The Case for a New Lower-Cost iPhone

Lost amid much of the rampant speculation that Apple is on the cusp of unveiling a new plastic-bodied lower-priced iPhone “5C” is the simple fact that Apple has offered lower-priced iPhones for several years now — year-old and two-year-old models. So the question to ask is not “Does Apple need a lower-cost iPhone?”, but rather, “Why would Apple change its lower-cost iPhone strategy from selling years-old high-end models to a new model designed from the get-go to sell at lower prices?” I.e. why change now?

Make no mistake: Apple’s current strategy has been remarkably successful. They sell a ton of iPhone 4S and 4 devices, and have expanded the iOS market by doing so. But there are several factors this year that suggest a change in strategy.

If Apple does unveil an iPhone 5C, I expect them to concurrently abandon the iPhones 4 and 4S. Their three pricing tiers for the next year would be a new iPhone 5S at the high end, today’s iPhone 5 in the mid-range, and the new 5C at the low end.1 This way, all new iPhones would sport 16:9 aspect ratio displays, and all would have Lightning adapter ports. Adios both to 3:2 displays and the grody old 30-pin port.2

The other factor is that I think Apple needs to push the low end of the iPhone lineup even lower. Today they’re primarily selling the low end models as free-with-contract devices. Apple has no iPhone that competes well in non-subsidized markets. In the U.S. and other subsidized markets, I expect the 5C to be sold just like the iPhone 4 is today: “free” with a contract. But in non-subsidized markets, I expect the 5C to sell at lower prices than an unsubsidized iPhone 4 does today.

How low? Well, ever since 2007 and the original iPod Touch, it’s always seemed to me that the Touch suggests a floor for a hypothetical lower-priced iPhone. Take an iPod Touch and add cellular networking components. Boom, there’s your lower-priced iPhone.

With the iPad, Apple charges quite a premium for cellular models — they cost $130 more than the corresponding Wi-Fi-only models. Apply that to today’s iPod Touch lineup and you’d get a 32 GB low-cost iPhone for $299 + $130 = $429. But there’s also that 16 GB Touch for just $229. Part of the cost savings on that device is that it doesn’t even have a rear-facing camera. And I’ve never believed that the $130 premium for cellular iPads is entirely related to component and assembly costs; I think Apple charges a premium for cellular iPads because they know many people are willing to pay that premium.

All told, I think Apple could build and sell an iPod Touch-caliber iPhone 5C for $399, possibly as low as $349.

Would this cannibalize sales of the actual iPod Touch? Perhaps, but modern-era Apple has never been afraid of cannibalizing its own products. But don’t underestimate the Touch — thinner and lighter is still appealing for many customers, and the Touch has always been thinner and lighter than the iPhone.

A better question is whether the 5C might cannibalize sales of the 5S (and 5, if it stays around as a mid-tier model). If Apple is functioning properly, this shouldn’t be a concern. I expect the 5S to offer performance and camera upgrades that should clearly set it apart from a 5C model with iPod Touch-caliber specs. The camera alone might be worth the difference. The long-rumored fingerprint-scanner-built-into-the-home-button would be another.

What I’d consider a red flag, a sign that perhaps we should start being worried about post-Jobs Apple, would be if Apple crippled the software on the 5C to diminish it against the 5 and 5S. Analyst Gene Munster predicts just that, though:

In terms of the phone itself, we expect the cheaper phone to have a plastic casing, 4” display, and lower end internal specs (processor, camera, memory, etc.) than the 5S/5 line up. Additionally, we believe that Apple may exclude some software features, such as Siri, which we note was not an option on the iPhone 3GS or iPhone 4 upon launch.

I think, or at least hope, Munster is wrong. Apple can withhold cutting edge software features from old devices; they can’t do that for brand-new ones. There can be no penalty for buying a lower-priced iPhone 5C, only rewards for splurging on the higher-priced models, and those rewards should revolve around hardware (camera quality, CPU speed, fingerprint sensor, etc.). The 5C is not about selling a piece of junk to some sort of unwashed masses; it’s about continuing to push the price down to expand the iPhone’s market without changing what the iPhone brand stands for. Siri is now a big part of that brand. If Apple thinks the iPhone 5S needs “protection”, then the 5S (and Apple itself) has problems.

If the 5S isn’t appealing enough based on hardware alone to compete against the 5C, then so be it. At least people buying a 5C are still buying an iPhone. But I don’t expect the 5S to have any such problems.