Apple’s Cheaper iPhone: How Low Will They Go?

Wednesday, August 28, 2013

Apple (AAPL) is expanding its iPhone line next month with a new low-end, lower-priced device, according to numerous well-sourced reports. But no one outside Apple seems to know just how much lower the price will go.

Apple sells its current model, the iPhone 5, starting at $649 in the United States without a subsidy. It also offers two older models, the 2011 iPhone 4S at $549 and the 2010 iPhone 4 at $450. In the U.S., most customers pay much less if they sign up for a two year cell phone contract. But in much of the rest of the world, carriers can’t afford to offer subsidies and customers are far more price sensitive.

Initially, most analysts thought the new lower priced iPhone, rumored to be called the iPhone 5C, would undercut the iPhone 4 and be priced at $300 to $350. But lately, Wall Street analysts have been raising their predicted priced for the 5C. Morgan Stanley’s Katy Huberty and UBS analyst Steve Milunovich expect a $399 phone. And Citi’s Glen Yeung has pegged $450.

Now the question is will Apple price above what’s expected, like it did with last year’s iPad mini, or shock the crowd by going below, as it did with the original iPad. The announcement is expected at a September 10 event.

In 2010, most analysts expected the brand new iPad tablet would sell for $800 and up. When Apple unveiled the iPad starting at $499, it created the perception of a great bargain, ignited massive sales and stymied competitors who had trouble matching the price.

But when it came to last year’s mini version, Apple’s $329 price was slightly higher than many expected. Android tablets have undercut the mini’s price and sales of the entire iPad line have slowed dramatically. Last quarter, Apple sold only 14.6 million iPads, 14% less than a year earlier.

With the new iPhone, the challenge for Apple is that a truly low priced phone could cannibalize a lot of higher end sales. After all, the cheaper phone will still run the latest operating system, iOS 7, and give full entry into Apple’s iTunes ecosystem with its great selection of apps, music, movies and ebooks. The high end iPhone is Apple’s most profitable product by far ,with a gross profit margin estimated around 50%.

A low price could also unsettle Wall Street, where analysts are expecting a price at $400 and above. Apple’s stock has been on a strong run since its July earnings report, up 11%. But fears that a cheap iPhone 5C will cannibalize higher profit iPhones and depress earnings per share could put an end to the rally.

On the other hand, if the new phone is priced at the high end, say at the same $450 level as the iPhone 4, it seemingly wouldn’t solve Apple’s competitiveness problem in less wealthy markets. Apple’s sales in India have increased this year but its market share is still under 5% amid competition from Android phones priced at less than $300. In China, where Apple also trails far behind Android, iPhone sales actually declined last quarter.

“With vigorous competition from Android, Apple’s pricing power is declining as we speak,” says Andreas Hinterhuber, a renowned pricing consultant. “Dramatically lower price points for the next generation of iPhones are thus highly likely.”

It’s quite possible, however, that Apple could price the 5C differently in different markets. In fact, the iPhone 5 retails for greatly varying amounts around the world. The iPhone 5, sold for $649 in the U.S., went on sale in Russia for over $1,000 last year. In Europe, the phone went on sale for 679 euros, or over $900.

By the same logic, an iPhone 5C could sell for $450 in the local mall’s U.S. Apple store but retail for the equivalent of $300 or less overseas.

And Apple may have a few gimmicks in store. The company has piloted an iPhone trade in program at Apple stores in the Dallas, Texas, area and is expected to roll out something similar nationwide to coincide with the Sept. 10 event. That could help make the not-so-cheap 5C look cheaper.

In less wealthy markets, Apple has used a combination of discounts, trade-ins and financing programs to lower the price of entry. In India, a 4% to 9% discount coupled with zero interest installment payment plans helped triple sales in the last quarter.

With customers already excited about the iPhone 5C’s rumored multi-colored plastic case and new features in iOS 7, even a few gimmicks could help reverse Apple’s sliding market share worldwide.

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