Why Apple Needs A Low-Cost iPhone More Than Ever

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Since Apple launched the iPhone in 2007, smartphones have really taken off , and more than 1 billion people worldwide now own one. Last year alone, smartphones generated $293.9 billion in sales, but the cost of the average smartphone has begun falling.

More than half of cellphone owners in the U.S. and other developed markets already own a smartphone, and those in emerging markets such as China and India aren’t able to pay for high-end devices like the iPhone. As a result, cheaper options are becoming increasingly popular.

According to data from IDC, the average price of a smartphone has fallen from $450 to $375 since the beginning of 2012. This means the iPhone and its high-end rivals like the Samsung Galaxy S4 and the HTC One are less appealing when up against cheaper alternatives.

“The days of great growth in the high end of the market are gone,” Michael Morgan, an analyst at ABI Research, told Bloomberg. “It’s the Chinese companies who know how to survive on tiny margins that are ready for the fight that’s about to ensue.”

A similar thing happened to the PC industry in the late ’90s. Former eMachines CEO Stephen Dukker recalls a time when millions of people who wanted access to the Internet bought cheap desktops from eMachines and other low-cost hardware providers, dropping PC prices from $1,898 in 1996 to $1,026 in 2002.

For Samsung, HTC, and others, this is less of a problem. While it may mean that their high-end offerings don’t sell quite as well, they have cheaper, entry-level and midrange alternatives that may benefit as a result. But for Apple, this isn’t the case — at least not yet.

You can either buy the high-end iPhone — the latest model which costs $199 with a two-year contract or from $649 unlocked — or you have to settle for older hardware, which doesn’t always get the latest software features. And even if you do go for an iPhone 4S or an iPhone 4, the cost of the monthly tariff can sometimes be more than that of a brand new midrange smartphone from a competitor.

So Apple needs a “low-cost” iPhone more than ever. Its shares have plummeted from a record high to an unfamiliar low, dropping below $400 apiece for the first time since December 2011 back in April. Apple may rectify that with a brand new gadget — possibly the iWatch — in the not-too-distant future, but right now it needs a stepping stone.

The iPad mini has been a massive success for Apple, proving that consumers want to pay less for the latest technology, and it’s likely an iPhone equivalent will can be just as big. Apple certainly appears to be working on one, but it’s unclear when it will become available.

Many reports suggest we’ll see it this fall — alongside the iPhone 5S, the fifth-generation iPad, and a new iPad mini.

  • aardman

    For Apple, this is trickier than simply releasing a lower (not low!) cost model. The thing about computers (and I include smartphones in that category) is that the primary differentiating feature is the OS (or for smartphones, the platform which is OS + ecosystem). With Windows computers, what we saw was that the release of low cost PCs basically eradicated the high end market. For most consumers, as long as it runs on Windows, then it’s good enough. No sense in paying for fancy bells and whistles like build quality, a machined aluminum case, or bleeding edge graphics, etc. The risk for Apple in introducing a lower cost iPhone is whether or not that’ll kill the market for the high end and high margin iPhone.

    Obviously, with the Mac, Apple concluded that a low cost Mac is bad for the overall Mac business. And that’s not just conjecture, they found that out from their experience with Mac clones. For sure the introduction of lower cost iPhones will affect the high end iPhone business but the question is can Apple more than make up for the lost profits by a judicious choice of features, pricing, and geographic restrictions for the low cost iPhone?

    One big complicating factor is I doubt if Apple is willing to offer two tiers of service. I don’t think they can or would want to. Imagine how upset customers would get if they go to a genius bar and the genius says I can’t help you as much because your iPhone is the lower cost model. So customer support costs will be the same for the cheaper phone.

  • Sebastião Gazolla Costa Júnior

    IMHO, Apple should have been working on a Phablet iPhone not on a Budget iPhone. Three reasons: 1) look at the massive selling of Galaxy S3, 2) Apple already has multiple display sizes in all products but iphone and 3) Apple already has the “Budget iPhone” this is the iPhone 4S and iPhone 4 that are still on sale.

  • Karolis Makrickas

    Kind of stupid point of view. Apple need budget iPhone, just like Porshe or Ferrari needs budget car for people, who don’t want to pay more than $20 k for a car. Apple is a luxury brand, it dosnt need to have a BUDGET version, ”cause rich people will stop buying apple stuff.

  • thehardnochlife

    IMHO, Apple should have been working on a Phablet iPhone not on a Budget iPhone. Three reasons: 1) look at the massive selling of Galaxy S3, 2) Apple already has multiple display sizes in all products but iphone and 3) Apple already has the “Budget iPhone” this is the iPhone 4S and iPhone 4 that are still on sale.

    The only reason I HAVE an iPhone is because I don’t want a phablet. There’s also no doubt in my mind that on paper, Samsung’s S line might be better but the small, unique screen and controlled OS is what makes an iPhone an iPhone.

  • mister_grey

    Kind of stupid point of view. Apple need budget iPhone, just like Porshe or Ferrari needs budget car for people, who don’t want to pay more than $20 k for a car. Apple is a luxury brand, it dosnt need to have a BUDGET version, ”cause rich people will stop buying apple stuff.

    You don’t understand markets or economics at all do you?

  • vaness

    As you can see Apple is going to blow up the market! All cases for Lowcost iphone was mad? by Apple to increase the popularity of the iPhone and also to know the opinion of the staff!
    I think Apple will do it because
    1) It almost has an iPad mini(it is not low – its just another ipad)
    2) They have a low cost ipod touch
    All Premium brands has a cheap models(comparing with the flagmans)
    For example in Russia you can buy MBenz S 500 for $200K, But C180 costs about $40K! C classe cheaper than S but it also expensive in poorest country!

  • FiveOhFour

    For Apple, this is trickier than simply releasing a lower (not low!) cost model. The thing about computers (and I include smartphones in that category) is that the primary differentiating feature is the OS (or for smartphones, the platform which is OS + ecosystem). With Windows computers, what we saw was that the release of low cost PCs basically eradicated the high end market. For most consumers, as long as it runs on Windows, then it’s good enough. No sense in paying for fancy bells and whistles like build quality, a machined aluminum case, or bleeding edge graphics, etc. The risk for Apple in introducing a lower cost iPhone is whether or not that’ll kill the market for the high end and high margin iPhone.

    Obviously, with the Mac, Apple concluded that a low cost Mac is bad for the overall Mac business. And that’s not just conjecture, they found that out from their experience with Mac clones. For sure the introduction of lower cost iPhones will affect the high end iPhone business but the question is can Apple more than make up for the lost profits by a judicious choice of features, pricing, and geographic restrictions for the low cost iPhone?

    One big complicating factor is I doubt if Apple is willing to offer two tiers of service. I don’t think they can or would want to. Imagine how upset customers would get if they go to a genius bar and the genius says I can’t help you as much because your iPhone is the lower cost model. So customer support costs will be the same for the cheaper phone.

    Apple concluded no such thing, they make the low cost mac themselves, they have been driving prices lower and watching shipments rise for years. Its amazing you have such an issue imagining a scenario that you can see in reality today and has been the case for many years. Two tiers: Macbook Pro and Macbook/Macbook Air now. Powerbook and ibook before. Powermac and iMac/emac and Mac Pro iMac, does anyone with a macbook air/ibook/imac get shoved to the back of the line while Pro customers are rushed to the front, no. There is no reason that would be the case with a phone either, we are not talking differences here that would have fur coats being forced to mix with the dreads of society. you have a semi valid point with the pc market especially with the platforms but if anything has been proven in recent years and again very recently it is that consumers have no issue paying up when they recognize the value and consider it worth the money, look at netbooks and ultra books as polar opposites. I worked for cingular back in 2005 and the wireless companies were scared to death then about market saturation etc. and no one wanted to pay anything for a phone everyone wanted the “free phone” (which we know isn’t free even when it is) and no one even really wanted the smart phones of the day except for a fringe element because they simply weren’t practical and we all know how that turned out. I see where you are coming from but as far as apple losing profits thats the whole point, they have reached a point they will be losing profits regardless as they lose potential customers whereas with a more affordable iPhone they take a hit on profit margins up front slightly, like with the iPad mini (still respectable margins by any standard) and they make up for it with another customer tied into the apple ecosystem and iTunes and buying music and apps etc. and that much more likely have the value of iwatches and itvs and iMacs appeal to them.

  • Al

    comparing ipad mini and something like low cost iphone is stupid.ipad mini is a success not because it’s cheaper than the original iPad,but because it’s a much more practical size.most people prefer mni’s size to the original,I’m sure it would’ve been be a success even if it was more expensive than the original.again very poor and stupid comparison.

  • aardman

    @FiveOhFour. Seems you have misunderstood me. I made a distinction between ‘low cost’ And ‘lower cost’. Ironically, within the context of the current discussion, ‘low cost’ means lower prices than ‘lower cost’. The so-called ‘low cost MacBook’ that you refer to starts at $999 which is still way more than the lowest cost Windows laptops. And Apple did conclude that a low cost (as in race-to-the-bottom low cost) Mac is not good for business, that’s why Steve Jobs cancelled the Apple clone license of Power Computing AND did not offer their own bottom feeder Macs to replace the Mac clones.

    I never said that a low cost iPhone would be bad for Apple, I said it’s trickier then the article (and most analysts who pine for such a phone) made it sound. Apple needs to judiciously calibrate the features, price, and geographic markets of such a phone to avoid doing to the high end iPhone what cheap PCs did to the market for high end PCs. First of all, they can’t make it too cheap because it just might be too attractive at such a price and siphon off too many high end customers. And we’re not even talking about margins on a cheap iPhone. Second, they can’t cut down on its features and capabilities too much. If the consumers view it to be a gimped iPhone, nobody will buy it. That lesson was learned as far back as the 386SX chip and the IBM PC Jr. and as recently as Microsoft’s Kin phones.

    Be that as it may, I have complete faith that Apple will make/has made the right choices and the lower cost iPhone will strengthen their bottom line. I just don’t know if it will be enough to satisfy analysts’ and stock manipulators’ impossible expectations. I expect it won’t, especially the manipulators who have so obviously shorted AAPL big.

About the author

Killian BellKillian Bell is a staff writer based in the U.K. He has an interest in all things tech and also covers Android over at CultofAndroid.com. You can follow him on Twitter via @killianbell.

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