Why a less expensive iPhone might make more sense

If Apple sticks to their current pattern, there'll be an iPhone 5s later this year, and the iPhone 5 will drop to $100 on-contract, the iPhone 4S will drop to free on-contract, and the iPhone 4 will be retired. If Apple sticks to their current pattern, there'll be an iPhone 6 in 2014, and the iPhone 5s will drop to $100 on-contract, the iPhone 5 will drop to free on-contract, and the iPhone 4S will be retired.

But Apple doesn't always stick to their current patterns, and this year, rumor has it Apple might also introduce a less expensive iPhone. A less expensive iPhone very nicely addresses three key issues for Apple:

  1. It lowers off-contract cost of entry for both emerging markets (like China) and price-sensitive customers everywhere (like first-time smartphone buyers).
  2. It differentiates the product line, taking pressure off higher end, higher margin devices (like a theoretical iPhone 5s).
  3. It gets all iPhones onto the 4-inch, Lightning connector platform faster (by dropping the iPhone 4S a year earlier).

Apple has explored the idea of less expensive iPhones for years, but ultimately decided to drop the price of previous generation iPhones instead. It allowed them to eventually get to zero dollars on-contract, and it let them exploit economies of scale, but it didn't service the needs of emerging markets where phones aren't typically sold on-contract, and even the zero dollar option costs $450. It also didn't serve the needs of first time buyers for whom price was the single most important feature.

It also relied on newer models being sufficiently distinct in hardware to justify their higher price points. The iPhone 4 has Retina and a new, glass and metal casing. The iPhone 4S was more of a challenge, with little visual distinction, and marketing focused a little on speed and camera, and a lot on Siri. The iPhone 5 had a bigger, 4-inch, 16:9 screen, and LTE.

Even with speed and size as obvious distinctions, the iPhone 5 still faced stiff competition from... the iPhone 4S and iPhone 4. For many people, that design, that screen size, that radio technology is good enough. And at those lower price points, it's great.

Apple CEO Tim Cook, during the Q1 2013 conference call, said the iPhone 4 and iPhone 4S haven't yet cannibalized iPhone 5 sales. More specifically, he said the product mix this year, with the iPhone 5 as the flagship, was essentially the same as last year, when the iPhone 4S was the flagship. That -- maintaining the average selling price for the iPhone -- is important for Apple's inventors who value the bottom line. But what happens later this year, or next? What happens when the 4-inch LTE iPhone 5 is $100? When it's $0?

It's not impossible to imagine a world where the flagship iPhone, be it iPhone 5s or iPhone 6, is the flagship iPhone, and the less expensive iPhones aren't just older models sold at incremental $100 discounts, but iPhones specifically designed to be less expensive.

Again, less expensive doesn't mean cheap, Apple doesn't do cheap. Apple doesn't do crappy netbooks or budget tablets. They do the Mac mini and the iPad mini, the iPod nano and the iPod shuffle.

Whether they return to plastic backs offered in their reserved-for-lower-end color palettes, and keep less expensive, less expansive, components inside like chipsets, radios, and cameras, or once again zag instead of zig, as much as a less expensive iPhone could increase Apple's addressable customer base in emerging markets on carriers like China Mobile, it could also decrease the pressure on Apple's premium phone business in established markets on carriers like AT&T and Verizon, and help better welcome those "next billion users" world-wide.

Not only has Apple done this in the past with the iPod line, they've done it as recently as last year with the iPad mini. Given the issues a less expensive iPhone could address, it's not hard to imagine Apple addressing a less expensive iPhone this year.

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Rene Ritchie

EiC of iMore, EP of Mobile Nations, Apple analyst, co-host of Debug, Iterate, Vector, Review, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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Reader comments

Why a less expensive iPhone might make more sense


Apple is in the hands of smart people and let them do their job. In my view, they don't need to come up with lower end model as their new product launch pushes the old one to the lower end with price automatically. I strongly oppose any lower end model launch by the apple like company which promised to deliver best products in the world. This is my personal view only. Besides, I think stock market is going to kill the innovative companies of U.S like Apple for their personal greed and interests. Apple is spending more efforts and money on rest of the matters than focusing on her core innovative business in the world.

I understand that this is your opinion but it doesn't seem to take into account the facts, as stated above - in particular, the "emerging markets" point.

I got the impression that that was a key point to the whole article.

I know the strong point to compete android in the emerging markets, but I don't think Apple may compete with low end products. Apple means best product in the market with extra price for quality. Today my friend in Dubai told me that they bought iPad mini on account of best experience and they were least concerned with little extra price tag as compare to the extraordinary services and experience with Apple...

I tend to agree. No matter what "less expensive" phone Apple can introduce, their required margins will always make it more expensive than the competition who don't seem to care about margins on hardware because their primary business is something else.

So it's not really about Apple competing with the competition. It'd be more about Apple trying to expand their own markets by "reaching down" a bit but still achieving a decent profit margin. They did this with the ipad Mini.

A less expensive iphone of course would have older processors, cheaper parts, etc. Basically an ipod touch with a 3G chip. It'd still be priced at around 399-429 though off contract. Think price of current ipod touch plus extra cost to throw in the 3G chip.

On the other hand, an iphone 4 (the free, on-contract, option this year) costs 450 unlocked and off contract. It'll be the 4S this year that moves to this price. And iphone 5 next year. And so on.

So in effect, Apple is already doing a "less expensive" iphone. It just takes 2 years for the current iphone to become less expensive.

But what if Apple made a phone that just starts off this way? The floor is dropped (cheaper parts) and the off contract price can get even lower. Maybe this year it starts at 429. Next year, it can move to 329 as it scales up. That's the reaching down part. It could also be marketed better since the "less expensive" phones would be "newer" than a 2 year old one.

You're not buying a two year old iphone 4. Nope, it's the iphone mini. And that matters. Go ask HTC how marketing and brands matters vs Samsung. Samsung cleaned up in the android space.

When you have emerging markets where the average salary is $10,000 and less (ex: India and China), buying any current Apple product (off-contract) doesn't make financial sense. But it might if Apple could make a lower costing, high-quality plastic iPhone with perhaps fewer features.

The reason I could see it making any sense is that the carriers have already stated that they are looking into (read: planning on) moving away from subsidized phones with a two year agreement. T-Mobile has started the trend already, and even though they don't have the iPhone officially (yet), Verizon and AT&T have both gone on record to say they are going to watch how it plays out. Once this all comes to fruition, how many teenagers and twenty somethings are going to be able to drop $600+ on a phone that will likely be "old news" in 1 year? Even myself, a 30 something male with a decent job and a new house and home mortgage, would have a hard time justifying a $700 mobile phone purchase. Android will capitalize on this fact if Apple doesn't respond with a less expensive iPhone. I think Apple needs to pull the trigger on this one and do it!

I get your point, but a Galaxy Note II off contract is $700, RAZR HD is $600, RAZR MAXX HD is $650, Galaxy S III is $600 and DROID DNA is $600.

These are the top tier phones, and while you can argue the merits of each, the fact is, the prices on contract and off are generally comparable.

Plus, T-Mobile will have 2 options. A set monthly amount, and you pay the full price up front, and a set monthly amount, a "down payment" on the phone, and an additional monthly fee until the phone is paid for. This, ultimately is a win for the consumer, if they all adopt it. I can easily see myself doing the second option, and paying a bit more a month until my phone is paid off, and having a few months or a year of a lower bill. Or, once I pay my phone off, buy a new one and keep the "higher" bill. No different than now, only, with the new option, my bill could theoretically go down if I decide to keep my phone for say three years.

And this is why I don't think it will happen, unless an overwhelming majority of Verizon and AT&T customers upgrade on day 20 months, 1 day.

Sounds about right. But to be honest, it doesn't really matter to me much. The iphone 5 is a great phone and outside of increasing screen size (along with doubling resolution), there's nothing they can add that would mean much to me. I'm looking forward moreso to iOS and ecosystem updates.

It's only $199. Plus if you want a less advanced model, it's only $99. Unfortunately, some people sneer at it because it's last years model. But if Apple had released a $0, $99, and $199 phones on the same day (that were the equivalent of the 4, 4s and 5) people would be fine with it, in my opinion).

Speaking of cost:
If you have a basic cell phone plan you're likely paying at least $199 every 3 or 4 months, so the cost for the phone isn't really that high. Compare that to a TV $400, if you have a basic TV plan at $50, it would take 8 months to pay it off, and that's with a low end $400 TV, Apple isn't end, if you want to say a $1000 it'd take 20 months to reach that plateau.

Now we don't upgrade our TVs every 2-years, so that has to factor in, but then again, it's not really necessary to upgrade the phone every two years either.

Two things,
One, you mean I don't HAVE to get a new phone every other year? I thought that was a must...
Two, great point about the TVs. The smart phone is something we all carry with us all the time. A little more of an investment in something that is ALWAYS with us and can save our lives, rescue apps and the ability to call for help, makes more sense than paying extra for a TV and less for a phone.

Last year's iPhone, and the several years before (even the non-retina displays) can probably save my life just about as the latest model. Although, on the older models, the battery life might not last as long.

Actually, I upgrade mine every two years, but it's not necessary. But at only $100 a year ($199/2 years) for the phone upgrades to me it's worth it. Plus, I usually time the rumors pretty good and get my Gazelle buyback price at a pretty good rate, so it's doesn't even have to cost that.

(I'll confess, I usually buy the models with more storage and I've actually paid the premium and purchased after only one year!)

Rene-- I don't normally pick out 'mistakes' in iMore articles, but I figured I would help. I am not sure, but I think you meant investors, not inventors in the 4th paragraph. If you want I will read all articles for you guys and you only need to pay me in apple products or iTunes credits LOL. Just playing, unless you are serious...

cricket noises.... (At least you "LOL" at your own "joke")

--sorry to pick on you, I just hate people writing LOL after their own statements so damn much

I bought my iP5 16GB for EUR 750 = 1000 USD. The 64GB version is EUR 950. It is still the best selling smartphone here in Finland. But with good WP 8 devices becoming available by Nokia at much lower price points, I doubt this can last.

I'm sorry, but this article jumps around. For emerging markets I think these are some EXCELLENT points. Developing an iPhone that costs far less to build thus far cheaper to buy is a great idea. It will open up an entirely new segment.

For markets that aren't new, and especially for the US (I don't want to speak for other countries) this idea is, well, STUPID. Why? The way it is now, you're getting the old phone at a much lower price. Sure it's not as snazzy as the new one, but it's still what it was a year ago, or two years ago. Put a less featured model out in the US and it will be viewed as a "crippled" model. Yeah, TECHNICALLY it's an iPhone, but it's not a REAL iPhone. It's the KMart version. I'm not a fanboy (even moreseo, I HATE Macs) but Apple is doing it the right way (again, at least in the US).

The problem is, Would the cost reduction of iPhone 5 / iPhone 4S has been reduced by that much over the course of the year/s. Dropping the price of previous iPhone only means apple is operating on a lower margin on those products.

Would Apple make a larger screen iPhone first to capture those who are still waiting for large screen iPhone or a lower margin iPhone?

I can't imagine Apple introducing a dumbed-down iPhone that strips features from the existing iPhone 5. Instead, I can envision Apple introducing two all-new iPhones simultaneously; one being the iPhone 5S with 4'' screen and incremental updates and the other a high-end 5'' iPhone with premium features.

The result would be two phones updated each year, both perceived to be full-featured relative to their respective predecessors, and a new iPhone lineup with multiple price points (like every other Apple product).

This scenario would also make for a perfect "one more thing" introduction of the 5'' iPhone, although it seems those days have passed. But a fanboy can dream.

What if Apple will focus more on tablets than smartphones this year? The tablet market is really on the rise. Plus, in the recent past it is clear that they have focused more on the iPhone and Mac. On the tablet side they just renewed the iPad and released the mini (with many complaining about the lack of retina display). Without any element to ground my bet, I think they will focus a bit more on the iPad this year.

There is a huge market out there that Apple hasn't tapped into yet. Not everyone can afford an iPhone but would love to have one. I just hope when it comes out it's not lacking too many things.

I think Apple is looking at budget buyers which is a huge market and if they can come up with a cost effective iPhone that can retain the basic essence of iPhone but with lesser features , Apple can penetrate into this huge growing market segment.