Maybe the Low-End iPhone Is Really a Mid-End iPhone

What if Apple’s long-rumored low-end iPhone isn’t targeted at the smartphone market’s lower reaches? What if it’s targeted at the middle?

What if it isn’t low-end at all, but simply mainstream? Not a $150 phone or even a $200 one, but a $350 one? A “mid-end” iPhone?

That’s the theory put forth by Gokul Hariharan and Mark Moskowitz over at J.P. Morgan, and it’s a pretty compelling one, with strong historical precedents.

With a starting price tag of $329, Apple’s iPad mini was initially dismissed as too pricey to attract budget-conscious consumers drawn to Google’s Nexus 7 and Amazon’s Kindle Fire, which, at $249 and $199, respectively, were significantly cheaper. But the device proved wildly popular, and has since established a new mainstream price band between the tablet market’s high end ($499 and up) and its low end ($249 and down). And it unquestionably expanded Apple’s tablet market share.

Apple did pretty much the same thing with the iPod nano. At launch, it priced that device at $199, which was less than the $299 the marquee iPod commanded, but significantly more than the low-end MP3 players of the time. And that, too, proved a winning strategy. The nano solidified Apple’s dominance of the MP3-player market, becoming so popular that it accounted for about half of all iPod shipments in the first few years after its launch in 2005, according to J.P. Morgan.

In each case, Apple sacrificed a portion of its typically high margins to field a high-end product with enough mainstream aspirational appeal to expand its market share. And that has become the company’s M.O. — CFO Peter Oppenheimer said as much during Apple’s last earnings call:

“We are managing the business for the long term and are willing to trade off short-term profits where we see long-term potential. The iPod is a great example of this. When we launched it in 2001, its margins were significantly below the margins of Apple at that time. Four years later, the iPod and the iTunes music store comprised half of Apple’s revenues and inspired us to build the iPhone.” Now the iPad mini is another great example. We have priced it aggressively and its margins are significantly below the corporate average. However, we believe deeply in the long-term potential of the tablet market and think that we’ve made a great strategic decision.”

Presumably, Apple feels much the same way about the smartphone market. Will it follow a similar path to tap into its long-term potential? Seems likely. And, as you can see from the J.P. Morgan chart below, it could have a lot to gain by doing so. All it needs is a new iPhone priced low enough to draw budget-conscious consumers and first-time smartphone buyers into a higher price range.

Here’s Hariharan and Moskowitz on the implications: “Currently Samsung dominates this segment ($200-500 price range) with 35+ percent market share. … We believe Apple could take 20-25 percent of this market in the next 12 months (from almost no market share currently), if it prices a lower-priced product at $350-400 levels.”