Apple Inc. (AAPL) Would Damage Its Brand, Margins With Cheap iPhone

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Apple Inc. (NASDAQ:AAPL)’s less expensive iPhone, the iPhone 5C, turned out to be priced much higher than analysts were hoping. However, Needham analyst Charlie Wolf thinks Apple did the right thing. In fact, suggests now that the handset was indeed the least expensive one the company could put out without damaging its precious brand and margins.

Apple couldn’t possibly build a cheap iPhone

Wolf broke down the numbers associated with his theory. He suggests that in order to land at the right price for emerging markets, Apple would have to price an iPhone at around $350 without a subsidy from a carrier or a contract. The company has been known for its healthy margins, and investors historically don’t like it when those margins are threatened. So if Apple wanted a 40% gross margin on a $350 iPhone, then Wolf believes the materials would have to only cost a collective $90. Then he adds a $120 per phone cost for items which are not part of the materials, like shipping packaging, licensing fees, etc.

According to Wolf, Apple Inc. (NASDAQ:AAPL) could be paying around $165 for the materials used in the iPhone 5C, plus the $120 in extra costs. This, he suggests, means that it would be impossible for Apple to release an iPhone which is truly targeted at emerging markets because, essentially, it would be of such lousy quality that it would damage the Apple brand. Or it would erode margins considerably.

Apple doesn’t need a cheap iPhone

Wolf doesn’t think Apple will ever launch an iPhone which is truly priced for emerging markets because of these numbers. He also thinks that the threats from U.S. carriers to start cutting down on contract subsidies are empty.

Then he goes on to say that Apple Inc. (NASDAQ:AAPL) doesn’t really need to release a truly cheap iPhone because Android users are switching to the iPhone anyway. However, as the high end of the smartphone market gets more and more saturation, he suggests that Android users will begin switching over to the iPhone even more quickly, unless makers of Android phones really slash the prices. He notes that it is true that Apple will see its growth slow because that’s the nature of the business. However, he doesn’t think it will stop entirely.

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