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.

iPhone 4. Click image to expand.
Will Apple release a cheaper iPhone?

The iPhone is at a crossroads. It's been four years since Apple first released its super-duper-wonderphone, and you don't have to be a fanboy to appreciate how thoroughly this single gadget has upended the tech industry. The iPhone wasn't the first smartphone, it wasn't the first touchscreen device, and it wasn't the first app-enabled mobile computer (indeed, the first iPhone didn't run apps). Still, the iPhone was something novel—a smart, intuitive, beautifully designed, futuristic-seeming gizmo that was immediately lapped up by consumers and wholly copied by rivals. For Apple, the iPhone has been a godsend. In 2010, the company reported $25 billion in revenue from the iPhone alone—that was about 40 percent of its total annual revenue—and the phone's growth shows no signs of slowing.

The trouble is, Apple's main rival, Android, also looks unstoppable. Andy Rubin, who heads up Google's phone division, just reported on Twitter that there are 500,000 "activations" of new Android devices every day around the world, and the number is growing by 4 percent per week. Some of these devices are tablet computers—where Android still lags far, far behind Apple's iPad—but the vast majority are phones, a sector where Android's share of sales far surpasses Apple's. According to the research firm IDC, Android's worldwide share of the smartphone market is about 40 percent, compared to around 16 percent for Apple's iOS. In the United States, Android has nearly 50 percent of the smartphone market, while Apple has 29.5 percent. (Android's share stateside declined by a couple points over the last year, mainly due to the introduction of the iPhone on Verizon.)

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What's fueling Android's growth? Sure, it's a terrific operating system, and over the last year it's gotten lots of new apps, too. But in all sorts of ways, Android phones can't match the polish and power of the iPhone. The main reason that Android is capturing a bigger slice of the phone market is price. Every major American mobile carrier now offers at least a few Android phones for free with a contract. The iPhone 4, by comparison, sells for $199 with a contract (you can also get the 2009-era iPhone 3GS for $50 with a contract). Apple's prices look even steeper if you consider the market for "unlocked phones"—that is, phones that sell for full price, without a contract. A new, unlocked iPhone 4 will set you back $649. There are dozens of unlocked Android phones that sell for less than $200.

The numbers seem to mark a clear path for Apple: It needs to make a cheaper iPhone. And it needs to do it now.

But how? What would a cheaper iPhone look like, what would it do, and how would Apple make sure that such a device doesn't eat into its revenues? Tech pundits have been predicting the release of a low-priced iPhone for many years—this week, Chris Whitmore of Deutsche Bank told investors to expect Apple to add a cheap iPhone to its lineup this year. Whitmore, like many others, predicts that Apple will sell the low-priced phone alongside the standard iPhone rather than replace the expensive model. This makes sense when you consider Apple's strategy with the iPod. The iPod Mini, which the company released in 2004, was a smaller, cheaper version of the original. It quickly became Apple's best-selling music player. (The Mini was replaced with the Nano in 2005.)

Of course, an iPhone Mini wouldn't be a very good device. Apple was able to shrink its music player because the screen wasn't a big part of its utility. The iPhone, though, is a visual gadget, and reducing its screen size would make for a terrible experience. Because its screen will have to be the same size as the expensive iPhone, and because the screen is what makes the iPhone the iPhone, a cheaper version won't look very different from the expensive one. Apple could certainly add a few design cues to differentiate the two—it could make the cheap one thinner, or it could give it a plastic skin—but the main differences are likely to be internal: The cheaper iPhone might have a slower processor, less RAM, and less onboard storage space. Some wags predict that Apple's next full-fledged iPhone—presumably called the iPhone 5—will be able to access faster 4G networks, so that could be a another point of differentiation. The "iPhone lite," as TechCrunch's MG Siegler has taken to calling the mythical cheap iPhone, might only run on 3G networks.

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