Barclays Makes the Case for a Cheaper $AAPL iPhone

$AAPLBarclays analyst Ben Reitzes issued a research note on Tuesday making the case for a cheaper Apple iPhone for the company to use to compete in emerging markets. The investment bank said that Apple is likely to bring a cheaper iPhone to market in the next 1-2 years.

"One popular view among some investors is to assume Apple will ignore the low end of the market so it can keep its industry high subsidies and ASPs, but we believe the company could meaningfully extend its growth through thoughtful product expansion," the company wrote in the research note, which was obtained by The Mac Observer.

A key thesis is that cheap smartphones are the fastest growing segment of the market in emerging markets, and that this segment is led by cheap Android devices. Mr. Reitzes and his team believe that as emerging markets graduate from feature phones, there's value for Apple in capturing them early.

From the note, "Apple can benefit from those upgrading to higher end smart phones later on but the company also needs to make sure it can 'hook' customers into the Apple ecosystem early enough in the upgrade cycle to prevent more consumers from developing loyalty to Android."

Barclays said that vendors outside of the top six smartphone makers (Samsung, Apple, Nokia, HTC, RIM, and LG) comprise 28 percent of the market. They are projecting those makers—who deal almost exclusively in cheap devices—to see their business grow 70 percent in 2013 and another 27 percent in 2014.

In China alone, Barlcays is forecasting sales of 300 million smartphones in 2013 and 500 million in 2015, with the low end of the market being a major portion of these staggering numbers. By hooking those low-end customers into its ecosystem from the beginning, Barclays believes Apple can benefit from the sale of higher end devices later in the relationship.

"We believe that Apple may need to sell a low- end model of the iPhone over the next 1-2 years to capitalize on growth in emerging markets," the analyst wrote. "We imagine an iPhone at a low price point to capture the initial smartphone purchase from customers upgrading from feature phones – pushing new consumers into the Apple ecosystem."

That low price point would be based on a device with an inexpensive case and a bill of materials (BOM) of $150. Such a device could be offered for sale in emerging markets without a contract or subsidy, according to the firm.

Mr. Reitzes didn't offer a retail price point for such a device, but said that unlike the iPad mini, he believes it wouldn't have a negative impact on Apple's margins. iPhone gross margins are in the neighborhood of 50 percent, suggesting a retail price in the $300 range. Apple's current iPhone 5 retails starting at $699.

The research note specified that, "success in the low end of the market would be additive," though it would also keep gross margins from expanding past the the low 40 percent range. Of course, that range already dwarfs the competition.

Investors were unimpressed with Barclays's thesis, trading lower on Tuesday. The stock closed at $575.845, down $10.345 (-1.76 percent), on strong volume of 19.8 million shares trading hands.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.