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Why should Apple build a cheaper iPhone? Because not doing so would be stupid

Thursday, March 14, 2013 · 4:02 pm · 40 Comments

“Apple needs to finish up development of the low-cost iPhone it’s been working on for the past few years, and bring the device to market now,” John Paczkowski reports for AllThingsD. “Because to do otherwise is utterly illogical. There’s simply far too much revenue at stake.”

“That’s the argument put forth by BTIG analyst Walter Piecyk, who says that Apple will debut a low-cost iPhone before the year is over, because it would be stupid not to,” Paczkowski reports. “Piecyk, like many who follow Apple, sees massive untapped demand for a lower-end version of the company’s flagship smartphone. According to his back-of-the-napkin math, Apple could sell about 36.5 million such iPhones in fiscal 2014. And that could add $11 billion in revenue for the period, even after accounting for some cannibalization of the higher-priced models.”

Read more in the full article here.

[Thanks to MacDailyNews Readers "Fred Mertz" and "Dan K." for the heads up.]

Categories: MacDailyNews

Tags: emerging markets, iphone, iPhone 3GS, iPhone 4, iPhone 4S, iPhone 5, pre-paid, pre-paid iPhone

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Comment Feed

40 Comments

Steven

Thursday, March 14, 2013 - 4:07 pm · Reply

There already is a cheaper iPhone, it’s last year’s model, and even the model before that is even cheaper now.
- DERP
  
  Thursday, March 14, 2013 - 7:55 pm · Reply
  
  im not buying an old iphone where the os cant be upgraded
  
  honestly thats no solution – and no more responsible than samsung selling new outdated 2.2.3 droid running phones
  
  apple needs to cut away the functionality and make a strong new contender a more simple smart phone that perhaps isa more for communication and less about songs and movies..
  
  if apple can make a range of price points with iPod so it can with iPad and more so with iPhone
  - GruvDOne
    
    Thursday, March 14, 2013 - 8:49 pm · Reply
    
    Wow, you really aren’t paying attention are you?
    
    iOS 6 is compatible as far back as the iPhone 3GS (which is not even available anymore). All of the iOS 6 exclusive features function on iPhone 5 and the discounted iPhone 4S, while many of those said features will work on an iPhone 4, which is the current free-with contract iPhone.
    
    This is WORLDS apart from Android phones shipping with an old OS, and not having the spec to upgrade to the latest within months of the phone’s release.
    
    ‘DERP’ indeed.
    - DERP
      
      Thursday, March 14, 2013 - 10:01 pm · Reply
      
      I am not defending Android. Nor do I like its platform.
      
      Its very nice if you can run iOS6 on a iPhone 3GS, however, have you tried? The functionality is slow and almost useless. The newest apps do not work well and some will not even install. And for that reason – I believe best avoided. Like the dead, iPhone 3G which stopped with upgrades at iOS 5. Say what you will… but those old devices really aren’t what Apple should responsibly offer as inexpensive phones. Its a choice, but its not a great one.
      - Gruvdone
        
        Friday, March 15, 2013 - 2:42 am · Reply
        
        Again , you’re not paying attention.
        
        The iPhone 3GS is not available for sale any longer. However, that it is still technically possible to run the latest iOS release on a phone that hasn’t been new in 4 years, is pretty amazing. Can you name s single 4-year old Android phone that can run Android 4.2.2? No, didn’t think so.
        
        The iPhones that ARE still available as free or lower cost alternatives, the 4 and the 4S run iOS 6 extremely well.
        
        Why would Apple need to spend time and R&D dollars to create a device that would significantly shorten the useful life of the phones in the existing life. Their current strategy is brilliant, and it’s working.
        
        DERP
        
        Friday, March 15, 2013 - 9:26 am · Reply
        
        Its you who hasn’t paid attention…
        this is my comment – my opinion – correct.
        
        Eventually the old iPhone 4 will not be able to upgrade… i don’t also buy into the bs of contracts – free phone is not a free phone.
        
        I do agree – Apple has been responsible with software and hardware to last a much longer life… where Android phones from the likes of Samsung – are brand new yet suffer from day one – with an outdated 2.2.3 OS and are not upgradable – plus are extremely limited with on board ram.
        
        Nevertheless – buying an old iPhone just doesn’t cut it – And this offering from Apple needs and can change.
        
        Apple should offer another inexpensive phone period… one that is new and current.
        
        xpusostomos
        
        Friday, March 15, 2013 - 5:41 pm · Reply
        
        “Eventually the old iPhone 4 will not be able to upgrade”
        
        Eventually?? No duh. But who’s to say that day is any further away that it would be for some hypothetical cheap iPhone? That’s a fact not in evidence. And who’s to say such a hypotheical “cheap” iPhone would be any more “current” than an iPhone 4 anyway?
Raymond

Thursday, March 14, 2013 - 4:08 pm · Reply

If cheap iPhone can help , Apple won’t earn 70% of the profit in the market .
iNeuron

Thursday, March 14, 2013 - 4:10 pm · Reply

I seriously doubt it is part of Apple’s business plan to lose money on a J.C.Penney clearance phone.

There are other cheap phone sources that do not require an Apple logo.
- Zeke
  
  Thursday, March 14, 2013 - 6:33 pm · Reply
  
  According to this guy’s numbers, each “cheap” iPhone would sell for $300. “But that’s not cheap”, you object. Well, I suspect it will cost the customer about $20, maximum on a 2 year contract. So wait, who is this phone cheaper for? Ohhhhhhhhhhh!!!! Now I get it! All this clamoring for a cheap iPhone is so that the CARRIERS get a better deal. Now everything makes sense.
bimmerdude

Thursday, March 14, 2013 - 4:13 pm · Reply

Apple never provides two levels of experience in their products.. everyone get the same level of experience. The only variable has ever been the underlying hardware performance. So a cheap iPhone would only be slower. The alternative is using inferior materials.. but that would take away from the experience again… so basically the premise is wrong that Apple needs a cheap iPhone. What the article is really saying is that they want Apple to stop being Apple and be like all the other vendors producing varying levels of quality and experience in their products. That is not Apple!
- WaterFalls 2013
  
  Thursday, March 14, 2013 - 9:50 pm · Reply
  
  Somewhat disagree,
  
  iPod comes in Shuffle, Classic, Touch and Nano.
  Each are differentiated by size – minor quality – minor functionality and major in price.
  
  Let me suggest;
  
  iPod touch should be considered the iPad nano then the product line has three tiers based on size – memory – and price. Yes each provides the same enriched experience. Disable some of the functionality like on the iPod nano and possibilities are achieved for inexpensive options like the Shuffle… add enhancements and you arrive at iTouch.
  
  If cellular telephone capabilities were added to the iPad mini you would have a sweet one handed extra large cellphone. Bigger than the competition at an incredible price point.
  
  Apple does products right… they have choices as to how to achieve this inexpensive Phone.
Dresden Sparrow

Thursday, March 14, 2013 - 4:13 pm · Reply

Why? Because it can do so in an awesome way that changes things for the better. Or not at all.
3l3c7ro

Thursday, March 14, 2013 - 4:16 pm · Reply

No matter what Apple does, someone somewhere will say Apple is wrong and will never survive. Why did Apple grow to be the largest publicly owned company if they are so stupid?
- 3l3c7ro
  
  Thursday, March 14, 2013 - 4:19 pm · Reply
  
  Oh yeah, I forgot. Apple set out to build a better user experience and just happened to accidentally build three super popular devices and was just lucky in their marketing approach and had extra money sitting around and decided to waste it on building physical stores and . . .
sfgh

Thursday, March 14, 2013 - 4:22 pm · Reply

The older I get the more I realize that the media is almost completely irrelevant because of how stupid the writers and editors are. It’s gotten so bad that any idiot can write something and it’s called an article.

Welcome to the world of link whoring.

To this fuck chop: Apple already has a cheaper iPhone, it’s called the iPhone 4S. Now go back to your basement and think about something else to do with your life.
- chris
  
  Thursday, March 14, 2013 - 4:25 pm · Reply
  
  Great!
- chris
  
  Thursday, March 14, 2013 - 4:27 pm · Reply
  
  @ sfgh… I Concur!
  - btaylor
    
    Thursday, March 14, 2013 - 7:21 pm · Reply
    
    I double Concur! Even though as an Androidian, I con-cur-less. e-heh
    Apple don’t do cheap. They do useless, pet projects like the iBoombox and the Cube, but they dont do cheap abd they dont need to.
    - jack
      
      Friday, March 15, 2013 - 9:08 am · Reply
      
      Clever. You must definitely be clever. Very clever.
RP

Thursday, March 14, 2013 - 4:31 pm · Reply

Making a case out of a solid piece of aircraft grade aluminum is way cool and all, but making a great phone with a cool plastic case and passing the savings on to consumers who would otherwise stuff it down Samsung’s pockets doesn’t makes sense too. I mean if Apple is making “new” iPhone 4′s and selling them at a discount, why the need for the fancy case? The analyst is correct, it makes perfect sense. Customer’s get a cool new phone not an outdated fancy hand-me-down.
- JPS
  
  Thursday, March 14, 2013 - 4:54 pm · Reply
  
  How much is Apple really saving if they went with a plastic case vs. a ‘fancy’ aluminum one ? I doubt it’s very much in relation to the rest of the cost of the phone.
  
  Note the teardown analysis below for the 4S, it doesn’t appear they even list the aluminum case as a major cost.
  
  http://www.isuppli.com/Teardowns/News/Pages/iPhone-4S-Carries-BOM-of-$188,-IHS-iSuppli-Teardown-Analysis-Reveals.aspx
  
  Apple would have to downgrade many of their other components (down from what’s in the 4S currently) to make your comment make any sense.
  
  I don’t see Apple doing that, when the alternative is just to continue to make as many 4Ss as the market demands and use the power of economies of scale to get as much margin as possible. (especially since all the design and product development money for the 4S has already been paid for).
  - RP
    
    Thursday, March 14, 2013 - 6:06 pm · Reply
    
    I see where you are coming from and I used to be on the same page, but it looks like that when development of a new phone begins, they will begin with three different models from the get go. The development costs will be shared. The Flagship, the Jumbo, and the one for the masses. We marginalize a more affordable version,but it doesn’t have to be that way. It could be a world-class phone intended for the masses, while the Flagship iPhone could be THE premium phone we all know and love.
    - JPS
      
      Friday, March 15, 2013 - 12:57 pm · Reply
      
      I just don’t believe that one can effectively design and manufacture three phones (Flagship, Jumbo and one for the masses) and share the development costs between in a way that they can be significantly differentiated in terms of cost.
      
      Again, the only thing I’ve heard to date from critics is to slap on a plastic case instead of aluminum. But that’s not going to be enough to differentiate the phones. They’ll have to make meaningful concessions for a number of components in terms of performance to save a signficant amount in raw material costs.
      
      Just considering the case, how much is Apple really going to save by going from aluminum to reinforced plastic ? Maybe $5 a handset at most ? But that will be offset by the additional engineering and design that will be involved to make it work. It’s not a simple drop-in replacement.
      
      Remember antennagate and how the placement of the antenna was so critical, and how the phone works differently with a plastic back vs. an aluminum one etc. Then you consider the structural integrity of the phone, how it’s manufactured etc.
      
      Taking that all into account and considering that Apple would need to do this for a large number of key components, it starts to add up to real costs quickly.
      
      That’s why I think it’s a smarter move just to keep churning out late model phones. The design has been done, the specifications defined and agree to, the production line and supply chain is already set up etc. It’s largely a matter of contacting your suppliers and asking them to make 20 million more of the same thing they’ve already been making, (and hopefully optimizing in a way that the component price continues to drop).
      - RP
        
        Friday, March 15, 2013 - 2:34 pm · Reply
        
        What I do for a living is way different and may not apply, but when we design products, we design them as “groupings” We design products that share the same look and share the development and marketing costs. For us it makes sense because when a customer buys one product, they may end up buying the entire set, or recommend another product in the set to friends or family. I think that same principle could easily apply. And I am pretty certain this will be the case. Actually , I think it’s nuts that it hasn’t been the case. My guess is there will definitely be three iPhones released next year and every year going forward as part of a grouping that will appeal to different sectors. Flagship, jumbo and one for the masses. It seems only obvious.
- Jim
  
  Thursday, March 14, 2013 - 5:00 pm · Reply
  
  Apple’s “outdated” hardware runs the current OS.
  
  Samsung’s “current” hardware runs the “outdated” OS.
- quiviran
  
  Thursday, March 14, 2013 - 5:28 pm · Reply
  
  Apple has a lot of poor history with plastic. Remember the orange MacBooks, supposed to be white, but reacted with some peoples body chemistry in an unexpected way (or Cheetos, I’ve never been totally convinced).
  
  They make even the least expensive iPod from aluminum, using a unibody design. I expect that decision is driven by cost considerations, not that someone wants a “fancy” iPod case. Supply chain management and industrial design are two of Apples strong suits and cost analysis is part of both disciplines.
pdr400

Thursday, March 14, 2013 - 5:03 pm · Reply

So Apple needs to sell a “low-cost” iPhone because “too much revenue” is at stake. Am I missing something?

And then: Selling the low-cost model could “add $11 billion in revenue”. Of course, since a low-cost model by definition has a lower margin, the production costs are nearly $11 billion, but hey.

Finally: “…some cannibalization of the higher-priced models”…Any cannibalization of the higher-priced models *reduces* profit while (possibly) increasing “revenue”.
- Jim
  
  Thursday, March 14, 2013 - 5:08 pm · Reply
  
  Yup. This is the advice to the folks running the most profitable technology company of all time. I’m pretty sure the Excel spreadsheet Apple is modeling this thinking on churns for a while and spits out a red “No!”
  - 3l3c7ro
    
    Thursday, March 14, 2013 - 7:09 pm · Reply
    
    Numbers spreadsheet.
    - Jim
      
      Friday, March 15, 2013 - 12:03 pm · Reply
      
      Um, no. Apple’s internal systems export data to Excel spreadsheets for the managers to work with.
- aka Christian
  
  Thursday, March 14, 2013 - 5:14 pm · Reply
  
  Excellent point, and it speaks to the lack of business acumen that so many of these pundits suffer. Rule number one of any good business is to have a strategy and stick to it. Apple’s consumer device strategy is to product a limited range of quality products. Period. If they stray from that, either by expanding their range and making production too difficult, or by producing products perceived as “cheap,” they are straying from their strategy, and that’s bad for their business.
Jim

Thursday, March 14, 2013 - 5:09 pm · Reply

“Class: What should you do when you have Shorts going south on you because positive press is starting to push the stock up?”
Laughing_Boy48

Thursday, March 14, 2013 - 6:06 pm · Reply

I don’t like the idea of Apple building “cheap, plastic” smartphones either, but they certainly need a reasonably priced smartphone for the China smartphone market. I feel certain Apple is going to have to make some sort of tradeoff between profit margins and higher sales to penetrate the China market. If Apple doesn’t do something, the share price is likely to continue falling. Wall Street doesn’t value profits, cash, no debt load, dividends or anything else except for major market share. Apple will be left with some very unhappy shareholders, including myself, unless Apple really starts giving some of the highest dividends available.

My question to all of you is how can Apple’s stock be worth anything if Wall Street only values market share leaders and those are the companies worthy of share price gains. Do most of you really think that Wall Street is going to start valuing Apple any higher as their market share falls?

Some guy on CNBC was already shouting about how Samsung has already beaten Apple and will soon take over Apple’s market share in the U.S. Do you think that’s going to make investors start buying Apple stock? I’m almost certain no investor wants to back a market share loser. So if Apple never goes after any market share how can the stock itself be worth anything if no one wants to buy it.
- Zeke
  
  Thursday, March 14, 2013 - 6:57 pm · Reply
  
  Sooner or later, reality sets in. Continue to value AAPL based on share of the total market, regardless of profits, and sooner or later you have AAPL valued at its “cash on hand” value, which will continue to rise, and you have Google or Amazon that’s got huge market share and small profits, which results in a stock price unsupported by reality. Remember all those companies in the late 1990′s that ate their way through billions in capital and then went bust? We never learn.
Seamus

Thursday, March 14, 2013 - 6:13 pm · Reply

Apple will debut a low-cost mini-tower before the year is over, because it would be stupid not to…

Apple will debut a low-cost netbook before the year is over, because it would be stupid not to…

snore.
Zeke

Thursday, March 14, 2013 - 7:22 pm · Reply

There are some customers you can’t afford to do business with. They want too low a purchase price. They won’t spend money on services and accessories. They generate customer service and support expenses out of proportion to the revenue they generate, because they aren’t very tech savvy.

Apple has defined the “market” it wants to go after, and it’s gotten a 90% share of that market. The customers who fit into the category above were excluded from Apple’s desired market. Because of this, Apple has a 70% profit share in the total market, while Android devices, designed to appeal to that segment that Apple didn’t want, are used significantly less on the internet, generate less money in apps and accessories, are typically running two or three OS generations behind the current one (if they can be upgraded at all), and require excessive support.

That’s the “market share” fallacy. Microsoft and its PC manufacturing partners have been the victims of this fallacy in the computer industry. We’ll be seeing the same thing happen to Samsung, Google, and Amazon in the near future.
- Seamus
  
  Thursday, March 14, 2013 - 7:52 pm · Reply
  
  “They generate customer service and support expenses out of proportion to the revenue they generate…”
  
  Definitely!!! As my own business developed, I found that those spending $500 with me wanted EVEN MORE support/education time than those spending $20,000. And the second difference was that those spending more money expected to pay for any time they asked for while those spending almost nothing somehow thought they’d get all that time for free!!!
  
  This was almost always true, and almost always in clear inverse proportion to how much was being spent.
Prophet HUP

Thursday, March 14, 2013 - 9:11 pm · Reply

The cheapest way to build a cheaper iPhone is to lower the price of the present one, don’t you think?
Hmmm.
dj0ferdy

Sunday, March 17, 2013 - 12:50 pm · Reply

Why not ask Ferrari, BMW, or Porsche build a car as cheap as Mazda or Honda? This is ridiculous.. Extremely ridiculous..