How much would a low-cost iPhone ding Apple’s profit margins?

“So confident are analysts that Apple is getting ready to launch a lower-cost iPhone that some have started building the new device — which none have ever seen — into spreadsheets like the one at right issued Thursday by Piper Jaffray’s Gene Munster,” Philip Elmer-DeWitt reports for Fortune.

“What these analysts are not so sure about is what kind of damage a cheaper (and presumably lower-margin) iPhone would do to the product’s enviably high gross margin — currently about 55%,” P.E.D. reports. “The fear on the Street, according to Munster, is that Apple’s overall gross margin could fall from its record high of 47.4% in March 2012 to 30% by 2015.”

P.E.D. reports, “That fear, he says, is ‘overblown.'”

Read more in the full article here.

17 Comments

  1. It will not ding Apple’s profit margins at all.

    Even with the cheapest of its products like low-price iPods, Apple always maintain healthy margins. They will not get lower than 35% overall.

    1. agreed.

      1) Slamdung is profiting at 43% according recent Q113 reports, yet there is no indication which products its profit margins come from. Is it the S2, S3 or S4 or all Slamdung crappy devices in one adobe-dung-hill serving. Most-likely the report comes form a combination of all Slamdungs devices. Pointing to the fact the S3 or S4 could not compete on its own head to head with iPhone 4s or 5 – specially since the plastic device also costs more to produce then Apples’ metal device.

      2) iPad mini, is proof that Apple will provide less expensive devices and consume profit margins from its own iPad line. Not only does the product compete against its’ own but the tablet market which is next to none – Apple finds a position in the market. It’s a safe zone for Apple, since the tablet market is rather non-existing. It expresses people buy smaller not bigger tablets. And it could be a test strategy for a bigger phone or phablet.

      3) So… would a less expensive iPhone hurt Apple profit margins. No way. It will eat in to Slamdungs margins. It provides a choice for those wanting Apple.

      —-

      Since some of the public seeks larger phones form Apple and another portion wants a less expensive phone option…
      two possibilities could occur next.

      A) iPad mini goes retina with phone capabilities – and Apple then has the largest smartphone. — AND/OR —

      B) An all new, simpler smartphone, a less priced iPhone arrives that runs only dedicated Apple apps, perhaps no retina as seen in iPad mini to lower costs.

      BUT NO MATTER WHAT – APPLE WILL NOT LOSE ITS POSITION
      unless SLAMDUNG totally has something to offer the world wants.

      Apple has no fear and only needs to maintain the interest of its customers, with service and great products that are of high quality and simple to use. Asian is the key sectors of market presently. India loves iPhone. China is eating it up and awaits a major deal with the tel-coms. Japan consumed iPhone for lunch and is so pro-Apple there. Samsung needs to actually compete more with HTC and NOKIA and Windows in ASIA as they try to grab anything available. Apples strategy with one phone one price has paid off. And as it waits, new iPhone arrives. Dinner is served… enjoy.

  2. Does it matter if Apple’s profit margins fall by 40% if their addressable market grows by 80%? They’d still be the envy of the business world.

    1. That is how companies like Asus and Dell think and see what it has brought to them. It is a much better business to sell something good at a high price then something crappy at a low price and be a total slave to volume. Apple has never played that game. It is also about brand perception. Apple is a premium brand. It will destroy its value to be too obtainable.

  3. A sale is a sale. In a saturated market you have to find other customers or develop a product so much better that consumers of Brand X are willing to switch.

  4. If lower cost, then features will be reduced or constrained in some way that does not appeal to current iPhone users. But quality will still be high. So it could serve well as entry level iPhone for new demographic.

    1. I agree somewhat, I would buy a iPhone which only runs Apple dedicated apps. Perhaps the basics: mail, maps, messenger, facetime and of course the communication portion of the phone – like contacts and calculator and notes. Maybe it will not run pages, garageband, numbers, keynotes but thats ok because those things are better on an iPad anyways. Doesn’t need music or movies. Just as long as its OS is still upgradable.

  5. Steve was a big fan of Edwin Land of Polaroid fame.
    Their method was milk the market with the high end camera
    then after a few years bring out the lower priced models.
    Those that wouldn’t or couldn’t afford the high end would now climb on board. I saw it many times in the camera business that I worked in.

  6. I still don’t understand why Apple would spend the time and money to develop a new ‘low-cost’ handset when they’ve already got production lines and supply chains building millions of iPhone 4’s and 4s’, and can continue to do so with absolutely no additional R&D costs.

    In order to make a truly affordable phone, they will need to build something that is significantly cheaper than the iPhone 4, significant enough to pay for the additional R&D, testing and logistics costs of a new product. This means low quality parts, less rigorous QA, less capability to run the current iOS etc.

    I just don’t see how they can accomplish this AND have a product that meets customer expectations for a phone from Apple (at least compared to the 4 and 4s), either in terms of components or build quality.

    If they want to slightly refine the 4 or 4s to further drive down costs etc. that’s one thing. But to design an entirely new phone makes no sense.

    1. I think that Apple’s iPhones are more difficult to assemble and are rather labor intensive designs. Maybe Apple would like to eliminate some of that labor. That wouldn’t involve moving to lower quality parts or lowered QA. I think it takes far more time for Foxconn to assemble iPhones whereas Samsung can spit their smartphones out like using a cookie cutter. Apple has always been running into supply problems (so they say) where iPhones can’t be produced fast enough.

      I also don’t see how Samsung can produce high-quality smartphones in less time than Apple but maybe consumers don’t really care if their products are somewhat shoddy. I wouldn’t like it, but maybe most consumers don’t mind. Maybe a bigger display and more features offset the lower build quality in consumers minds. All I know is Samsung is definitely shipping lots of smartphones, but I don’t know how well consumers actually like those products. Those are intangibles that are never covered by analysts. Things like product loyalty and customer satisfaction never seem to enter into the Wall Street value equations.

      1. Granted iPhones are more difficult and are more labor intensive to manufacture, but how much are you really saving ? According to a teardown analysis of the 4S done in October 2011, the cost of assembly was given $8 a device. (to go along with a BOM of $188)

        http://www.isuppli.com/Teardowns/News/Pages/iPhone-4S-Carries-BOM-of-$188,-IHS-iSuppli-Teardown-Analysis-Reveals.aspx

        In order for Apple to make a new device that’s compelling enough to justify additional expenditures on R&D, setting up a new manufacturing line and supply chain etc., they will need to substantially undercut this price (which again was from October 2011, presumably the price of manufacture today has decreased even more as components get cheaper, suppliers improve yields etc.)

        Saving even the complete $8 per device in assembly cost wouldn’t put you close to where you need to be. To achieve that, Apple would need to severely drop the quantity and quality of components, cut back on QC, etc. in addition to saving on assembly costs.

        This will lead to a much less functional phone, which BTW will require additional R&D resources just to ensure Apple has a recent iOS which runs decently on it.

        With the existing 4S (or 4), you have none of these issues.

    2. They will need to do a few things to move the existing iP4 & 4S along. Replacement of the dock connector with a Lightning connector, for example. Maybe an upgraded processor, just to reduce the efforts required to keep the older base design in step for iOS evolution.

      But I agree. Why abandon a perfectly usable, nay, desirable design just to do it. Tweak on the inside, upgrade the outside only as necessary to stay current.

      1. I agree with this. There can be some relatively minor changes which can and should be made to ensure the phones have some future. Your example of using the newer dock connector is a good one.

        What I’m arguing against is putting a lot of time and effort into designing a significantly new form factor etc. or require a new production line, which seems to be what a lot of analysts and pundits are expecting. Even changing from an aluminum to plastic case BTW would require significant reengineering and testing (as evidenced by antenna-gate).

        1. I think Apple has a secret. Namely, when looking at total cost: engineering, fabrication, assembly into the product, durability and recycling, the aluminum uni-body case is more cost effective. Every other portable Apple product, from the iPod shuffle up has an aluminum case. Why would they suddenly make a plastic phone? I doubt that is the plan.

  7. These analysts are just too funny.
    They really fear what a “low cost” iPhone would do to Apple still they really think that Apple has to release one… Are they thinking clearly?

    Besides. A low cost iPhone and a lower cost iPhone is already here in the form of iPhone 4 which you can get for 0 dollars with a 2 year contract at Verizon a believe and the iPhone 4S.

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