The cheap Apple phone problem

The idea of a cheaper iPhone has been around almost as long as the iPhone itself. Apple sells the previous and previous-but-one models at discounts (currently the iPhone 4 at $450 and the iPhone 4S at $550 before subsidies), but even these prices are high-end in the context of the overall market. They do little to address prepay markets (half of European users), nor China, where outside of the 100m or so people who can afford luxury goods $150 (unsubsidised) is the hot price for Android. There are good-quality Android devices for $300, perfectly acceptable ones for $150 and I expect the price for usable models to push well below $100 in the course of 2013 (I'll be spending a lot of MWC looking at this part of the industry). This is a large, unaddressed market that Apple could be serving with a good product and, so far, it is not. 

There are really three widely-discussed sets of questions about what a cheap Apple phone might be: 

  • Would it target $300 (mainstream smartphones), $150-200 (top end of prepay) or even go below $150, potentially even without iOS, to target mass-market prepay?
  • How would Apple segment it, minimising both cannibalisation of the existing line and fragmentation of the platform? This was easy with iPods (less storage) but the options for a phone are less obvious
  • How would Apple meet its own benchmarks of quality over price while hitting a price 50% or more lower and margins of, say, 25-30% (similar to the iPad Mini and in line with what Nokia used to achieve)?

I have no particular angle on how Apple might approach this, though I tend towards the lower price school of thought, but what ultimately matters is how many devices Apple could sell, and how much money it could make, presuming it did put such a product on the market. 

450m phones* were sold globally in Q4 2012, for about $80-85bn (Apple had $30.7bn of that). 48m were iPhones and maybe 150m were Androids. Around 150-175m were sold for between $100 and $600, the widest brackets of what Apple might target, for $30-$40bn. (The mix within this is very changeable, since the capabilities of phones at different price points are changing fast.) 

The share that Apple could take of that bracket, and the consequent revenue and profit, is of course entirely dependent on the price. One could more easily imagine a great $150 Apple phone selling 50m units than a great $300 product, but the cheaper product would be lower margin.

So, for the sake of argument, suppose Apple sells a phone for $200 pre-subsidy (attacking the bottom and middle of the contract market and the top of prepay), manages a 30% gross margin on it (perfectly plausible) and sells 50m a quarter (ignoring cyclicality). This would double Apple's share of handset unit sales to 20%, amount to a third of actual Q4 Android sales (c.150m) and equal Samsung's non-GS3 Android business. 50m would be a Big Number. Assume, also, that it doesn't cannibalise the existing iPhone line (which of course it would).

That would generate $10bn of revenue a quarter and $3bn gross profit. Apple's gross profit in the December quarter was $21bn; in the September quarter (i.e. not a launch quarter so arguably a fairer comparison) it was $14bn. 

In other words, a blockbuster new Apple phone that more than doubles unit sales and blows a hole in the middle of the Android market might only add 20% to Apple's profits. 

* 450m will grow to close to 600m by 2017, which applies to all of these numbers, probably including sales of the existing iPhone line