The case for a new, cheaper iPhone

Jan 07, 2013

FORTUNE -- Apple has always priced its products at a premium. (Steve Jobs was fond of comparing Apple to Mercedes-Benz when commentators pointed out the Mac relatively low market share compared to mass PC makers.) The question now is, does a cheaper iPhone model make sense to boost the company's formidable smartphone share even further? Some analysts argue yes.

According to recent report by Bernstein Research analyst Toni Sacconaghi, the smartphone market will more than double to 1.4 billion units during the next five years. And even though Apple (aapl) is poised to see iPhone sales grow 40% on average through 2014, the research firm argues Apple will likely lose market share if it doesn't bring out a lower-priced iPhone.

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But wouldn't doing so clash with Apple's history of premium pricing? Not necessarily.

Brian White, an analyst at Topeka Capital Markets, says there's real opportunity abroad in China for the company. Although Apple has gained tremendous momentum there, the company is currently overlooking a huge chunk of the population: the average consumer in China that doesn't have a huge discretionary income. "Apple doesn't need to have a $100 smartphone, but I think if you had something priced $200-ish-type range that had the cache of Apple, the aesthetics of Apple, and the newness, it would sell there," says White.

(For more on Cupertino's odyssey in China, check out Fortune's recent cover story Can Apple win over China?)

Of course, Apple already sells older iPhone models at deep discounts. A U.S. customer can pick up an iPhone 4 with contract for free and an iPhone 4S for $99. In theory, these devices wouldn't sell nearly as well abroad as a new model for one simple reason. Customers -- whether they're shopping in the breathtaking Pudong store or somewhere more prosaic -- want the latest and greatest.

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Made to choose between an older model or a so-called "new" model at the same price point, users will spring for the latter. People like "new." What's more, because a smartphone can often be an individuals one big expense, there's a certain amount of pride in purchasing the hottest device. A purpose-built cheaper iPhone would be just that.

White puts it this way: "There are ways to work around it, and the iPad Mini is the perfect example with what they could start to do with smartphones and the iPhone."

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