Want a Cheap iPhone? Don’t Hold Your Breath

| Analysis

Apple needs to make a cheaper iPhone. That's what analysts are saying, which tells me they still don't understand Apple's market. The company has proven quarter after quarter through sales that consumers are fine with its price structure, and that it has no interest in following the overall market's make-it-cheap mentality.

Don't look for a low quality, low cost iPhoneDon't look for a low quality, low cost iPhone

Apple currently offers the iPhone 5 as its full-price model, the iPhone 4S as it's economy-priced model, and the iPhone 4 as its entry level practically free model. As new models come out, the older versions move down the price list so there's always three price brackets to choose from. That's the circle of life at Apple.

With three price ranges from consumers to choose from, Apple has managed to bring new buyers into the fold that otherwise may not have been able to afford an iPhone -- and once they're in, they tend to keep buying the company's products. Loyal customers are a good thing because they keep giving you, and not your competitors, their money.

Analysts, however, aren't happy with the iPhone's market performance and think it's time for Apple to follow companies like Samsung and produce lower quality smartphones that hit a much lower price point. By doing so, they think Apple will take more of the smartphone marketshare.

Apple may not hold the largest percentage of the smartphone market, although it is one of the top players. What Apple does hold is the lion's share of smartphone market profits, which ultimately translates to more earnings for shareholders.

What analysts are seeing are new iPhone buyers dropping their hard earned dollars on the iPhone 4 and iPhone 4S instead of the iPhone 5, and that has them worried that Apple has lost its magic touch. They fear there isn't enough innovation happening in Apple's secret labs to draw consumers to the top of the line model, so instead they're opting for good enough: The iPhone 4 and 4S.

Quarterly activations from AT&T and Verizon show that the iPhone 4 and iPhone 4S are still big sellers, making up about half of their iPhone numbers. Overall iPhone activations are down for AT&T, Verizon, and Sprint compared to the previous quarter, as well.

AT&T's iPhone activations hit 6 million, down from the previous quarter's 8 million. Verizon activated 4 million iPhones compared to 6.2 million, and Sprint activated 1.5 million which was down from 2.2 million. Apple's quarterly iPhone sales hit 37.4 million units, which was a dip, but still a year-over-year increase.

iPhone numbers may be slipping some, but Yankee Group thinks Apple's smartphone is still going strong. In a recent study, the research firm found that interst in the iPhone is still high, and that it's the product of choice for many consumers. The study showed that overall, Android smartphone owners are inclined to make their next smartphone an iPhone, and they expect iPhone sales to top all Android sales by 2016.

While Apple's three-generation iPhone strategy seems to be working to draw in more buyers, that doesn't mean there isn't room for a new lower-end model targeted at markets that otherwise can't afford to get into the iPhone game, such as parts of India and China. An iPhone specifically for those markets could lead to a new sales boost for Apple, but it doesn't fit with the company's philosphy to sell that kind of product in every market.

Apple is all about making the best products, not the cheapest. Analysts have a long track record of wanting Apple's business plan to fit into the rest of the tech market. Remember when they were calling for Apple to follow Microsoft as an OS maker while letting any company make compatible computers? Apple has done pretty well ignoring analysts and doing their own thing.

The PC clone market turned into a wild free fall where prices kept going lower and lower, product quality suffered, and ultimately PC makers were showing almost no profit for their efforts to take marketshare.

Apple didn't run in the race to the bottom like other companies during the PC wars. Don't expect Apple to join in now.

Sign Up for the Newsletter

Join the TMO Express Daily Newsletter to get the latest Mac headlines in your e-mail every weekday.

8 Comments Leave Your Own

geoduck

Very good points. If I add a couple of others:

A cheap, entry level iPhone would likely eat into sales of the higher priced models. This would reduce margins and profits, which you’d think would be something ‘analysts’ would be against.

Apple’s strategy works but they should think of changing the terminology so it isn’t screaming the fact that the 4S is a year old model and the 4 is two years old. Suppose they dropped model numbers and just called them the iPhone. Then they’d have three models of iPhone, Low, Medium, High, or Entry, Middle, Sport, or Good, Better, Best, you get the idea. This would eliminate the possible stigma of getting the “old” model. Not that this seems to be hurting them any, but I can just see someone selling a Samsung with “Why buy an old iPhone4 when for the same price you can get a new Samsung”.

1stplacemacuser

Better to sell one widget at $1500 than 10 widgets at $150, especially if the cost of materials is the same per widget.

mhikl

Spot on, Jeff.
“The PC clone market turned into a wild free fall where prices kept going lower and lower, product quality suffered, and ultimately PC makers were showing almost no profit for their efforts to take marketshare.”

Are you suggesting in time this will be the case for Android while Apple continues to take the dollars, nix a few coin?  There will always be a market for cheap and quick but the market for quality will continue, especially for those who use their little computers for more than calling, texting and a little search.

graxspoo

I think Apple needs to have a cheaper iPhone because pre-paid plans are becoming more important. Pre-paid plans are popular overseas, where much potential growth lies, and there’s a trend towards pre-paid or “fully disclosed” plans (like T-Mobile’s latest shift) in the US. This is a problem for Apple because with these plans, less of the phone’s cost gets hidden in the contract, and so iPhone is shown to be substantially more expensive than other phones. Margin is important, but so is market-share, especially with a mass-consumer product like a cellphone. Plus, there’s really no reason not to. Apple has a diverse iPod line-up, so there’s no strict rule at the company against diversifying into lower cost products (iPod shuffle, iPod nano etc) as long as it doesn’t cheapen the overall brand image.

John Dingler, artist

Where’s my comment!? OK, will resubmit it:

“And any lower cost device would start a trend of offering low cost devices which consumers would then expect, if not demand, moving forward (finally found a reason to use that cliche), thus Apple would have lost some of its ability to offer devices made of high end materials, top notch design, and introduce them at high margin retail prices.”

geoduck

pre-paid plans are becoming more important. Pre-paid plans are popular overseas, where much potential growth lies, and there’s a trend towards pre-paid

I know that I always buy the phone outright and go prepaid month to month. I will never sign another cell contract. OK Canada is not technically ‘overseas’ but with the utterly abusive contracts up here it’s the only way to go. Actually the contracts are the reason I DON’T have an iPhone yet. I haven’t been able to justify $700, (or even $450 for an older model) to buy one outright. But maybe that’ll change this year.

Peter Sichel

Several of good points in your article.  Let me add a couple more:

(1) The biggest cost of owning a cell phone is the service, not the phone. By embracing low cost carriers and allowing phones to be unlocked, Apple has already cut the iPhone price in half for anyone paying attention.

(2) As the industry leader, Apple sets the price umbrella that influences the price of competing products. Since no other vendor has been able to match Apple’s user experience at the same or lower price, lowering the price umbrella for the best user experience would be self defeating. To the millions of users who buy and love their iPhones, the product is not over-priced based on the value it delivers.

Enjoy!

aardman

In the market for computers the primary differentiating feature is the OS.  It’s the main thing that sets one computer apart from another.  Two computers, different build quality, different marketing pitch, etc.  If they have the same OS, does basically the same things the same way, then the market will go for the cheaper one.  We’ve seen that with Windows PCs. —The introduction of a low-margin low-end model kills the high-margin luxury business.  Apple saw that with Macs, that’s why Steve killed the Mac clones.

For smartphones, I would modify the above by saying that the primary differentiating feature is the OS and the ecosystem (platform?).  I don’t think Apple would suddenly become stupid and introduce bottom-feeder iPhone models that would kill their high-margin business.  They might come out with ‘cheaper’ phones but not ‘cheap’ phones which some analysts seem to be demanding even as they complain that Apple’s margins are falling.

Log-in to comment