J.P. Morgan takes a deep look at a low-end iPhone

“Currently,” write J.P. Morgan’s analysts, “the Smartphone market is polarized at the high-end and the rapidly growing low-end segment, while the mid-end price points do not see too much volume. However, if Apple comes in at the $350-400 price point, it could change the shape of the price pyramid, by pulling some consumers into higher end price ranges.” Click to enlarge.

FORTUNE — It took longer than usual for the report J.P. Morgan issued to clients Wednesday to filter through the tech press.

At 28 pages, with contributions from eight different analysts, it was a lot to digest. Barrons’ columnist Tiernan Ray posted an eight-paragraph summary after the markets closed Thursday and AllThingsD’s John Paczkowski did 10 paragraphs early Friday morning, a précis that was later boiled down to short blurbs by a dozen writers for distribution through the blogosphere.

I got my copy of the full report — “Lower-Priced iPhone: Stooping to Conquer” — Friday afternoon, but didn’t get around to reading it through to the end until Saturday.

It’s the deepest dive yet into the prospects of a mid-range iPhone — a device whose release in August or September its authors take as a given. The report covers a lot of territory, from a detailed bill of materials (with estimated prices for more than a dozen components) to the likely impact on suppliers and competitors in three continents.

But what matters most to Apple (AAPL) investors, I believe, is what it has to say about the device itself — its raison d’etre, its price, its ramp-rate and how it’s likely reshape the smartphone industry.

  • Why Apple needs a mid-range phone. The high end of the smartphone market (which Apple shares with Samsung) is become increasingly saturated while the rapidly growing low-end is becoming increasingly commoditized. To increase device sales and broaden its market share, the authors write, Apple has to offer a “mainstream” iPhone that could appeal both to new smartphone buyers and to customers in the developing world.
  • What it would look like. “We are expecting,” team Morgan writes, “a 4″ screen device with plastic casings, running one-generation older silicon, with two variants running on FDD [frequency division multiplex] and TDD [time division multiplex] LTE networks. Our Bill-Of-Materials analysis indicates that the device could be priced at $350 unlocked, if Apple settles at 35% GM (corporate average, but well below iPhone 4S and 5).”
  • Why they believe it’s in the works. The J.P. Morgan analysts see broad hints from Apple in last month’s earnings call, both in comments suggesting that the company is willing to accept lower margins in the short term to dominate new market segments (as it did with the iPad mini) and in Apple’s increased emphasis on the size of the iOS installed base and the newly consolidated iTunes revenue stream (already 81% the size of Amazon’s media revenues, accounting for 10% of Apple’s total revenue and growing at 30% a year).
  • How fast could it ramp up? J.P. Morgan’s checks with Asian vendors suggest “strong plans” to ramp up for plastic casings and lower end components, with volume production starting in July and a product launch around August or September. The analsyts expect production volumes to reach 50 million units in the first 6 months after launch.
  • How big is the market for a mid-range iPhone? The market for smartphones in the $200 to $500 price range is currently about 200 million units a year, dominated by Samsung (35%) followed by Nokia, LG and HTC in single digits. It’s smaller than the high-end market, and although it’s been growing, it hasn’t kept up with the rapidly growing low-end.
  • What would be effect of Apple’s entry? First, it would give Apple a way to address the uneven distribution of its current market share, which is high in the U.S., Europe and Japan (14% to 27%) but in single digits in the rest of the world. It would also give Apple a way to attract some of the price-conscious first time buyers just now switching from feature phones to smartphones. Ultimately it is likely to lead to an Apple-Samsung duopoly in the mid-range market that mirrors the one they share in the high-end.
  • Can Apple pull it off? “One key challenge to ensure success of this product,” the report concludes, “would be to hit cheaper price points but at the same time, retain the Apple ethos and ‘uniqueness’ in these products. From the supply chain perspective, we believe that hitting a mainstream price point ($350-400) while still keeping its design aesthetics unchanged may not be difficult, especially if Apple is willing to sacrifice near-term gross margins.”
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