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8 Ways Apple Could Make A Cheaper iPhone

To build an iPhone that's affordable in emerging markets, Apple will have to cut some corners or rethink the iPhone entirely. We break down some options.

Will Apple launch a cheaper iPhone, or won't it? Earlier this week, reports from The Wall Street Journal and Bloomberg said Apple is working on a low-cost iPhone that could be launched later this year. Then, Apple senior VP of worldwide marketing Phil Schiller downplayed that idea in an interview with the Shanghai Evening News. But what Schiller means by "cheap" and we mean by "cheap" may be two different things. He may be speaking to quality, not price. And he won't give away this hand before he plays it.

According to the reports, the company is considering a retail price ranging from $99 to $149. Although it's uncertain Apple will actually introduce a low-end iPhone this year, CEO Tim Cook has suggested that the company wants to have products at the full range of price points. Back when he was COO in 2009, Cook said during an earnings call that Apple didn't intend to "leave a price umbrella" for competitors.

Nonetheless, competitors are seeking shelter from the challenge of competing with Apple at the low end of the market. Mozilla, late to the mobile arena, is focusing on putting its Firefox OS in affordable phones in emerging markets outside the U.S. Intel at CES just announced a smartphone reference platform for emerging markets. And low-cost, no-contract plans are proliferating in the U.S., thanks to companies like Cricket Wireless, Republic Wireless and StraightTalk, a shift that should encourage phone makers to offer appropriately affordable hardware to complement budget subscription plans.

[ Apple is stealing some of the CES spotlight from afar. Read CES 2013: Apple Shadow Looms Large. ]

Apple has profited immensely by selling high-end smartphones with high margins -- from 49% to 58%, according to court documents. But with its flagship iPhone 5 ranging from $649 to $849 without a mobile carrier contract subsidy, the company isn't really competing for more price-conscious customers, particularly outside the U.S. Although Apple does offer older iPhones at reduced prices, it might win more price-sensitive customers if it could offer an inexpensive current model iPhone rather than last year's model.

There are several ways Apple might be able to do this, but it's hard to see how it could reach a $99 price point if its inexpensive iPhone were offered without a contract subsidy. Apple analyst Gene Munster expects a higher price, $199, which makes more sense given known component costs.

Based on iSuppli's component cost breakdown for the iPhone 5 and iPhone 4S, it seems likely that Apple could drive down unit manufacturing costs from the $196 to $207 range to approximately $150, without sacrificing major features such as a camera. Presumably, the $120 to $130 range would be ideal for a $199 retail price, in terms of maintaining gross margins.

A potential problem with this scenario, however, is the iPod Touch. Apple would probably sell far fewer $299 iPod touch devices if its affordable iPhone could be had for $199. So expect any iPhone repricing to affect other products.

In any event, to deliver a cheap iPhone, Apple has several options. See the infographic below and read on for some ideas.

Where Apple Could Cut iPhone Costs

1. Lower Gross Margins.

This is what Apple stockholders fear, but competition in the mobile market will make it very hard for Apple to maintain a 50%+ gross margin on a low-end phone. However, Apple might find it worthwhile to sacrifice hardware profits for new customers likely to pay for software, services and perhaps fancier hardware in the future.

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User Rank: Apprentice
1/15/2013 | 3:55:21 PM
re: 8 Ways Apple Could Make A Cheaper iPhone
True, with so many people programmed to shell out hundreds and thousands of dollars the second apple releases anything new, there's no need for a lower price point device.
User Rank: Apprentice
1/14/2013 | 2:29:44 PM
re: 8 Ways Apple Could Make A Cheaper iPhone
Why would Apple want to make a cheaper iPhone when people are falling over each other trying to be the first to have whatever thing Apple puts out there next, whether it's worth the money or not?
Atlanta Owner
Atlanta Owner,
User Rank: Apprentice
1/14/2013 | 4:07:38 AM
re: 8 Ways Apple Could Make A Cheaper iPhone
Why do people keep obsessing about this? In the unlikely event that Cook alters their model of "maximum profit", whatever phone they come up with would still never be sold in North America, so it's something for emerging countries to think about. For us, since so many of us are willing to get the more expensive model, nothing will change in terms of choices or prices.
User Rank: Apprentice
1/13/2013 | 3:56:46 PM
re: 8 Ways Apple Could Make A Cheaper iPhone
Follow the money. Where does Apple make their "real" money? In margins from phone sales? Or, on revenues from App and Content sales? imho, it's best to rope customers into the ecosystem rather than try and maintain high margins on low end devices.
User Rank: Strategist
1/11/2013 | 8:24:47 PM
re: 8 Ways Apple Could Make A Cheaper iPhone
Almost none of the ways mentioned in the story/graphic would significantly reduce the iPhone manufacturing costs. A plastic case would have a negligible effect on price. A cheaper camera might save a few bucks. Less memory? Maybe a little ... but you have to have enough to store songs, photos and videos, let alone run apps. Recycled components? Not likely -- the costs of getting them off old boards, testing them and putting them back into production would likely out-weigh the benefits.

Apple would be better off just selling more of the older models at an even lower price, thanks to cost savings due higher volume production. But a less-capable iPhone really isn't The Apple Way. Who wants a cheap-feeling plastic phone with a lousy screen and hampered capabilities? (I'm resisting the urge to take a cheap shot at so many of the Android phones here. ;-)

Seriously: I can see Apple wanting to prevent others from getting the low-end market, because it wants to prevent people from getting comfortable in another ecosystem and on another platform. But a crippled, flimsy product doesn't seem like the way to go. Instead, give them a well-engineered, quality phone at a lower (or competitive) price, due to volume efficiencies.

Oh ... as for cannibalizing iPod Touch sales ... I don't see that happening, because the Touch doesn't involve a monthly service fee like the phones. They're different animals. People who need a phone aren't going to consider the Touch. And people who want a nifty hand-held device for running some games or work-related apps aren't going to sign up for monthly service fees. If that were the case, the cheap/free iPhones would have killed sales of the Touch, which hasn't yet happened.
User Rank: Apprentice
1/11/2013 | 7:41:44 PM
re: 8 Ways Apple Could Make A Cheaper iPhone
I don't think that Apple's all that competitive at the lower end. They tried to make a cheaper tablet and the iPad mini is still significantly costlier (although also better) than a kindle fire. At least in my opinion. Instead of wading into the battle over lower end tablets I think they just created a new niche in the market that's a step above the lower end products but not a full blown iPad.
User Rank: Apprentice
1/11/2013 | 6:53:47 PM
re: 8 Ways Apple Could Make A Cheaper iPhone
The premise that Apple would WANT to build a cheaper iPhone is unsupported. Why would a company race into a lower margin business? Sure, volume is higher. Apple doesn't already have supply chain issues...oh wait, they do. Apple surely needs the revenue...oh wait, they don't. This target segment is surely a winner for the incumbents...oh wait, it's a loser by a number of metrics.

Ok, so I see that there is little reason for Apple to produce a product for the low-to-mid range. I wonder why people are so anxious to jump on that bozo bus?
Tom Claburn
Tom Claburn,
User Rank: Apprentice
1/11/2013 | 5:21:25 PM
re: 8 Ways Apple Could Make A Cheaper iPhone
I agree, Fritz. If Apple produces a much cheaper phone, I don't think it will be an iPhone. I'd bet plenty people would be interested in a iPod nano size device that doesn't have a touchscreen at all. It would be a different product line -- a small phone with push notifications and limited network interaction -- but it might open the door for more Apple services and could shut out competitors. No apps or Web would also mean no Google Maps embarrassment.
User Rank: Apprentice
1/11/2013 | 5:05:56 PM
re: 8 Ways Apple Could Make A Cheaper iPhone
It's hard for me to see Apple succeeding at the lower end. Less pricey, sure. But fewer features or a crippled phone? It doesn't exactly speak to the Apple brand promise. I know there are cheaper models of BMW or Mercedez automobiles, so maybe there's a model there, but there aren't that many differentiating features to strip out and have an "iPhone" still be an iPhone.
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