A Respectful Conversation Regarding The iPhone Nano

  • Posted: 27 June 2011 12:25 PM

    This is a topic that splits the AFB and raises the ire of many. In regard to the latter, I have been one of the worst offenders. I promise to keep my tone civil and I ask for others to do likewise. (Which, I guess, is like a pyromanic asking others not to smoke.  grin )

    There are at least two articles today on the low-cost iPhone. For identification only, I will refer to it as the iPhone Nano. I would like to use those articles to examine, once again, the pros and cons of Apple creating such a device. I look forward to your responses.

    The two articles can be found at:

    Apple seen introducing mid-range contract-free $350 iPhone in Sept. - By Neil Hughes

    Report: Apple is building two (!) iPhones for September release - PED

    “It’s time for a mid-range iPhone,” analyst Chris Whitmore with Deutsche Bank declared in a note to investors on Monday. He believes Apple will offer a lower-end iPhone priced between $300 and $500 paired with a pre-paid voice offering.

    Whitmore noted that of the addressable market of 1.5 billion mobile customers worldwide, two-thirds of those are pre-paid users. He sees a so-called “iPhone 4S,” released alongside an anticipated fifth-generation iPhone, as a new category of device that would help Apple address that market.

    I concede the addressable market and the desirability of an iPhone that meets the needs of this market.

    If Apple were to price this “iPhone 4S” at $349, Whitmore estimates that Apple could have the product be incremental to its corporate gross margin without negatively impacting profitability.

    1) Would such a phone cannibalize the sales of the existing iPhone?

    2) What features would the iPhone Nano be missing or what features would be added to the original iPhone in order to distinguish the iPhone Nano from the original iPhone?

    3) How could Apple make such an inexpensive phone without damaging the integrity of the device?

    Whitmore sees an “iPhone 4S” that would look a lot like the low-end iPod touch. He estimates that an unlocked iPhone priced at $649 has a manufacturing margin of 70 percent, while the $229 low-end iPod touch has 38 percent margins.

    “Using this framework, we believe an 8GB iPod touch with an RF module could be priced ~$350 (unlocked without a contract) and still generate healthy manufacturing margins of ~53%,” he said.

    OK. You’d have to add radio antennas. GPS? Retina display? Other?

    4) How would it benefit Apple to reduce their margins from 70% of $649 to 53% of $350? They make it up in volume? Doesn’t sound like Apple’s Modus Operandi.

    Again, I see a low cost iPhone Nano as desirable, but I don’t see it as practical? Or very Apple-like. What am I missing? (Besides manners, couth, and a gift for repartee.) Your thoughts?

         
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    Posted: 27 June 2011 12:34 PM #1

    At the least, I expect to see an additional family of Apple phones.  One size does not fit all.  Certainly not me.

         
  • Posted: 27 June 2011 02:17 PM #2

    See comments below

    [ Edited: 27 June 2011 03:10 PM by Mikedmvp ]      
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    Posted: 27 June 2011 02:35 PM #3

    FalKirk - 27 June 2011 03:25 PM

    If Apple were to price this “iPhone 4S” at $349, Whitmore estimates that Apple could have the product be incremental to its corporate gross margin without negatively impacting profitability.

    1) Would such a phone cannibalize the sales of the existing iPhone?

    At that price I think it would cannibalize sales of both the iPhone 5 and iPhone 4. What makes most sense to me is to retain the 3GS as the low-price iPhone option. It isn’t that the Retina display is so much more expensive; it’s that it is a big differentiator.

    iPhone 5 from $649
    iPhone 4 from $499
    iPhone 3GS from $349
    iPod touch 5th gen. from $229

    Whitmore sees an “iPhone 4S” that would look a lot like the low-end iPod touch. He estimates that an unlocked iPhone priced at $649 has a manufacturing margin of 70 percent, while the $229 low-end iPod touch has 38 percent margins.

    “Using this framework, we believe an 8GB iPod touch with an RF module could be priced ~$350 (unlocked without a contract) and still generate healthy manufacturing margins of ~53%,” he said.

    I agree that Apple could make a cheaper iPhone 4, but it would cannibalize iPhone 4 sales. I think the iPod touch is too thin to handle all the components needed for an iPhone. It also doesn’t make sense to make the low-end iPhone model the thinnest.

    4) How would it benefit Apple to reduce their margins from 70% of $649 to 53% of $350? They make it up in volume? Doesn’t sound like Apple’s Modus Operandi.

    Right now Apple is getting 0% margins on $0 sales of mid-range smartphones. I look at a mid-priced iPhone as entering a new market (pre-paid smartphones). It won’t affect margins or sales of the iPhone 4/5 series. Those will go on to sell over 100 million in FY 2012. Anyone want to venture a guess how many pre-paid iPhones will sell the first year?

         
  • Posted: 27 June 2011 02:37 PM #4

    Irregardless of margins, an iphone to address 2/3 of the worlds market (prepaid) seems extremely bullish. Serious marketshare push.

         
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    Posted: 27 June 2011 02:39 PM #5

    Mikedmvp - 27 June 2011 05:17 PM

    Take the iPhone 3gs today.  I’m sure that Apple still gets good margins with the phone, yet they are selling like crazy on AT&T.  Release the 3gs or a phone that is similar in cost to the 3gs on the pre-paid market for $349.  You open up hundreds of millions of potential buyers.

    I agree. I was typing the same thought while you posted this.

         
  • Posted: 27 June 2011 02:50 PM #6

    As long as Apple is production constrained they cannot introduce a lower priced iPhone.

    As long as the iPhone is growing faster than the market and therefore taking market share Apple will not choose to cannibilize margins by offering a nano “iPhone”.

    With that in mind, Apple can introduce a cheaper iPhone at some point in the future that has a slower processor, less memory, inexpensive camera, etc. enabling them to lower the price point while maintaing margins. On the other hand, they may be doing that now by offering the previous generation iPhone at a discount. Maybe the future just portends a greater discount?

    Apple cannot reduce the functionality of the device as they do not want to alter the iOS experience. Additionally, a cheaper iPhone must remain feature competitive with competitors, specifically Android devices.

    Apple has been able to maintain their profit margins for years and years because of innovation. Therefore, it’s in Apple’s DNA to continue to expand the functionality and performance (consumer utility) to maintain margins. Many analysts contend that Apple’s margins are about to collapse. They have been wrong in the past and will continue to be wrong due to a material misunderstanding of these dynamics. Icloud will only add to the consumer utility of the IPhone and iPad strengthening Apples ability to maintain margins.

    On the other hand, maybe Apple can introduce a materially cheaper iPhone exclusively for China Mobile that is incompatible with other networks. The market for a cheaper phone in China may be so much larger than that for the full priced model that any cannibalization limited to China will be justified.

    Of course, IMHO. smile

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  • Posted: 27 June 2011 03:06 PM #7

    jeffi - 27 June 2011 05:50 PM

    As long as Apple is production constrained they cannot introduce a lower priced iPhone.

    As long as the iPhone is growing faster than the market and therefore taking market share Apple will not choose to cannibilize margins by offering a nano “iPhone”.

    With that in mind, Apple can introduce a cheaper iPhone at some point in the future that has a slower processor, less memory, inexpensive camera, etc. enabling them to lower the price point while maintaing margins. On the other hand, they may be doing that now by offering the previous generation iPhone at a discount. Maybe the future just portends a greater discount?

    Apple cannot reduce the functionality of the device as they do not want to alter the iOS experience. Additionally, a cheaper iPhone must remain feature competitive with competitors, specifically Android devices.

    Apple has been able to maintain their profit margins for years and years because of innovation. Therefore, it’s in Apple’s DNA to continue to expand the functionality and performance (consumer utility) to maintain margins. Many analysts contend that Apple’s margins are about to collapse. They have been wrong in the past and will continue to be wrong due to a material misunderstanding of these dynamics. Icloud will only add to the consumer utility of the IPhone and iPad strengthening Apples ability to maintain margins.

    On the other hand, maybe Apple can introduce a materially cheaper iPhone exclusively for China Mobile that is incompatible with other networks. The market for a cheaper phone in China may be so much larger than that for the full priced model that any cannibalization limited to China will be justified.

    Of course, IMHO. smile

    There is a lot of talk about a cheaper iPhone cannibalizing another iPhone.  I think these people are missing the point.  The entire point of a new, cheaper phone for prepaid markets would be to reach a new market that the current iPhone is not reaching.  This makes complete sense, even if margins aren’t as good as the current iPhone. 

    A prepaid phone buyer WANTS an iPhone, but isn’t going to pay $650 for one (probably), so they buy a cheaper, crap phone.  They DON’T want a contract, so the $199 or even $49 price target iPhones aren’t even considered.  But now take that contract free iPhone 4 and make it $350 and it sounds much more reasonable. 

    If you have to relate it to Apple’s current market, think about it like the new Macbook Air.  At a $999 price target, they are cheaper than a MacBook Pro, but this slimmer laptop addresses not only the ultra-porable market, but also the sub-$1000 laptop market and has been a huge hit.

         
  • Posted: 27 June 2011 03:58 PM #8

    Drew Bear - 27 June 2011 05:35 PM

    4) How would it benefit Apple to reduce their margins from 70% of $649 to 53% of $350? They make it up in volume? Doesn’t sound like Apple’s Modus Operandi.

    Right now Apple is getting 0% margins on $0 sales of mid-range smartphones.

    This is a very compelling argument.

         
  • Posted: 27 June 2011 04:08 PM #9

    Mikedmvp - 27 June 2011 06:06 PM

    If you have to relate it to Apple’s current market, think about it like the new Macbook Air.  At a $999 price target, they are cheaper than a MacBook Pro, but this slimmer laptop addresses not only the ultra-porable market, but also the sub-$1000 laptop market and has been a huge hit.

    Here’s the difference.

    For many people, the MacBook Air - regardless price - is an IMPROVEMENT over the MacBook Pro. Those customers don’t need all the Pro’s processing power but they adore the Air’s size, weight and instant on ability.

    Apple did the same thing with the Nano (and the mini before it). Yes, they made it cheaper. But they also made it much, much smaller. For many, the loss of the extra hard drive space meant nothing but the gaining of a smaller device meant everything.

    The MacBook Air and the Nano were viewed as IMPROVEMENTS by their target markets. The lowered price was an additional bonus. How is Apple going to both IMPROVE the iPhone Nano without swallowing the iPhone whole?

         
  • Posted: 27 June 2011 04:29 PM #10

    FalKirk - 27 June 2011 07:08 PM
    Mikedmvp - 27 June 2011 06:06 PM

    If you have to relate it to Apple’s current market, think about it like the new Macbook Air.  At a $999 price target, they are cheaper than a MacBook Pro, but this slimmer laptop addresses not only the ultra-porable market, but also the sub-$1000 laptop market and has been a huge hit.

    Here’s the difference.

    For many people, the MacBook Air - regardless price - is an IMPROVEMENT over the MacBook Pro. Those customers don’t need all the Pro’s processing power but they adore the Air’s size, weight and instant on ability.

    Apple did the same thing with the Nano (and the mini before it). Yes, they made it cheaper. But they also made it much, much smaller. For many, the loss of the extra hard drive space meant nothing but the gaining of a smaller device meant everything.

    The MacBook Air and the Nano were viewed as IMPROVEMENTS by their target markets. The lowered price was an additional bonus. How is Apple going to both IMPROVE the iPhone Nano without swallowing the iPhone whole?

    That’s why I was cringing when I even made that comparison.  The market that Apple will go after with a prepaid iPhone isn’t a current Apple consumer.  A prepaid consumer will be comparing a prepaid iPhone with other prepaid phones, not with contract phones.  A cheaper iPhone for prepaid markets opens up a whole new consumer of products.

         
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    Posted: 27 June 2011 05:15 PM #11

    If Apple made an affordable China Mobile TD-SCDMA exclusive, wouldn’t that vastly expand the addressable market and minimize cannibalization?

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    Posted: 27 June 2011 05:28 PM #12

    I think we are at the point in the iPhone life cycle where a lower cost device for the prepaid market makes sense.  The emerging market holds the key to success.  China and India have huge potential if Apple can reach the right price point.  The unit cost of the a4 processor should allow Apple to build a 3GS kind of phone with some updates to the internals in the 300-350 price range.

         
  • Posted: 27 June 2011 07:41 PM #13

    adamthompson3232 - 27 June 2011 10:34 PM
    Tetrachloride - 27 June 2011 03:34 PM

    At the least, I expect to see an additional family of Apple phones.  One size does not fit all.  Certainly not me.

    One size doesn’t fit all, but one size fits 15-18M people per quarter right now and iPhone isn’t available in every country in the world yet and is only on 200 carriers today. So, with the smart phone market growing roughly 50% YoY and with iPhone gaining carriers and gaining share on its existing carriers every day iPhone should fit roughly 25-30M customers per quarter going forward beginning in the next 3-6 months. Volumes will continue to ramp from there even with one model. In 2-3 years when smart phone growth slows or stagnates I agree that an additional model might make sense. Until then, it would be beyond moronic to introduce a new model. It simply isn’t in the cards for at least another couple years.

    Amen! Couldn’t agree more (with the possible exception of China Mobile exclusive).

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    Posted: 27 June 2011 09:02 PM #14

    I can see both sides if the argument since we started it last year, but I come down on the side of yes for an iPhone Air release.

    As the smartphone marketshare of the overall handset market increases, it continues to move more & more into downmarket territory. Apple does not yet have a model for this market, so eventually its growth will trail that of the overall smartphone market ? especially in mature markets where it already has distribution.

    I could be wrong, but would overall iPhone production increases be easier if it was split over two separate manufacturing lines, where annual product ramp ups can be staggered (say one in September, the other in march/April)?

    I believe there is enough technology & feature differentiation choices that can be made whereby cannibalisation of sales of the high end iphone would be minimal by an iPhone Air introduction. As follows -

    An example of product lineups after iPhone 5 & iPhone Air introduction.

    iPhone Air:  Slimmer design (slimmer, smaller capacity battery), ipod touch class retina display, 3G only, smaller bezel, lower clocked CPU & GPU to conserve power, 5MP camera + front facing camera, 720p max video recording, no airplay mirroring.

    iPhone Air 8GB:  $449.00 (free subsidised)
    iPhone Air 16GB:  $549.00 ($99.00 subsidised)

    (Updated every September ? as the cheaper unsubsidised model would prove more popular at xmas time)

    iPhone 5:  Premium quality retina display, LTE/4G radios, A5 processor & improved GPU, 8MP camera with dual flash, 1080p HD recording, big battery life, Airplay mirroring.

    iPhone 5 16GB:      $649.00 ($199.00 subsidised)
    iPhone 5 32GB:      $749.00 ($299.00 subsidised)
    iPhone 5 64GB:      $849.00 ($399.00 subsidised)

    (updated every March/April?)

    Thoughts?

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    Posted: 27 June 2011 09:35 PM #15

    adamthompson3232 - 28 June 2011 12:24 AM

    I think in 2-3 years Horace will be right.

    http://www.asymco.com/2011/06/27/the-four-year-ol/

    Horace is by far & away the most intelligent person I have ever had the pleasure of reading/listening to when it comes to the mobile computing industry.

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