Introducing a cheaper iPhone would remove the risk of falling behind Android in the crucial race for apps - but does it need a larger screen and LTE?

A cheaper iPhone: what it would cost, and what it would leave out (and in)

Analysts are increasingly certain that Apple will offer a cheaper iPhone this autumn, despite the unexpected 20% rise in its sales during the past quarter.

What would it look like? The best guesses are that the screen would be the same 4in as the existing iPhone 5; it would use the Lightning connector introduced with that phone (so that all Apple's mobile product range used the same connector, introduced last September); and that the "cheaper" model would be differentiated by lower specifications for the camera, storage, processor speeds and onboard RAM than the top-end model expected to be released in September or October.

Analysts disagree on one key point: whether or not it would include 4G/LTE.

Pictures purporting to show just such a "cheap iPhone" emerged from a supplier near Foxconn on a blog run by Tactus, which offers haptic technologies. It showed a white, plastic device with the iPhone 5's "Lightning" connector. (However, there are plenty of copycat factories in China offering "iPhones" which run Android.)

But if iPhone sales just went up 20%, why would Apple want to introduce a cheaper phone that might cannibalise its top-end devices?

Two reasons: its share of the smartphone market, and so the mobile phone market, is slipping. Apple's share of the smartphone market fell to about 17% in the most recent quarter. As the smartphone market expands, it needs to expand with it to keep pulling in users.

And it needs those users because the phrase "Android first", if used by app developers, would strike terror into Apple executives' hearts. The idea is beginning to form that as Android smartphone ownership grows in Europe and Asia, startups in those regions might begin to look at writing their app for that platform first, suggests Benedict Evans of Enders Analysis. "If Android users only have one-quarter as much engagement [with apps], but there are five time as many of them, that becomes quite compelling for developers," he says.

In the US, Apple is safer; the distortions introduced by the phone companies' contract plans (which mean hardly anyone has SIM-only contracts) effectively mean that cheaper Android phones cost the same for the consumer as comparatively more expensive iPhones such as the iPhone 4. That means that the iPhone has about 40% of the installed base of smartphones - a safe base from which to attack.

Splits in the market

The challenge though is that the phone market is seeing price deflation, even as the "premium" end grows. Data from the analyst company Gartner provided exclusively to the Guardian says that the "premium" segment of the phone market (that is, higher-end smartphones with average selling prices (ASPs) to carriers averaging over $400) will grow over the next four years, from around 539m phones in 2013 to 876m in 2017.

But - and it's a key point - the ASP of those phones will drop by 12%, from $433.50 now to $383.80 in 2017. The whole segment is going to get cheaper. And that contrasts with the iPhone ASP, which last quarter stood at $581 - its lowest ever, but still 34% above Gartner's average for the segment.

Yet Tim Cook didn't sound convinced about the need for a cheaper iPhone: speaking to Wall Street on Tuesday night, and asked about the "saturation" others perceive in the high-end market, he said: "I don't subscribe to the common view that the higher end of the smartphone market is at its peak. I don't believe that, but we will see, and we will report our result as we go along."

Then again, it wouldn't be the first time Apple had head-faked ahead of a product introduction.

Making the difference

It's worth pausing to consider quite how Apple would differentiate a cheaper phone. Asked whether Apple doesn't set itself goals - such as "we need X% growth" - Cook offered an intriguing insight into the company's thinking. "We start a product because we believe that the most important thing is that our customers love the products and want them. If you don't start at that level you can wind up creating things that people don't want."

(Coming the week after Microsoft wrote off $900m on Surface RTs that it seems far too few people want, his words have some resonance.)

He continued: "So we try very hard to focus on products and customers, enriching customers and making great products." That, after he had said: "we think that if we focus on that and do that really, really well that the financial metrics will also come, and so we don't see those two things being mutually exclusive."

So Apple wants to do something which it thinks will delight users, at a price point that suits both of them. It reckons that will then show up on the bottom line.

How do you differentiate such a phone from the top-end model? The materials and specifications are the obvious way. "It's the same as the HTC One Mini and Samsung Galaxy S4 Mini," says Daniel Gleeson, mobile analyst at IHS Electronics and Media. "You offer less memory, a lower processor speed, less processor memory. There are compromises which all add up and can make a huge difference to the bill of materials cost [how much the raw parts of the phone cost]."

Phablet fable?

Earlier this week the Wall Street Journal reported that Apple "is testing larger screens for its smartphones and tablets as it attempts to answer increasing concerns about its product lineup, and competition from Samsung". Certainly, lots of high-end Android devices offer bigger screens, often 4.3in or more.

Yet Evans is unconvinced. "I'm sure that they are testing lots of sizes. But look at all the different sizes of tablet they tested before they produced the iPad, where the prototypes came out in the legal case [against Samsung in 2012]." That showed an array of tablets of different sizes before Apple fixed on the 9.7in model for the first iPad.

"LG Display reckons that large screens for smartphones are actually only about 10% of the overall market," Evans continues. "Everybody pays attention to the high-end Android devices, which have big screens. Samsung said it sold 15.5m Galaxy S3s in the December quarter. But that was out of, what, 60m smartphones it sold?" He suggests that "it isn't entirely clear that large-screen Android phones are really where the action's at." And the suggestion that Apple is losing share to larger screen phones "isn't necessarily true", he says. "There's a 'phablet' space, and a significant number of people who think it's a significant product. Apple might do a larger screen, but offer a lower pixel density to suit lower-end buyers while not causing problems for developers."

Name a price

What's unclear is the pricing. Gleeson suggests an ASP of around $450 - comparable with the HTC One or Samsung Galaxy S4. Evans reckons it will be between $200 and $300 in order to capture more share in the emerging markets such as India and China, where cheap Android phones are carrying all before them, and the prepaid (aka pay-as-you-go) market in Europe and elsewhere.

They disagree on whether it will include 4G/LTE. Gleeson says that the high-speed mobile internet capability is now a must-have, especially for any device that would be sold in the US (as, presumably, these would be). Evans thinks that not having it would make the device cheaper, and also make the top-end device - the iPhone 5S? iPhone 6? - more aspirational.

It's notable that the iPhone 4S, released in 2012, doesn't have 4G/LTE - even though many phones released even the year before did. And Verizon, which did well selling iPhones in the just-gone quarter, pointed to figures for LTE-capable devices as a key to its growth.

Gleeson reckons that LTE would be essential in a cheap iPhone for the Chinese market, where around a billion people have a mobile phone - and 420m already have mobile internet connections.

But Apple does not yet have a phone that works on the China Mobile network, the country's largest. The two have reportedly been arguing over how to split revenues.

How many more?

The other key question is: if Apple introduces a cheaper iPhone, how many will it sell? This is largely guesswork. It's sure to grab some market share at whichever price level it competes at. But who form?

Gleeson suggested it would add double-digit millions to its sales - but then declined to be specific; IHS is having a discussion on precisely that point later on Wednesday.

Evans is more sure. With a phone priced between $200 and $300 (which - take note of Gartner's figures - would come in at the bottom of the "premium" market), he reckons it would double Apple's unit sales, and could grab another 10% of the handset market - not just the smartphone market. With that, Apple could take 20% of the whole overall mobile market, which runs at about 400m handsets per quarter. That would be 80m handsets.

For comparison, Apple's largest-ever iPhone quarter - so far - was 47.8m in the Christmas quarter of 2012.

"That would solve all the ecosystem problems," says Evans. "It would also pose an existential problem for some of the Android OEMs."

When will we know? Cook said he's expecting a "very busy" autumn - so September or October. The iPhone is sure to be part of it. The question is, how many? And will they, like iMacs in the past, come in colours?