Here’s your math behind a budget iPhone

iPhone 5 mini (Martin uit Utrecht 001)

After meeting with Apple CFO Peter Oppenheimer recently, Morgan Stanley analyst Katy Huberty issued a report proclaiming so-called budget iPhone a no-brainer. Huberty joins what is now a growing list of analysts calling for such a device so Apple could better target emerging markets where cash-strapped folks mostly buy unlocked sub-$200 handsets – unlike the United States where carriers subsidize smartphones handsomely.

Thanks to these generous subsidies, US consumers don’t pay full price for the hardware – provided they agree to a long-term service agreement, of course. Now, with the penetration level for the iPhone approaching a limit in the high-end segment, the untapped low-end represents an estimated $135 billion opportunity.

Even with Apple’s margins peaking, an iPhone mini – as the media dubbed it – should triple Apple’s addressable market in China and add nearly $2.4 billion to its handset business…

Apple’s least expensive no-commit iPhone is the $450 iPhone 4, period.

At that price, it’s outside the reach of buyers in China and India, where an average low-end cell phone sells for $138 and $140, respectively. In other words, the 20-month old contract-free $450 iPhone 4 is nearly 265 percent more expensive than cell phones in those countries.

Even the high-end iPhone 5 is nineteen percent pricier than comparable flagship devices from rival vendors. As for the iPhone 4S, it’s 48 percent more expensive than mid-range phones.

It doesn’t take a rocket scientist to figure out that the budget iPhone could go a long way toward bridging the gap between the low-end and high-end segment.

Here, this chart by Piper Jaffray says it all.

Piper Jaffray (world average unlocked handset price)

Analyst Gene Munster (via AppleInsider) explains why low-end matters:

This low-end segment is important given we estimate it is a $135B market in 2013 that Apple is currently not participating in.

While high-end is the source of insane profits, low-end is where the growth is as the remaining 50 percent of handset users upgrade from feature phones to their first smartphone.

Specifically, low-end will account for 60 percent of smartphones, or 540 million units at a $250 average sales price.

That simply is way too much money to leave on the table.

Morgan Stanley analyst Katy Huberty on Tuesday wrote in a report (via AppleInsider) that the iPhone 5 currently addresses ten percent of the market in China. A $330 iPhone mini, as she calls it, could address an additional 20 percent of the market, provided it’s compatible with the China Mobile’s TD-SCDMA network.

Morgan Stanley (average handset price China)

She wrote in a note to clients:

We believe Apple could launch iPhone Mini at $330 (about Rmb2,000), in-line with flagship products in China from Lenovo, Huawei, ZTE and Coolpad.

Even in a scenario of low 40% gross margin and 1/3 iPhone cannibalization rate (flattening legacy iPhone shipment growth), which we view as conservative, the iPhone Mini adds incremental revenue and gross profit dollars.

A lower priced iPhone makes a lot of sense.

A similar strategy with the $329 iPad mini has served Apple well thus far: it expanded Apple’s customer base with 50 percent of purchases in China and Brazil representing new customers to the ecosystem, she explains.

Even at a low 40 percent gross margin and 1/3 cannibalization rate, Huberty sees the budget iPhone as incremental to Apple’s revenue and gross profit.

Coincidentally, the chip maker Qualcomm yesterday announced its new wireless chip.

Per expectations, it supports major cellular radio technologies, including LTE-FDD, LTE-TDD, WCDMA, EV-DO, CDMA 1x, TD-SCDMA and GSM/EDGE. By seemingly solving the LTE fragmentation problem, the chip is poised to turn the dream of a truly global iPhone into a reality. Huberty estimates nearly 40 percent of all 3G smartphones shipped in China are TD-SCDMA.

Morgan Stanley (radio technologies in China)

Apple currently sells its iPhone 5 – which uses uses Qualcomm’s MDM9615M LTE modem and RTR8600 Multi-band/mode RF transceiver – in two GSM and one CDMA variant.

Of course, rumor mills continue to churn out reports of Apple developing an all-new inexpensive handset, one that is allegedly made from cheaper plastic materials.

According to analyst Gene Munster, a $199 budget iPhone will arrive in the September quarter to sell the projected 37 million units before year ends. In 2014, the analyst is calling for a whopping 96 million budget iPhone sales and 170 million units in 2015.

iPhone 5 alternative future (CiccareseDesign 001)

Then op-chief Tim Cook told analyst two years ago he wanted Apple to be “for everyone,” not “just for the rich”. Still, the iPhone during the holiday quarter saw its highest growth in China “into the triple digits,” Cook said last month.

During his Goldman Sachs keynote, Cook reiterated how Apple doesn’t know how to make a cheap iPhone that doesn’t suck.

On the other hand, he hasn’t exactly dismissed it either:

We wouldn’t do anything we don’t consider to be a great product. That’s just not who we are.

“Rather than cheapening, we build new products with a separate experience,” said the CEO, highlighting the iPod which started at $399 but now costs as little as $49.

I’m thinking this budget iPhone won’t be your typical iPhone. Just like the iPod nano changed the game by using flash memory for storage that enabled its compact design, the budget iPhone in my view should mark a radical new approach to making an affordable cell phone.


Imagine a sexy, ultra compact device straight from Jony Ive’s design bunker.

Something that’s ultra efficient at surfing the web, checking email, instant messaging and staying in touch with friends on social networks.

I also don’t think it should be backwards compatible with apps for regular iPhones – to hell with that. Instead, an entirely new approach to what a low-end cell phone should be is to be expected of Apple.