iPhone 3GS now available for $180 on Aircel India -- what does that tell us about the budget phone future?

The iPhone 3GS is now being offered, unlocked, for the equivalent of US$180 on India's Aircel network, provided customers sign up for minimum $55/year unlimited, post-paid data plan. That makes for a TCO (total cost of ownership) of only US$235, something far, far lower than the thousands of dollars typically required over the course of 2-year American cellular contract. Matthew Panzarino of the The Next Web reports:

Aircel is India’s 7th largest network, with a large share of customers where it is headquartered in Chennai. The iPhone is being offered for 9,999 Rs, which converts to $181 U.S., with a minimum commitment of 3,000 Rs in advance rental ($54.37), reports IBN Live. The advance rental, which roughly equates to a ’1 year up front payment of service’, brings the total cost of the phone to Rs. 12,999 ($236), which is still easily the cheapest we’ve seen the iPhone 3GS being offered yet.

The iPhone 3GS is 3 years old now, an eternity in smartphone time. While it doesn't have a Retina display or FaceTime camera, it does run iOS 5 and will be upgraded to iO6. It won't get all the features, especially hardware dependent ones, but it will stay binary compatible with modern App Store apps, and that's absolutely key.

As to pricing, when the iPhone 3GS launched in 2009, iSuppli's Andrew Rassweiler pegged the bill of goods for the then-entry level 16GB model at $172.46, with manufacturing expense of $6.50, for a total of $178.96.

In 2010, Apple dropped the memory in the iPhone 3GS down to 8GB, the on-contract price to $99, and the unlocked price to $549.In 2011, Apple kept the iPhone 3GS the same but dropped the on-contract price to $0, and the unlocked price to $375.

Economies of scale have likely pushed the iPhone 3GS bill of materials lower over the last 3 years. iSuppli estimates the current iPhone 4S has a bill of materials of $188, for a total manufacturing cost of $196, so it's hard not to imagine the iPhone 3GS isn't well below that now. Likewise, iPhone 3GS research and development costs have likely been more than offset over the intervening years. (It's important to remember with any bill of materials estimate that while the first production unit cost just over a hundred dollars in parts, the R&D getting to that point cost millions.)

Apple typically won't budge a penny on margins, and absent a statement from Aircel, it's hard to tell how much they're subsidizing the iPhone 3GS or data plan to get the TCO that low, but the simple fact remains -- there's now a sub-$250 iPhone on the market, all in.

The importance of that can't be overstated. While Apple enjoys top-selling status in North America, and unmatched profits, they currently do not compete, or compete well at least, in emerging markets, or markets where pre-paid plans dominate post-paid plans. When carriers don't subsidize the price of the iPhone, it costs significantly more than bargain basement Android or BlackBerry devices, making the latter more realistic options for budget shoppers.

In an earlier article on The Next Web, Panzarino wrote:

There are hundreds of millions of customers using pre-paid devices that would gladly replace their devices with a cost-effective iPhone, gaining access to Apple’s app library and its aggressive support for software updates on older devices.

That's exactly right. If Apple keeps the iPhone 3GS on the market for another year, and can bring the cost down significantly, it suddenly has a handset that's interesting in Africa, South America, Asia, and parts of Europe where phones and plans are decoupled, and sticker price is key.

Commenting on the post iPhone 5 future of the iPhone 3GS, Daring Fireball's John Gruber pointed out:

[The iPhone 3GS] is sold around the world as a low cost (by iPhone standards at least) pre-paid device. So AT&T wouldn’t even carry the 3GS anymore, they’d just have the 4 as their “free” iPhone, where the word free gets wrapped in dick quotes because it’s only free with an expensive two-year contract.

The big thing to remember about the iPhone 4 is that it’s the first CDMA iPhone. No way it’s going to disappear from the lineup, because now Apple could offer a “free” iPhone on Verizon and Sprint, too.

Up until now, only AT&T in the U.S. has enjoyed a $0 iPhone on their network. Having a $0 on-contract iPhone on Verizon in particular is a big win, at least psychologically. Many customers don't or can't consider TCO, only up-front costs, when picking a new phone.

Even if Apple removes the iPhone 3GS from sale on the major carriers (it can't offer it for -$100 on-contract, after all), it can certainly keep it on small, regional U.S. carriers for customers that are far more price sensitive.

At that point, just like they did with the iPod line years ago, Apple has the market pretty much covered at every price point that matters.