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Apple Inc. (AAPL) Profit Margins Could Be Damaged By Cheaper iPhone

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Apple Inc. (NASDAQ:AAPL) could make a less expensive iPhone to increase its market share in price-sensitive developing markets, although increasing market share that way could have a negative effect for investors. The company’s profit margins are likely to drop if it does begin to produce a less expensive iPhone.

Apple Inc. (AAPL) Profit Margins Could Be Damaged By Cheaper iPhone

The Wall Street Journal was the first to speculate Tuesday that Apple Inc. (NASDAQ:AAPL) could start building an iPhone made of less expensive materials in order to increase its market share in developing markets. However the cheaper handsets would carry a lower price and, most likely, a lower profit margin.

As MarketWatch points out, Apple Inc. (NASDAQ:AAPL)’s profit margins are among the highest in the industry. The company also receives high subsidies from wireless carriers that carry the iPhone. Apple Inc. (NASDAQ:AAPL) sold almost 27 million iPhones in its September quarter for an estimated average selling price of $636 each. That’s only 1 percent less than the estimated average price for the same period a year ago. Meanwhile unit sales skyrocketed almost 58 percent during that time frame, which indicates that Apple has managed to hold on to its high price point while still gaining significantly in the smartphone market share.

We will see the December quarter results from Apple on Jan. 23, and the general consensus right now is that the company sold at least 40 million iPhones during the quarter, which would push the total sales for last year to about 133 million iPhones. That’s a 43 percent increase over the same quarter in 2011.

At this time, most analysts believe that smartphone growth this year will be focused in developing markets where there is high demand for cheaper phones. So Apple executives must be asking themselves right now whether it’s more important to increase market share in areas where a less expensive phone will sell better, or to keep the company’s strong profit margins in place.

From an investor’s point of view, it seems pretty clear that better profit margins would be the better choice, but we’ll just have to wait and see where the company goes from here.

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