The "Cheap iPhone"

A few thoughts on the latest report of a “less-expensive” iPhone by Jessica E. Lessin for The Wall Street Journal:

1) This report seems to surface every year, including by the same Wall Street Journal that is reporting the news today.

2) That said, there does seem to be more gathering momentum around the idea of a “cheap iPhone” this time around. I smell a faint hint of Apple.

3) But Apple already sells “cheap iPhones”: the iPhone 4S is currently $99 with a two-year contract and the iPhone 4 is free with the same contract. Hard to get cheaper than “free”. (But: see point 6 below.)

4) So perhaps this has to do more with perception. The current cheaper iPhones must lose some luster as they’re simply older devices at a discounted price. Maybe this new “cheap iPhone” would be a complete makeover with the same internals as the older models but with a new build to entice buyers.

5) Along those lines, I find it hard to believe Apple would simply do a “cheap iPhone” — it would have to be a different product from the flagship version in some other way. Offering various colors is an obvious approach, but I think there would have to be something else as well. There are no “cheap iPads” or “cheap iPods”, there are significantly different versions (iPad mini, iPod nano, etc) at different price points.

6) Or perhaps this is all simply meant for other markets where the iPhone does not sell as well (and subsidies matter far less, or don’t exist at all). As WSJ notes, the iPhone is still the top selling smartphone in the U.S. But that’s not the case in other markets, and China has been particularly troublesome. Apple probably doesn’t want to just cede a billion potential users to cheap Android devices.

7) But I don’t think Apple would do a device just focused on particular foreign markets. Their product lines are very simple and for the most part worldwide. I imagine that any “cheap iPhone” would be on sale in the U.S. as well. So… pre-paid?

8) I do think Apple has to be careful here. While Gene Munster doesn’t seem too worried about the margins (thinking this phone would attract users that wouldn’t normally buy an iPhone), if such a device was popular enough, it would definitely drive down Apple’s famous margins. Users, of course, won’t and shouldn’t give a shit about that, but investors will (and Apple should — the iPhone dominates their bottom line). Just wait until we see what the iPad mini does to the margin this quarter.

My thought is that Apple might stop offering the older generations as the low-cost option, instead opting to release something to appease the budget-minded while still keeping a top-tier iPhone for those who want the latest and greatest. In my eyes, the iPhone 4 and 4S (at free and $99, respectively) deals are TOO good.