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Point-Counterpoint: The 'cheap iPhone'

The "Apple will make a low-cost iPhone" rumor is turning into one of the leading tech industry memes of 2013. Just like the "Apple will make an HDTV" and "Apple will introduce a streaming music service" rumors, the "low-cost iPhone" rumor isn't exactly new; there have been rumors of an "iPhone nano" for close to five years now.

The question no one seems to be asking is this: does it even make good sense for Apple to make a low-cost iPhone? Fellow TUAW writer Richard Gaywood and I batted that question around; our point/counterpoint follows.

Chris Rawson: The low-cost iPhone is the only way to save Apple. Otherwise, it's DOOMED. I know this because more than one analyst said so. This is the dumbest rumor so far this year, and that's saying something. There's already a low-cost iPhone; it's called the iPhone 4. In the next product cycle, it'll be the iPhone 4S. Duh.

Richard Gaywood: Hmmm. While it's certainly true that the iPhone 4 is free on contract, in the rest of the world pre-pay is far more common than it is in the US. Here in the UK, for example, I enjoy a choice of at least five mobile operators in the UK that offer competitive pre-pay iPhone tariffs. Pre-pay is more than 80% of the entire Italian mobile market, and it's typically 25-50% in most European markets. And so on, and so forth.

So let's consider Apple's pre-pay offering. A contract-free 8 GB iPhone 4 is £319 -- far more expensive than a Nexus 4 (£239 from Google, admittedly with vexing supply issues that are, remarkably, worse than trying to get an new iPhone in the first week after launch). The Nexus 4, of course, is probably more fairly compared to the iPhone 5 than the ageing iPhone 4; Apple's most advanced handset costs £529 for a 16 GB model. The Nexus's lack of LTE is less of an issue here in Europe, where LTE coverage is lagging behind the aggressive rollouts in US cities. (For another comparison point, the best-of-breed Samsung Galaxy S3 is showing on Amazon right now for around £399.)

This "the iPhone is already free, can't get any cheaper" meme is US-centric nonsense. Consider this graph posted on Twitter by telco analyst Benedict Evans, which breaks down handset sales by OS and price point. Android owns the $100-200 and the $200-300 brackets, markets that Apple simply doesn't compete in. That's Apple's economic motivation for a cheaper iPhone.

Now, often, people say Apple doesn't want this cheaper end of the market -- although I'm not sure I'd characterise that $200-300 bracket as particularly cheap, myself. That's not necessarily the wrong call. But right now, it is conceding huge numbers of sales to Android. And didn't Jobs once say something about a mistake when Apple went for profit and should have gone for market share...?

Indeed, Tim Cook said at the iPhone 4S launch that "The iPhone has 5% share of the worldwide market of handsets. I could have shown the bigger smartphone numbers. But we believe over time all handsets become smartphones." Cook chose to couch market share in terms of all phones, not just the thin sliver of the market -- "smartphones above $300" -- where Apple competes today.

CR: As someone living in New Zealand and shelling out over a thousand bucks for an off-contract iPhone every other year, I'll agree with you wholeheartedly on that "free iPhone 4" thing being US-centric bullhonkey. As for whether it makes sense for Apple to address the pre-paid market at all, much less at the low handset retail numbers people are wildly throwing around? Let's pretend it's Opposites Day. Of course, it makes perfect sense that Apple will produce a cut-rate iPhone just to beef up its market share numbers. If there's one thing Apple's famous for, it's producing cheap, crippled crap in the name of increasing market share.

RG: Because the iPad nano and Shuffle were such disasters?

To use with my iPhone 5, I have a pay-monthly contract (i.e. I can leave any time I want, with no lock-in, but I don't have to faff with top-ups; it's billed from my account). I pay £25/mo, and that's relatively expensive. I get 2000 minutes for outgoing mobile and landline calls, 5000 minutes for outgoing calls to other users of my network, and 5000 SMSs. Plus unlimited -- truly unlimited -- data. I've wracked up 10 GB in a month before now (mostly Netflix streaming in hotel rooms).

But of course, my off-net iPhone 5 that I needed for that cost more than twice as much as a Nexus 4 would have... Hence the entirely reasonable conclusion that the iPhone is expensive. The Nexus 4 is a very close match, in most of the ways I care about, for the iPhone 5. And there are plenty of other high spec Android handsets around that cost more than the Nexus but a lot less than the iPhone, too.

Then there's the other bit. Look at the graph I posted earlier. Look at the Nokia Feature and Samsung Feature lines; the hundreds of millions of sales in the developing world. Over time, many of these people are going to naturally migrate to smartphones, but they are going to do it without paying very much more. At the moment, Android is getting cheaper and cheaper, and gobbling up more and more of the market. Apple have frozen themselves out. Is that wise? I don't know, but I don't think it's an open-and-shut case that it is the right decision.

CR: All these arguments for why Apple "must" introduce a low-cost iPhone strike me as very similar to the pre-iPad discussions for why Apple simply had to build and ship a netbook. And yet I read an article the other day (can't find the link, rare moment of Google Fu letting me down) that said low-cost netbooks have likely caused a market crash in the average sale price (ASP) of Windows-based PCs-possibly permanently.

ASP for PCs is down near US$450, according to that article. ASP for Macs is around $1499. It doesn't take a math genius to notice the disparity.

Android handsets are gobbling up market share, true... and yet the only Android handset maker who's turning an appreciable profit is Samsung. And while I don't have the figures in front of me, I'd be willing to bet its most profitable phones aren't the cheap crap flooding the prepaid market, but the flagship lines that it advertises so heavily.

People see how much money Apple makes and how many devices it sells, and they assume it's a standard consumer electronics company. It's not. It's still very much a luxury brand, and if they drift away from that they do so at their own peril. If they sell a $200 pre-paid iPhone, that creates the illusion that a smartphone "should" only cost $200, the same way netbooks created the illusion that a PC "should" only cost a few hundred bucks. And then boom, crash, there goes the neighbourhood, and Apple's profits along with it.

RG: I'm not arguing that Apple "must" make a cheaper iPhone; that way lies madness. I'm making the case that perhaps it would behoove Apple to do so, nothing more; and I am doing so because the main reason for it to do so is being disregarded by a lot of American bloggers due to an artefact of how the US cellular market works.

There's a stronger case in favour of Apple doing this than many people are seeing. Doesn't mean Apple will. Doesn't mean Apple should.

Look at it this way. As the aforementioned Benedict Evans explains here, Apple will soon approach -- if it hasn't already -- saturation in the premium smartphone market. It's already selling a bit more than 50% of all the phones in the small sliver of the market it completes in. Which is more likely: that Apple will choose to push into new market segments, or that Apple will just rest on its laurels and accept stagnation?

And whilst I accept your arguments that Apple would be unwise to destroy its margins in the name of market share, the iPod market is clearly a demonstration that it can manage both. Profit margins on all the various iPods are certainly healthy, and yet Apple has managed to own practically the entire market of portable music players. That's not an easy trick to pull off, certainly -- it helps that Apple almost created the market, whereas smartphones are subject to far more intense competition -- but still, it shows there's hope that Apple could both have its market share cake and eat its tortuously constructed metaphor for profit.

Also (he adds, cheekily), isn't this an action reply of your arguments against the iPad mini?

CR: The iPod comparison is an interesting one, particularly in light of the fact that the iPod touch is Apple's best-selling iPod... accounting for more than half of all sales, by itself. I'd wager the iPod shuffle is pretty insignificant overall, which just leaves the iPod nano. So how does Apple make an iPhone nano? Do they put out a plastic thingy with a non-Retina screen? Well, they already had one of those for a few years -- the iPhone 3GS -- and they discontinued it. Not much enthusiasm apparent there.

So (and this may be the margaritas I had with dinner talking), how about a smaller iPhone, with a smaller screen, that just runs Apple's core applications and nothing from the App Store? That solves the problem of not wanting to force developers to target yet another screen size, but even though that's all we had to go on for that first year the iPhone was out, can you even imagine using an iPhone that couldn't run third-party apps? I certainly couldn't. And imagine the derision from the Android camp if Apple did that.

The only thing I can see making sense is if Apple does something similar to what it did with the iPad mini: make a product that costs (slightly) less without also making it suck. In retrospect it was kind of obvious how to do that with the iPad mini; it's less obvious how to do that with the iPhone.

My arguments against the iPad mini were made in the light of people predicting it would have an entry cost of $199 and seeing how craptastic competing tablets in that size/price range are. Since its entry cost is $329 instead and it's arguably superior to the full-size iPad in some ways, it alleviates pretty much all of the problems I saw with it undercutting Apple's profits and "commoditising" the iPad.

With Bloomberg and others saying this "low cost iPhone" will cost $99 or $149 (ridiculous), the same argument does indeed apply. If Apple instead introduces a "low cost" device in the neighbourhood of $249-299 for the base level handset, and it does the same thing it did with the iPad mini -- in other words, it doesn't compromise on build quality or performance in the name of hitting a price point -- then fine, it starts to make slightly more sense for them to go ahead and build/sell it.

The iPhone is already Apple's biggest moneymaker by far, though. I don't really see the need to mess with success. Meanwhile, Schiller has openly denied this "cheap iPhone" rumor... unless he hasn't. Reuters is making me dizzy.

Hey, here's a crazy thought: What if the "low-cost iPhone" is really just a souped-up iPod touch with data-only 3G? Call it the "iPad nano" or something.

RG: Well, I think the idea of an iPod touch with 3G is silly, which we touched on in a previous debate. The point I was making all along is that "there's a stronger case for Apple to do a cheaper iPhone than many people are giving credit to." That's divorced from the idea that Apple should chase that market (the best rebuttal being "this is the cheap end of the market that Apple doesn't want anyway"), so I think my points still stand.

CR: Agreed, and honestly, if Apple can find a way to make the iPhone less expensive without also making it terrible, I'll be first in line. I know I'm tired of shelling out NZ$1349 every couple of years when I want to buy a handset off-contract.

What's your take? Is Apple about to throw a cheaper iPhone out there? Let us know in the comments.

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