Apple Inc. (AAPL): How It Could Have Released A Truly Low-Cost iPhone

Apple Inc. (AAPL): How It Could Have Released A Truly Low-Cost iPhone
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When Apple Inc. (NASDAQ:AAPL) revealed the iPhone 5C, it was about what everyone expected—except for the price tag. This week Bernstein analysts issued a report with an explanation of how Apple could have released an iPhone with a much lower price tag than the iPhone 5C has—without compromising margins too much. Margins had been one of the concerns analysts did have about a so-called “low-cost iPhone.” They also question whether we could yet see a truly low cost iPhone in the very near future.

Apple Inc. (AAPL): How It Could Have Released A Truly Low-Cost iPhone

Why a low-cost iPhone makes sense for Apple

Analysts Toni Sacconaghi, Hr., Jonathan Cofsky and Eric C. Garfunkel admit to being one of the many who were disappointed when Apple Inc. (NASDAQ:AAPL) revealed the price of the iPhone 5C. They were hoping that it would be priced below $400 because such a handset would provide “significant incremental market opportunity” to Apple,” especially if it was done in such a way to limit cannibalization to the flagship handset. Instead though, Apple’s product announcement last week revealed two handsets that are both priced at the high end of the smartphone market.

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The analysts note that high-end smartphone market growth will likely slow down greatly, growing at about a third of the rate of the total smartphone market in terms of units. This would mean that even if Apple is able to keep its 2012 high-end market share of about 46.5 percent, the company’s unit share of the overall smartphone market by 2017 would be less than 13 percent, compared to 19 percent in 2012.

Did Apple drop hints about a low-cost iPhone?

The Bernstein analysts note that there were plenty of reasons everyone was convinced that Apple Inc. (NASDAQ:AAPL) would launch a truly low-cost iPhone. On the company’s last earnings call, management talked about the success of lowering the price of the iPhone 5 in certain markets, thus showing off “elasticity of demand.”

Apple also appears to be making move in China’s market, receiving regulatory approval for the iPhone to run on China Mobile’s TD-SCDMA and TD-LTE networks. In fact, it looks like a deal between the iPhone maker and China’s largest mobile carrier had been done.

How Apple could offer a truly low-cost phone

They note that there are still some options for Apple Inc. (NASDAQ:AAPL) if it wants to release an iPhone that truly belongs in the low end of the smartphone market. They believe the company “had multiple options to de-spec the iPhone 5 or iPhone 4 and offer” an iPhone which would sell for less than $400.

The analysts suggested what they call an iPhone 4C, which would have the internal components of the iPhone 4 inside an iPhone 5C case. They believe such a device would have margins of about 32 percent with an average selling price of $400, although margins on it could be even higher.

Making the case for the iPhone 4C

They said an iPhone 4C with a new case would make it look new rather than three years old, and the component savings on it would lower the bill of materials by more than 20 percent. In addition, they note that the iPhone 4 still has specs which are “solid for a mid-tier phone in emerging and prepaid markets.” They believe it’s also “differentiated enough” to prevent cannibalization of the high-end iPhone. Additionally, they note that it would require little to no investment for Apple Inc. (NASDAQ:AAPL) and could easily be phased out if it didn’t work.

In their estimates, an iPhone 4C would save Apple Inc. (NASDAQ:AAPL) money in the plastic casing and screen, which will help improve yields as well. Other areas of savings would be the 3G only cellular, the A5 processor, and a camera with lower specs. They estimate that the iPhone 5 has an average selling price of $650 and 47 percent gross margins. As a result, they believe that making the listed changes to the low-cost iPhone and selling it for $400 would give Apple gross margins in excess of 30 percent. A selling price of $375 would put margins just below 30 percent.

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