Why budget iPhone doesn’t mean lower profits

Budget iPhone (plastic backplate, Apple.pro 001)

Android smartphone makers have been doing it for years: controlling a market using inexpensive handsets to outnumber the more expensive iPhone. But when the idea that Apple should also produce a more affordable and contract-free device first appeared, a hue-and-cry erupted as if the next MacBook was to be powered by Windows 8.

Now comes calmer heads – ironically from Wall Street – showing Apple’s gross profit margin would increase by six percent because more people will buy the Apple smartphone if the company lowers the cost of owning an iPhone.

That’s right, all the hand-wringing going on about a less-pricey iPhone being suicide for Apple’s bottom-line could be all wrong…

Presuming Apple sells a hundred million iPhones during the second half of 2013 and that there is a 50/50 mix of regular-price models and lower-priced iPhones starting at $399, “we see 6 percent gross profit dollar and 10bps basis points gross profit margin upside to our model,” Morgan Stanley analyst Katy Huberty told investors Monday, via Fortune.


In two spreadsheets illustrating the impact of a low-priced iPhone, Huberty shows Apple’s total revenue for the second half of this year would rise five percent. iPhone revenue would jump ten percent and units sold would climb thirty percent, thus improving Apple’s standing in emerging markets.

Budget iPhone (Kathy Huberty 001)

Likewise, if Apple announced an inexpensive iPhone in time to effect the company’s June quarter, the move would also benefit Apple. Already, Apple is experimenting with discounts and other tactics to improve iPhone sales, such as in India.

Fortune’s Philip Elmer-DeWitt explains:

She shows that although iPhone 4 discounts could lower the device’s average selling price fourteen percent, the net effect of selling more of them would be to life the company’s gross margin for the June quarter 0.3 percent.

The key: the iPhone is a profit dynamo – so much so that a slowdown in iPad and Mac sales could still mean Apple’s overall profits grow by up to 0.9 percent.

Plus, we are not talking about Apple giving the iPhones away. Indeed, a $399 budget iPhone sold contract-free would just be $6 less than the top smartphones being offered by China’s largest makers.

Who knows how many more iPhones Apple could sell if it also got more carriers on-board, especially given the billions it is leaving on the table by not aggressively going after global carriers.

Image top of post: a purported plastic iPhone backplate via Apple.pro.