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Does a Cheap iPhone Make Sense?

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Apple is rumored to be unveiling a low-cost iPhone next week.

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Yes, it's that time of the year.

Next week, Apple (NASDAQ:AAPL) is expected to release not only an update to last year's iPhone 5, but also a cheaper model called the iPhone 5c.

In the past, Apple has continued selling older iPhones at lower prices alongside new flagship models. Right now, 2011's iPhone 4S and 2010's iPhone 4 are still on sale alongside the latest edition, the iPhone 5.

But selling a phone that's both new and bargain-priced would be a huge turnaround in Apple's traditional practice of focusing on premium products that carry fat profit margins.

Take a Step Back

As it stands now, IDC is forecasting that global smartphone shipments will top 1 billion this year, marking year-over-year growth of 40%.

That's impressive growth, for sure, but it's come at a price.

Here's the thing: There are just too many manufacturers making too many smartphones, and it's created a destructive environment that is dragging down names like Samsung (OTCMKTS:SSNLF), HTC (TPE:2498), and Motorola. Even Apple is taking some heat; the company is seeing falling average selling prices and below-industry growth levels.

And that is why a cheap iPhone may make some sense.

Pros

There are some advantages to Apple coming to the market with a new low-cost phone.

First and foremost, it would seriously turn up the heat on the Google (NASDAQ:GOOG) Android marketplace. A cheap iPhone would almost certainly take market share from the low-end Android phones that are hurting the high end of the Android market.

It could also stop Microsoft's (NASDAQ:MSFT) Windows Phone from gaining further traction. Believe it or not, Windows Phone is the fastest growing mobile phone operating system in the market, although its growth has been measured off of a small base.

And finally, there's another possible twist in the iPhone 5c story. Sean Udall of Minyanville's TechStrat newsletter (subscription required) sees the 5c as being for emerging markets only, and possibly specifically for China. If this is the case, Apple would scoop up market share in China without cannibalizing the iPhone 5s in developed markets like the US and Europe.

Cons

As I noted above, a cheap iPhone would be a radical departure from Apple's time-tested practice of focusing on premium products.

Essentially, by using a cheap phone to take back market share from Android, Apple would be shifting its strategy to satisfy the marketplace, rather than trailblazing with new products that redefine product categories.

Maybe that's just the reality of being a much bigger company, but either way, the good old days may be gone.

Plus, there's a chance that even with cheaper components, a lower-priced iPhone could carry reduced margins relative to more expensive full-featured models.

Also see:

Why Microsoft Got a Bum Deal

What Google Inc. Risks With Its KitKat Name

Should You Get a Head Start on Twitter's Rumored IPO?


Twitter: @Minyanville

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The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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