The "Apple will make a low-cost iPhone" rumor is turning into one of
the leading tech industry memes of 2013. Just like the "Apple will make
an HDTV" and "Apple will introduce a streaming music service" rumors,
the "low-cost iPhone" rumor isn't exactly new; there have been rumors of
an "iPhone nano" for close to five years now.
The question no one seems to be asking is this: does it even make good
sense for Apple to make a low-cost iPhone? Fellow TUAW writer Richard
Gaywood and I batted that question around; our point/counterpoint
follows.
Chris Rawson: The low-cost iPhone is the only way to
save Apple. Otherwise, it's DOOMED. I know this because more than one
analyst said so. This is the dumbest rumor so far this year, and that's
saying something. There's
already a low-cost iPhone; it's called the iPhone 4. In the next product cycle, it'll be the iPhone 4S. Duh.
Richard Gaywood: Hmmm. While it's certainly true that the iPhone 4 is free
on contract,
in the rest of the world pre-pay is far more common than it is in the
US. Here in the UK, for example, I enjoy a choice of at least five
mobile operators in the UK that offer competitive pre-pay iPhone
tariffs. Pre-pay is
more than 80% of the entire Italian mobile market, and it's typically 25-50% in most European markets. And so on, and so forth.
So let's consider Apple's pre-pay offering. A contract-free 8 GB iPhone 4 is £319 -- far more expensive than a Nexus 4 (
£239 from Google,
admittedly with vexing supply issues
that are, remarkably, worse than trying to get an new iPhone in the
first week after launch). The Nexus 4, of course, is probably more
fairly compared to the iPhone 5 than the ageing iPhone 4; Apple's most
advanced handset costs £529 for a 16 GB model. The Nexus's lack of LTE
is less of an issue here in Europe, where LTE coverage is lagging behind
the aggressive rollouts in US cities. (For another comparison point,
the best-of-breed Samsung Galaxy S3 is showing on Amazon right now for
around
£399.)
This "the iPhone is already free, can't get any cheaper" meme is US-centric nonsense. Consider
this graph posted on Twitter
by telco analyst Benedict Evans, which breaks down handset sales by OS
and price point. Android owns the $100-200 and the $200-300 brackets,
markets that Apple simply doesn't compete in. That's Apple's economic
motivation for a cheaper iPhone.
Now, often, people say Apple doesn't want this cheaper end of the
market -- although I'm not sure I'd characterise that $200-300 bracket
as particularly cheap, myself. That's not necessarily the wrong call.
But right now, it is conceding huge numbers of sales to Android. And
didn't Jobs once say something about a mistake when
Apple went for profit and should have gone for market share...?
Indeed, Tim Cook
said at the iPhone 4S launch
that "The iPhone has 5% share of the worldwide market of handsets. I
could have shown the bigger smartphone numbers. But we believe over time
all handsets become smartphones." Cook chose to couch market share in
terms of all phones, not just the thin sliver of the market --
"smartphones above $300" -- where Apple competes today.
CR: As someone living in New Zealand and shelling out
over a thousand bucks for an off-contract iPhone every other year, I'll
agree with you wholeheartedly on that "free iPhone 4" thing being
US-centric bullhonkey. As for whether it makes sense for Apple to
address the pre-paid market at all, much less at the low handset retail
numbers people are wildly throwing around? Let's pretend it's Opposites
Day.
Of course, it makes
perfect sense that Apple will
produce a cut-rate iPhone just to beef up its market share numbers. If
there's one thing Apple's famous for, it's producing cheap, crippled
crap in the name of increasing market share.
RG: Because the iPad nano and Shuffle were such disasters?
To use with my iPhone 5, I have a pay-monthly contract (i.e. I can
leave any time I want, with no lock-in, but I don't have to faff with
top-ups; it's billed from my account). I pay £25/mo, and that's
relatively expensive. I get 2000 minutes for outgoing mobile and
landline calls, 5000 minutes for outgoing calls to other users of my
network, and 5000 SMSs. Plus unlimited -- truly unlimited -- data. I've
wracked up 10 GB in a month before now (mostly Netflix streaming in
hotel rooms).
But of course, my off-net iPhone 5 that I needed for that cost more
than twice as much as a Nexus 4 would have... Hence the entirely
reasonable conclusion that the iPhone is expensive. The Nexus 4 is a
very close match, in most of the ways I care about, for the iPhone 5.
And there are plenty of other high spec Android handsets around that
cost more than the Nexus but a lot less than the iPhone, too.
Then there's the other bit. Look at the graph I posted earlier. Look at
the Nokia Feature and Samsung Feature lines; the hundreds of millions
of sales in the developing world. Over time, many of these people are
going to naturally migrate to smartphones, but they are going to do it
without paying very much more. At the moment, Android is getting cheaper
and cheaper, and gobbling up more and more of the market. Apple have
frozen themselves out. Is that wise? I don't know, but I don't think
it's an open-and-shut case that it is the right decision.
CR: All these arguments for why Apple "must" introduce
a low-cost iPhone strike me as very similar to the pre-iPad discussions
for why Apple simply
had to build and ship a netbook. And yet I
read an article the other day (can't find the link, rare moment of
Google Fu letting me down) that said low-cost netbooks have likely
caused a market crash in the average sale price (ASP) of Windows-based
PCs-possibly permanently.
ASP for PCs is down near US$450, according to that article. ASP for
Macs is around $1499. It doesn't take a math genius to notice the
disparity.
Android handsets are gobbling up market share, true... and yet the only
Android handset maker who's turning an appreciable profit is Samsung.
And while I don't have the figures in front of me, I'd be willing to bet
its most profitable phones aren't the cheap crap flooding the prepaid
market, but the flagship lines that it advertises so heavily.
People see how much money Apple makes and how many devices it sells,
and they assume it's a standard consumer electronics company. It's not.
It's still very much a luxury brand, and if they drift away from that
they do so at their own peril. If they sell a $200 pre-paid iPhone, that
creates the illusion that a smartphone "should" only cost $200, the
same way netbooks created the illusion that a PC "should" only cost a
few hundred bucks. And then boom, crash, there goes the neighbourhood,
and Apple's profits along with it.
RG: I'm not arguing that Apple "must" make a cheaper iPhone; that way lies madness. I'm making the case that
perhaps
it would behoove Apple to do so, nothing more; and I am doing so
because the main reason for it to do so is being disregarded by a lot of
American bloggers due to an artefact of how the US cellular market
works.
There's a stronger case in favour of Apple doing this than many people
are seeing. Doesn't mean Apple will. Doesn't mean Apple should.
Look at it this way. As the aforementioned Benedict Evans
explains here,
Apple will soon approach -- if it hasn't already -- saturation in the
premium smartphone market. It's already selling a bit more than 50% of
all the phones in the small sliver of the market it completes in. Which
is more likely: that Apple will choose to push into new market segments,
or that Apple will just rest on its laurels and accept stagnation?
And whilst I accept your arguments that Apple would be unwise to
destroy its margins in the name of market share, the iPod market is
clearly a demonstration that it can manage both. Profit margins on all
the various iPods are certainly healthy, and yet Apple has managed to
own practically the entire market of portable music players. That's not
an easy trick to pull off, certainly -- it helps that Apple almost
created the market, whereas smartphones are subject to far more intense
competition -- but still, it shows there's hope that Apple could both
have its market share cake and eat its tortuously constructed metaphor
for profit.
Also (he adds, cheekily), isn't this an action reply of your
arguments against the iPad mini?
CR: The iPod comparison is an interesting one,
particularly in light of the fact that the iPod touch is Apple's
best-selling iPod... accounting for more than half of all sales, by
itself. I'd wager the iPod shuffle is pretty insignificant overall,
which just leaves the iPod nano. So how does Apple make an iPhone nano?
Do they put out a plastic thingy with a non-Retina screen? Well, they
already
had one of those for a few years -- the iPhone 3GS -- and they discontinued it. Not much enthusiasm apparent there.
So (and this may be the margaritas I had with dinner talking), how
about a smaller iPhone, with a smaller screen, that just runs Apple's
core applications and nothing from the App Store? That solves the
problem of not wanting to force developers to target
yet another screen size, but even though that's all we had to go on for that first year the iPhone was out, can you even
imagine
using an iPhone that couldn't run third-party apps? I certainly
couldn't. And imagine the derision from the Android camp if Apple did
that.
The only thing I can see making sense is if Apple does something
similar to what it did with the iPad mini: make a product that costs
(slightly) less without also making it
suck. In retrospect it was kind of obvious how to do that with the iPad mini; it's less obvious how to do that with the iPhone.
My arguments against the iPad mini were made in the light of people
predicting it would have an entry cost of $199 and seeing how craptastic
competing tablets in that size/price range are. Since its entry cost is
$329 instead and it's arguably superior to the full-size iPad in some
ways, it alleviates pretty much all of the problems I saw with it
undercutting Apple's profits and "commoditising" the iPad.
With Bloomberg and others saying this "low cost iPhone" will cost $99
or $149 (ridiculous), the same argument does indeed apply. If Apple
instead introduces a "low cost" device in the neighbourhood of $249-299
for the base level handset, and it does the same thing it did with the
iPad mini -- in other words, it doesn't compromise on build quality or
performance in the name of hitting a price point -- then fine, it starts
to make
slightly more sense for them to go ahead and build/sell it.
The iPhone is already Apple's biggest moneymaker by far, though. I
don't really see the need to mess with success. Meanwhile, Schiller has
openly denied this "cheap iPhone" rumor... unless he hasn't. Reuters is
making me dizzy.
Hey, here's a crazy thought: What if the "low-cost iPhone" is really
just a souped-up iPod touch with data-only 3G? Call it the "iPad nano"
or something.
RG: Well, I think the idea of an iPod touch with 3G is silly, which
we touched on in a previous debate.
The point I was making all along is that "there's a stronger case for
Apple to do a cheaper iPhone than many people are giving credit to."
That's divorced from the idea that Apple
should chase that
market (the best rebuttal being "this is the cheap end of the market
that Apple doesn't want anyway"), so I think my points still stand.
CR: Agreed, and honestly, if Apple can find a way to
make the iPhone less expensive without also making it terrible, I'll be
first in line. I know I'm tired of shelling out NZ$1349 every couple of
years when I want to buy a handset off-contract.
What's your take? Is Apple about to throw a cheaper iPhone out there? Let us know in the comments.