Why a Cheaper iPhone 6 Doesn’t Matter to You, But it Does to Billions
In a report by Digitimes, Apple is looking into cheaper materials to deliver a cheaper iPhone 6 model to the world. Replacing expensive strengthened glass and unibody metal components for the shell of the device, Apple may once again be turning to plastics–as it had on the iPhone 3G and 3GS models–or mixed metal and plastic components for the casing. It’s still unclear on what the cost savings and profit margin would be for a cheaper iPhone, but with emerging markets like China, India, and Africa, the tradeoff would be greater and more lucrative market share for Apple.
The price of a subsidized iPhone 5 may be just $200–or as low as $150 through special holiday promotions at retailers like Best Buy and Walmart–but for the rest of the world, the cost is higher especially when you consider the unsubsidized pricing. In China, after high national taxes, the true cost of a base model iPhone 5 may be as high as $800 or $900.
Considering that the country’s average income is just under $5,000 according to The World Bank, the cost of an iPhone 5 hovers around 15-20 percent of a person’s income. As a result, we’ve seen some daring grey market tactics and in one case, a woman ended up being tasered for trying to buy too many iPhones. In the grey market, where scouters buy iPhones in the U.S. and ships them to China, those grey market phones would still be cheaper than Apple selling direct to the Chinese population as taxes play a big role in costs. A cheaper iPhone from Apple would at least help to mitigate scouters who drive up prices in the U.S. through third-party resellers on Craigslist, at least initially when supplies are constrained, and would help to reduce or eliminate the scouting and tasering problems.
And considering that the profit margin for the iPhone 5 may be as high as 70 percent per handset sold, a cheaper iPhone may not have such a big dent on Apple’s profits and financial earnings. Giving customers the internals of a modern generation iPhone and all the performance, but in a cheaper shell or case, would still allow Apple to deliver the same great user experience but at a more reasonable costs to emerging markets and the prepaid wireless market in the U.S.
And speaking of the prepaid market, there is 12 percent year-over-year increase in the population in the prepaid wireless market with over 100 million subscribers in the U.S. An unsubsidized handset at $650 may not be affordable for this segment and many are forced to choose an older generation iPhone model as a result. Sprint’s wholly-owned prepaid brands have been offering the older iPhone models and Walmart is adding the iPhone 5 to its Straight Talk plans, which piggybacks off of AT&T’s network. A cheaper iPhone 5 model made of plastic, for example, could help win some of those subscribers.
And with increasing competition from Android and Windows Phone in the low-cost segment, Apple will have to pay attention to the emerging market sooner or later. Samsung and a number of Chinese smartphone-makers are pushing unsubsidized Android smartphones with strong specs for as little as a few hundred dollars and Nokia hasn’t been shy about pushing Windows Phone to the low-cost market as well.
But it isn’t the cheaper market that will benefit from a low-cost handset. Potentially, if you’re a T-Mobile USA or Verizon Wireless subscriber, you’ll also benefit. T-Mobile USA has hinted that the iPhone may be arriving on its nascent 4G LTE network in as little as a few months, and the nation’s fourth largest carrier has stated that it would end contract subsidies, forcing people to pay full price for their handsets in exchange for reduced wireless service costs as the carrier would now not have to subsidize handsets. Verizon Wireless has said that it’s evaluating T-Mobile’s actions and results and may soon follow in its smaller rival’s footsteps as well.
And sure, while users can get a cheaper iPhone today through Apple offering the last two generations of iPhone hardware at reduced price. On contract, the iPhone 4 is free and the iPhone 4S costs $100 with a two-year service agreement. However, these models are older and don’t have the hardware prowess as the latest generation model. A more affordably constructed iPhone 5 model, for instance, can help steer these new generations of iPhone customers to a more modern device and show off how great a user experience Apple had envisioned through the marriage of software and modern, new hardware.
And also, a more affordable iPhone model, when it debuts, may spur more frequent hardware upgrades. Currently, if you’re in the middle of your contract on Verizon and Sprint, you’d have to pay full retail costs for a new iPhone model if you want to upgrade before your contract is up. On AT&T, you have a more modest subsidy to do this. However if the iPhone was priced more affordably, more customers would purchase new hardware and upgrade before their contract is up, perhaps even on an annual basis, which would mean Apple would get more volume.
Apple had been success with its iPod line in the past because it was flexible enough to target different market segments, from the then high-end iPod Classic to newer smaller capacity flash storage models, like the iPod Nano, iPod Mini, or iPod Shuffle. Presumably, a similar strategy can help Apple boost iPhone market share in light of strong competition from Android and Nokia in the low-cost market.
So while a lower cost iPhone may sound like Apple may not be making as much money per unit, as a whole if the cheaper model inspires more sales, Apple could make even more money than it does today. It’s a win for Apple, it’s a win for emerging markets, and it’s a win for consumers.