Apple is about to confront a new challenge for its iPhone business.
The next wave of growth in the smartphone business is expected to come from developing markets, where the iPhone is just too expensive for consumers.
If Apple wants to maintain its market share, it needs to figure out how to sell a less expensive phone to these consumers.
Unlike in the U.S., where carriers subsidize iPhone sales, in emerging markets like China and India, consumers pay full price for their phone. More often than not, they can't afford an iPhone.
This has helped Android grow its market share.
Analysts largely believe Apple plans to make a cheaper iPhone to take some share in these markets.
Back when Tim Cook was just COO at Apple, and not CEO, he told analyst Toni Sacconaghi that he wanted Apple to be for "everyone," not "just for the rich." He seemed to be hinting at a cheaper iPhone. Two years later, we still don't have a cheap pre-paid iPhone. The iPhone 4 is less expensive than the iPhone 5, but it's still not cheap enough to make Apple a player in emerging markets.
In a new note, Jefferies analyst Peter Misek writes that "there is a good chance" Apple introduces a "low-cost iPhone" in June of 2013 when it reveals the iPhone 5S. This phone was be targeted at pre-paid and emerging markets, especially in Asia, says Misek.
He continues, saying, "Our checks indicate a low-cost model would be a retooled iPhone 4 with a scaled-down modem, apps processor, etc. Foxconn International Holdings (FIH) already has a supply
chain for capacity scaling up to 200-300K units per day."
There are a few caveats with this report.
First, analysts have been predicting a pre-paid iPhone for years and it hasn't come. We'll believe it when we see it.
Second, and this might explain the previous point, Misek says a cheaper iPhone wouldn't increase Apple's sales or EPS. Here's his exact explanation:
We see little financial impact to Apple from a low-cost iPhone launch mainly due to an expected high cannibalization rate. We think the most likely scenario would lead to Apple increasing its unit market share but that its revenues and EPS would remain largely unchanged. But GM would be impinged in order to reach the desired $200-$250 price point. We estimate that the low-cost iPhone’s GM would be near corporate average but that it would be below the regular iPhone.
While a lot of pundits think Apple needs to grab market share, Apple might ask what good is market share if it doesn't increase sales or EPS. And if that's the case, it might just skip pre-paid iPhones.
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