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There's a Business Case to be made for an Economical iPhone

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Although Patently Apple was one of the first to report on an iPhone for emerging markets, a new report out today provides us with an understanding as to why an economical iPhone makes a lot of business sense.


When Apple launched their revolutionary iPhone in 2007, carriers were falling over themselves to be on Apple's short list of preferred wireless carriers. Cingular was announced as Apple's exclusive US carrier.

 

Before getting on board with Apple, new carriers must weigh the company's requirements, such as guaranteeing a minimum sales tally, as well as the price of the phone, currently above $600 before subsidies. At the outset, Apple was able to exact lucrative terms from partners such as AT&T Inc.

 

But the market is changing rapidly and Apple is leaving too much business on the table for their competitors to scoop up. It may not be the most lucrative business at the mid-level range but Apple can engineer a new iPhone to fit that market that can return a decent dollar.

 

While Apple's wireless distribution stands at about 240 carriers worldwide, there are about 800 carriers that haven't been able to pass Apple's requirements to be an official distributor. According to Bloomberg "Holdouts represent billions of would-be subscribers in countries such as China, Japan, India and Russia, said Horace Dediu, a market analyst who runs Asymco.com. On the flipside, Apple's fiercest competitor Samsung is selling their devices through almost all of the world's 800 carriers.

 

China Mobile, the world's biggest phone company, and NTT DoCoMo, Japan's largest mobile carrier, are among providers that haven't agreed to carry the iPhone, citing the high costs of subsidies needed to make the device affordable or other terms they find unacceptable. The slowdown in adding new partners is contributing to stagnating iPhone sales growth, giving Samsung-led competitors a potential advantage and putting pressure on Apple to deliver a cheaper device or make other margin-threatening concessions.

 

"Carriers are starting to question Apple's pricing strategy and are supporting multiple other platforms," said Shah at Strategy Analytics. "They no longer need Apple." To drive this point home, Samsung has just announced a new economical smartphone called the Galaxy Core this morning that will provide decent specifications for a "budget phone." However, Samsung has failed to provide any pricing on this future unit which goes to show you that they want to cut any announcement from Apple about an economical iPhone off at the knees before one is ever made.

 

Introducing a less-expensive iPhone would help appeal to more customers and carriers, said Benedict Evans, an analyst with Enders Analysis in London. Apple could sell 50 million iPhones a quarter if it introduced a cheaper model, he said. Priced at $200, with a 30 percent profit margin, the new product could generate at least $2 billion in profit a quarter, Evans said. The company brought in $9.55 billion in profit in the most recent period.

 

Whether it rolls out a lower-end phone or offers more favorable terms, Apple will need to find a way to reignite iPhone demand and reach more customers without sacrificing too much of its industry-leading profit margins. The urgency for Apple to be more flexible on terms is rising as Google Inc.'s Android gains ground, Shah said.

 

For now, I think the case for a new economical iPhone has been made. Apple's strategy could entail a new economical iPhone or they could simply and aggressively change their terms on older iPhone models so that more carriers could start to push the iPhone down their food chain.

 

Apple has been experimenting with aggressive pricing of the iPhone 4 in India and in Q4 2012 sales reportedly tripled. I don't think that all markets need the latest and greatest cutting edge features, which is true in North American and other mature markets as well. Sometimes people just want a mobile phone first, with just a few basics like access to email, texting and internet surfing as extras. They'll be glad to have a plastic iPhone with bare bone features. And apparently Apple is seriously thinking of giving that segment of the market what they want.

 

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Source: Bloomberg

 

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