Apple to assemble a lower-priced iPhone. His total, including manufacturing costs, came to $144.03.
By comparison, other BOM calculations by the likes of IHS iSuppli have pegged the BOM, including manufacturing, of the lowest-priced iPhone 5 at $207, indicating a 30% reduction in Apple's cost if it did pull the trigger on a less-expensive smartphone.
Singh made numerous assumptions about the hypothetical handset -- which he, like others, tentatively dubbed "iPhone Mini" in a sop to a frequently-used Apple naming convention -- including a 3.5-in. display, 8GB of storage space, the same processor and camera as used in the successful iPad Mini, a plastic rather than metal case, and the omission of support for faster LTE, or 4G, data networks.
"This is not a BOM estimate nor my prediction of the iPhone Mini's cost structure, but a rough estimate of how far Apple could realistically bring down product costs," Singh wrote in the Monday post.
Many of his component assumptions were based on the idea that Apple would reuse parts it has worked with in the past, such as a 3.5-in Retina screen -- last used in the iPhone 4S -- and the A5 system-on-a-chip (SoC) found in the iPad Mini.
Using the rough cost estimate, Singh then ball parked suggested list prices by determining various profit margins. He assumed that Apple would not surrender its historically high margins for such a phone, just as it did not when it created and priced the 7.9-in. iPad Mini tablet.
"After the launch of the iPad Mini, we can safely say that Apple will not compromise on margins and will price its products at a premium even at the low end of the market," Singh said.
The likeliest retail prices were $299 and $349, which would deliver margins ranging from 52% to 63%, close to, but not equal to, the 68% margin Apple collects on the iPhone 5.
Analysts have argued that Apple needs a lower-priced iPhone to compete with the hard-charging Samsung, and to keep its growth in line with Wall Street's expectations by broadening the potential pool of buyers.
Carriers in most emerging markets, China being at the top of the list, are resistant to paying Apple the large subsidies for the top-of-the-line iPhone -- which comes with a suggested retail price starting at $650 -- and so a cheaper model would presumably be more likely to sell well in those locales.
Singh also outlined other problems at Apple that bother analysts, especially those on Wall Street, including recent talk of major cuts in iPhone 5 component orders and the now-established pattern where Apple sells massive numbers of a new model in the first quarter or two after introduction, but with dramatic decreases after that.
A less-expensive iPhone may explain those rumors and help Apple address its up-and-down sales pattern, which seems to have had a major impact on its stock price.
The component cuts could be due, Singh said, to Apple shifting to a more frequent release schedule where it launches a new iPhone two or more times a year. "An iPhone refresh ahead of schedule doesn't make much sense unless they move to a semi-annual release schedule," he noted. "In that case, a cheaper iPhone launch later in the year would make sense."
With a cheaper iPhone in its portfolio, Apple would have two smartphone lines -- the flagship iPhone and the less-capable iPhone Mini -- and could spread out new model launches to alleviate the boom-bust cycle.
"iPhones sales have become increasingly concentrated in the launch quarter, partly attributed to Apple's marketing prowess as well," Singh said. "The only way to really solve this is to move to a release cycle that's a little more spread out. And if Apple is planning on multiple releases, it makes sense to make a cheaper iPhone."
While Singh acknowledged he has no information to support his theories, he speculated that if Apple does decide on a less-expensive iPhone, the company would launch the device in the fall, after it refreshes the iPhone 5 with a new high-priced model labeled "iPhone 5S" or even "iPhone 6."
A cheaper iPhone would also give Apple an instantly-available fallback position if, as some have predicted, carriers eventually revolt against high subsidies. In the U.S., for instance, T-Mobile plans to start selling the iPhone this year, but will not subsidize the device. Instead, T-Mobile will tempt buyers with no-contract, unlimited data plans. If that carrier's experiment works, others will follow, analysts have said.
"If they do go ahead with a cheaper iPhone, I think they'll view it as a hedge against subsidy disruption, as opposed to responding to an immediate threat," said Singh.
Apple will hold its quarterly earnings call with Wall Street analysts next week, on Jan. 23, and while questions about its future plans, including a less-expensive iPhone may be asked, it's very unlikely that Apple will break with policy and reveal anything.
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is firstname.lastname@example.org.
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