Apple faces tough choice on cheaper iPhone

Rumors of new model may be more than just smoke this time, argues one analyst

By , Computerworld |  Consumerization of IT, Apple, cheap iphone

Apple only recently managed to reach a balance between supply and demand for the iPhone 5, which went on sale in late September. Gottheil reasoned that a lower-priced iPhone, whose success would rely in large part on volume sales, would be beyond Apple's current production capacity.

Bloomberg said its source had pegged the retail price of a cheaper iPhone at between $99 and $149, but analysts dismissed that range as too low.

Brian Marshall, a Wall Street analyst with ISI, said Apple would be much more likely to price a new iPhone for emerging markets at an average sales price (ASP) of $300. "Basically half of current iPhone ASP," said Marshall. "The key is maintaining 40-45% gross margin, versus 50-55% gross margin on the iPhone 5."

Gottheil named the same $300 price point, but Gold figured if Apple went in for a penny, it would for a pound. "They have to hit all the price points," Gold said, noting three ranges: under $100, between $100 and $250, and above $250. "They could reduce the [manufacturing cost] by using a small display with lower resolution and lower memory," Gold added. "But there would be compromises."

Which may be the stumbling block for Apple. In the past, company executives, including former CEO Steve Jobs and current chief Tim Cook, have said they wouldn't sell devices at certain price points because they couldn't while maintaining product standards.

"Apple wants to remain a premium brand, with solidly-built devices and all the appropriate support services," said Gottheil. The company may eventually produce a less-expensive smartphone, but it would still be at what the analyst called "the higher end of the price band."

"That's necessary to maintain their margins and their high level of service, as well as their brand integrity," Gottheil said.

The aim would be to make the price difference between an iPhone and a low-cost Android smartphone "not so huge that it becomes a painful decision for consumers," he continued. "They'd like to narrow that gap."

Both experts pointed to the iPad Mini, the scaled-down tablet priced $170 under that of the full-sized iPad, as an example of how Apple would likely approach a cheaper iPhone.

But like the iPad Mini, whose sales some suspect have been at the expense of the iPad, there's potential cannibalization if Apple ships a lower-priced iPhone.

"Here's the trade-off on cannibalization of your installed base," said Gold. "If you don't cannibalization your own sales, someone else will."

Apple CEO Tim Cook has used that same logic to defend speculation that the iPad's success has eaten into sales of its Mac notebooks.

"If you price phones effectively, it expands your market, it doesn't contract it," Gold concluded.

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 gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

Read more about smartphones in Computerworld's Smartphones Topic Center.

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