UBS: Low-cost iPhones tricky, iOS 7 to restore innovation aura for Apple

UBS’s Steve Milunovich has reiterated a Buy rating on Apple (AAPL) shares, with a $500 price target, “writing that the company must respond to a maturing smartphone market by perhaps taking share, going for value shoppers, or just branching out into other categories,” Tiernan Ray reports for Barron’s.

A maturing market is problematic for Apple, not only in terms of available growth but potentially for its integrated strategy… If the high end is slowing, the obvious answer is to head to lower price points. Although analysts are anxious for Apple to broaden the iPhone line, we think the company has to be careful. Its brand cannot afford significant quality dilution— short-term gain could result in long-term pain. Management is very aware of the risk as reflected by Tim Cook’s comment that Apple is about making the best products rather than the most. If Apple wanted to go really low end, the right way to do it would be to set up a separate brand and perhaps even a wholly- owned subsidiary. But we don’t expect Apple to veer from its current strategy. The expected “low-end” iPhone probably won’t be priced below $350-400. Even at that level the gross margin could be near 30% and become an example of the company’s occasional willingness to accept lower margins to penetrate a market, as CFO Peter Oppenheimer said recently. — UBS analyst Steve Milunovich

Read more in the full article here.


  1. Would a low cost iPhone be a touchscreen smartphone? To run a current version of iOS it would have to be of similar spec to the older models on sale, and if so would just cannibalise those sales. Being lower spec would result in a lower quality of experience.

    Could they possibly make it be a high quality feature phone, something suited to the lower end of the market? Most people who buy Android phones at this end don’t use them as smartphones, so why try and sell one to them? A feature phone might have a smaller screen and even a number pad, but could still have an iPod, camera, and even optimised apps. It would open up an entirely new market, ripe for customers to upgrade to iPhones, and won’t cannibalise existing sales.

    1. So you want Apple to backpedal 6 years and put a number pad? Wow!
      When has Apple ever cared about cannibalizing their own sales. iPad -> iPad mini, Mac->iPad, iPod->iPhone. A great company continues to move forward even when they haven’t wrung the sales dry.

      1. I don’t personally, but there’s nothing wrong with a number pad if all it’s doing is entering numbers for phone calls ie a basic phone. Admittedly, a keyboard is needed if you’re going to label your contacts, which was one of the things that was touted about the iPhone originally, but at the same time they could have it rely on it’s integration with a computer address book, or other non phone iOS device to supply that info.

        It could be reasonably argued that Apple can’t make a phone much cheaper without sacrificing quality/performance, or making something that is just a new version of one of the older models they continue to sell.

        If they are going to make something that fits into the lower end market, then it might logically be something different from what they currently make. Since an iPhone is basically just one big screen, that might be one of the things to change.

        Cannibalising sales is fine if at the same time you’re going to open up a much bigger market, but literally replacing the iPhone 4S (in terms of performance) for example with something that is less profitable would be pointless unless it was so much cheaper that many, many millions more were sold. If it did rival the 4S in features and performance it would likely be an attractive alternative to the iPhone 5. It would seem to be a far riskier strategy than the situation with the iPad and iPad mini.

        My point is, and the number pad was just a quick example of some major difference that could make a low end iPhone very much a different proposition than the current one, as opposed to the assumption that it will just be cheaper whilst somehow still running iOS well and all apps in exactly the same way without destroying the current iPhone market completely.

      2. Agreed. Apple could do something like:
        – release an iPhone 6 with a killer feature like massive battery life
        – sell it at the current top-teir price point ($600)
        – sell the 5 for $450
        – sell the 4S for $300
        That would effectively get an iPhone into a the “affordable” price bracket without having to manufacture cheap junk.

  2. iOS 7 looks backwards rather than forwards with its unnecessary flatness, harking back to the era of 1990’s computing where the GPU was less powerful and could not render 3-D objects on screen properly not to mention the low resolution monitors that were unable to articulate a full range of colors.

    Flatness reduces the dimensions that icons can be expressed to two rather than three which will homogenise the look and feel of icons leading to a greater degree of confusion when glancing at the screen to decipher which icon does what.

    And finally, iOS 7 flat icons mimics the icons in WP8 and Android which have already proven that they lack the richness of iOS 6 icons. If by going backwards in time is seen as a good thing, then iOS 7 would be seen as introducing the Ford Edsel to fight against the Lamborghini Aventador. Not a fair fight.

    1. You obviously have not used iOS7. Where do you guys come from? You’re always the first one or two to post. You don’t think that the regulars on this site or onto your jig? You think you know what you’re saying but you only come off as somebody from Samsung’s or Google’s marketing department.

    2. Almost completely agree with that though would not agree that the new icons look at all like WP8 icons which are far more basic in nature. But yes it harks back at the limitations of the past when technology could not handle that rich iconography. One does not need mock textures (though some serve a purpose like that on the Mountain Lion home screen which breaks up the starkness of flat colour but differenciates from the desktop). What doesn’t need to go is depth and certain detailing. The new safari icon for example is ugly and yet is more skeumorphic than the existing one mimicking a cheap compass whereas the previous was purely conceptual and attractive with a glassy depth to it.

    3. What are you talking about? Icons do not equal user interface. Furthermore, there weren’t any 3D icons before, they were 2D as well. All Apple has done is remove unnecessary shading and reflection that gave the appearance of 3D.

      Furthermore, 90’s computing interfaces used the same effects to make buttons stand out, like a real button. It was the original Mac OS that was flat. When System 7 came along, Apple adopted a newer interface that “popped”.

      iOS 7’s interface is a rethinking that takes into account that all screens are flat 2D surfaces. So rather than making elements pop, they design the interface around planes that exist at different levels and serve different purposes. Animations that use real world physics give the interface a realistic feel that no “3D” icon ever could. It’s an entirely new concept that shifts the interface from purely being software to something that feels more like it’s part of the hardware.

    4. I design stuff for a living. I just don’t agree with your looking backwards critique. The icons are flatter but not flat. What Jony & company did was to isolate individual layers that could be distinguished from one another. In order to help distinguish the layers they compressed them, but they are not flat. They enhanced the layer effect with subtle motion which I think is brilliant. Using the phone you will understand it is less confusing, not more confusing. There are a few icons that will not make the cut, but overall this is something very new and interesting – and yes, forward looking.

    5. WOW your amazing – you must be some sort of well established interface designer and I thanks you so much for this information… I wish some how we could all band together and get YOU and job working with Jonny – thanks again for taking some time to fill us all in on the truth about flatness and non flatness… My eyes have been opened – do you have a resumé? have you contacted Apple? Please keep us all filled in on your progress Mr going backwards!

      1. I agree with Gavin – lets all get this guy working with Jonny – he seem to have such a handle on things – like for instance I like pancakes and I love maple syrup and if I don’t see the maple syrup then I find it hard for me to even know i’m eating pancakes – we need maple syrup – Hire Backass i mean backwards dude!

  3. Wrong! Only if Apple is interested in maintaing the growth they’ve had in the smartphone market in the passed couple of years.

    As the market matures and growth slows, Apple will continue to grab new users mainly from the fact that their customer satisfaction and retention rates are much higher then their competitors.

    Furthermore, the iPad still has momentum as does the AppleTV. And Apple may have another market they’re about to enter.

    The cheap phones being sold in emerging markets are not being used as smartphones, they are glorified feature phones. If Apple wanted to enter this market, I believe they would not allow access to the AppStore, just iTunes for content, but would have all the built-in apps still present.

  4. Interesting idea for Apple to look at a non touch screen phone – they would have to find a way to do the iPod nano thing to a phone, maybe leave off the internet completely. A very different animal? Could they pack a whole phone into a wristwatch with a bluetooth earpiece? (remember the cool looking apple bluetooth headset that sucked as bad as the hockey puck mouse – who says apple is perfect!) Maybe it works with the iPhone in your pocket? BUT, the phones they make right now are not really about being phones – they are much more of a communication computer than a phone. I think the new “low cost” phones (if they are real) will match the current iPhone 5 experience. Then they will also introduce something above those phones to drive innovation. I’m hoping for a MacBook – MacBook Pro kind of scenario.

  5. How is copying stuff that other platforms had for years innovation?

    I guess in a world where a Muslim Fascist president of the United States openly supports Islamist terrorists and receives the Peace Nobel prize, anything is possible.

    HEIL Oblama!

    Any opinions to the contrary will be reported to King Obama’s personal Atack Watch web page, where his Truth Team, the IRS and the NSA will deal with such.

    Please report all suspicious activities, such as criticizing Obama to this web page.

  6. Two tiers of iPhones; those with the sensor, those without. There will be more differentiation in terms of build quality and LTE availability.

    The sensor must tie in with services. I imagine an Apple debit card system of some sort. A lot is riding on this.

    Also, people assume that there will be lower margin on the lower end phone. It will probably be the opposite, especially since the build materials are likely cheaper than those for the 4 and the 4S.

    People forget how good Apple is at this stuff. Remember the Nano at 149 or the iPad at 499? When Apple does go after low price points, they shake up markets.

    Plenty of people will buy the high end phones. Apple is pretty darn good at differentiation too.

  7. Stupid standard rumour as always… They never learn. Standard answer provided.

    Apple already have a low cost iPhone in iPhone 4S and a Lowe cost iPhone in the iPhone 4.

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