Cheap iPhone: Why Apple should create a downmarket version of its best-selling product.

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June 28 2011 5:22 PM

The iPhone Is Too Expensive

Why Apple should create a downmarket version of its best-selling product.

(Continued from Page 1)

Apple's goal, with such a device, would be to sell it at a price of between $200 and $300 without a carrier contract—less than half the price of an unlocked, full-fledged iPhone. This is certainly doable: Apple sells the iPod Touch, which is essentially an iPhone without a cellular radio, for $229. Since the components for adding a radio cost only $16, a $200 unlocked iPhone isn't a pipe dream. And if Apple can reach that price, it will see huge sales. Horace Dedieu, the smartest Apple analyst on the Web, points out that the vast majority of cell phones across the world are sold without a contract. (The United States and Canada are unique in selling most with a plan; a cheaper, unlocked iPhone could push a lot of people to ditch their mobile contracts, which will anger the carriers—but I doubt Apple cares much about the carriers.) What's more, growth in the smartphone business will come via the hundreds of millions of people who are expected to switch from dumb phones to smartphones over the next few years. A cheap iPhone that sells without a contract will be irresistible to many of these customers—it could boost Apple's sales by several hundred percent.

But there's a danger in this model, too. Because the cheap iPhone would be visually and functionally similar to the expensive iPhone, you'd have to imagine that many (if not most) customers who would otherwise have purchased the expensive phone will choose to go with the cheaper one. Financially, this wouldn't be a disaster for Apple—you can bet that it would make healthy profits off the cheap iPhone. It would, however, represent a fundamental shift to Apple's business model. So far, the iPhone has been all about profit, even at the expense of market share.

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The other potential danger is that the cheap phone could fuel consumer disappointment. Apple markets the iPhone as the best phone anywhere. But how would it market a cheaper model—one that looks nearly identical to the expensive phone but does a lot less? The company would need to walk the tightrope of proclaiming the cheapie phone's amazingness without creating the expectation that it would do as much as a pricier iPhone. Maybe the tag line could be, "iPhone Lite. Relax—it's slower!"

Given the risks of releasing a cheaper iPhone, would Apple be willing to turn its mobile strategy on its head? Its history suggests two opposing theories. On the one hand, there's the Mac, where Apple decided to forget about market share and stick with profits. That led Apple to "lose" the PC wars, but it was a pretty good loss—Apple now makes more money selling a single Mac than HP does from selling seven PCs. The other path is what Apple did with the iPod—it relentlessly lowered cost and diversified its line-up, making sure that there was a music player for every budget. That worked out fantastically as well: At its peak about five years ago, the iPod represented more than half of Apple's revenue.

After weighing those two possibilities, I'm betting that Apple goes downmarket. It's not just because the financial opportunity in releasing a cheap phone seems too good to pass up. As Dedieu points out, Steve Jobs seems to regard Apple's Mac strategy to have been an enormous blunder. In 2004, Jobs told Newsweek that at "the critical juncture in the late '80s, when they should have gone for market share, [Apple's management] went for profits." He added: "They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens."

If Android is the new Windows, then the path for Apple is obvious: It can't afford to rest on its profits any longer. A cheap iPhone has got to be around the corner.

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