Budget iPhone (Martin Hajek 001)

Android is gaining ground largely by offering a cheaper alternative to Apple’s higher-priced iPhone and iPad. Case in point: Acer’s just announced $169 Iconia A1 Jelly Bean tablet. Now, for some time there’s been a drumbeat for Apple to respond with a cheap smartphone of its own, one sold unsubsidized and off-contract to cash-strapped buyers in emerging markets.

However, now comes a voice suggesting Apple doesn’t have to slash prices to improve its market standing. Instead, it could offer a mid-priced iPhone and in the process could cut rival Samsung’s U.S. operations off at the knees.

There’s no need for hokey plastic fake prototypes or leaks from “insiders.” Apple needs only to repeat what its done numerous times in the past, opine two Wall Street Apple observers at J.P. Morgan…

At the moment, Samsung – which sells the bulk of Android devices – owns about 35 percent of the market share for smartphones priced $200-$500.

AllThingsD passes along a note by analysts Gokul Hariharan and Mark Moskowitz;

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.

Not only would the supposedly inexpensive budget iPhone end up being a mid-range $350 product, but the report also implies that Samsung could be left with 10-15 percent of that segment should Apple produce a mid-priced budget iPhone.

It’s been done before.

Smartphone price pyramid

The $329 iPad mini, which many thought cost too much to compete with the $249 Google Nexus 7 and Amazon’s $199 Kindle Fire, is often cited as one of Apple’s most popular items.

This was accomplished not by aiming for an already-existing price floor, but creating a new price range. Add Apple’s usual halo and the well-known aspirational purchases and you get a killer product.

iPhone 5 presser (Phil Schiller, iPhone family prices)

J.P. Morgan also points to the iPod nano.

While costing more than the cheap MP3 players, at $199 the nano was priced below the $299 top iPod. Again, people snapped up the nano to share in the glow of the pricier iPod. The result: the mid-range nano accounted for around half of all iPods sold.

Do you see the trend?

Budget iPhone (Nickolay Lamm and Matteo Gianni concept 003)

Apple takes its high-end product – iPad, iPod – trims the price a bit, creating a wholly new midrange price segment. The action serves the dual purpose of limiting competitor growth and solidifying Apple’s lead.

It’s a tactic Apple is comfortable with, according to the company’s finance chief.

“We are managing the business for the long term and are willing to trade off short-term profits where we see long-term potential,” Peter Oppenheimer said at Apple’s latest earnings report.

While many on Wall Street are thinking about today, Apple is looking toward a longer future.

The chance of some cheap-o version of an iPhone which damages Apple’s reputation among consumers is not likely. However, there is a good possibility Apple will rely on its own history to create a whole new market for the iPhone.