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Hypothetical no-contract $300 'iPhone lite' would net Apple 16% gross margin - analysis

post #1 of 44
Thread Starter 
Given the current cost of components, a prepaid contract-free iPhone with less internal storage would likely earn Apple only about 16 percent gross margin if it were priced at $300, a new analysis has estimated.

Analyst Charlie Wolf with Needham & Company took a closer look at the prospect of a hypothetical "iPhone lite," to see if it would be in Apple's best interest to build such a product. A cheaper iPhone has been viewed as a strategy that would work to Apple's advantage in emerging markets like China.

In February, both Bloomberg and The Wall Street Journal reported that Apple is working on a smaller and cheaper iPhone that it could sell contract-free. Soon after, The New York Times chimed in, and claimed that while Apple is not working on a smaller iPhone, it has explored opportunities in developing a cheaper handset.

Wolf largely agrees with the Times, and doesn't see a smaller iPhone with a new form factor as something that would be in Apple's best interest, even though it would be the easiest way to cut costs and created a cheaper handset.

"In our view, the iPhone would not be an iPhone if the display were, say, cut in half," he said. "Such a move would (dramatically) reduce the value of the iPod module for video viewing as well as the size of web sites accessed through the Safari browser. A smaller screen would also degrade the experience in using some applications, not to mention the possibility that some applications would probably have to be rewritten to accommodate a smaller screen."

iSuppli estimated that the 16GB iPhone 4, when it launched last June, carried a bill of materials of $188. The iPhone has an average selling price of $625 with a carrier subsidy, while gross margin is usually around 50 percent, suggesting that additional costs like assembly, software, testing, licenses and warrantees add up to $100 or more.

Ruling out the possibility of a smaller iPhone, Wolf said Apple could reduce internal storage from 16GB to about 4GB, but that would only reduce the bill of materials by $30 to about $157. By his estimation, such a handset would still have a total cost of $270.

"Apple would at best break even if it priced an iPhone Light at $250; and it would earn a modest 16% gross margin if it priced it at $300, which we regard as the high end of the range for a prepaid phone," Wolf wrote.

Gross margins of just 16 percent would be a number uncharacteristically low for Apple. For example, in its last quarterly results for the 2010 holiday buying season, Apple reported margins of 38.5 percent, or more than twice Wolf's estimate for a low-cost, no-contract iPhone.

"We suspect that the iPhone's designers and engineers have thought about this a lot more than we have so that the cost savings would be somewhat greater than we've estimated," Wolf said. "If, for example, the expenses incurred beyond the cost of components could be materially reduced, Apple might be able to earn a gross margin of 20% pricing the phone at $250 and 33% gross margin pricing it at $300."

The possibility of a cheaper iPhone with fewer features was hinted at by Apple Chief Operating Officer Tim Cook earlier this year. Cook, in an interview with Bernstein Research analyst Toni Sacconaghi, said Apple doesn't want its products to be "just for the rich."

Cook reportedly said that Apple is planning "clever things" to compete in the prepaid handset market. He also stated that Apple is "not ceding any market." He also referenced China, where Apple has found great success of late, and noted that it is a "classic prepaid market."
post #2 of 44
Oh, those analysts... Never a dull moment.

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post #3 of 44
16% GM = ain't gonna happen

Apple pursues profit, not market share. Companies like Acer pursue market share. Well, until their CEO quits and their founder says, "Sorry, we effed up our business model and we did not significantly increase shareholder value by chasing market share."
post #4 of 44
A cost break-down of a product that doesn't exist. Gottaluvit.
post #5 of 44
Not every iPhone needs a Retina display. A prepaid iPhone could be a rebranded iPhone 3GS, and probably sell quite well. Apple isn't always adverse to lower margins in exchange for marketshare - see the iPod and iPad.
post #6 of 44
I hope they come up with a solution for this. I want more carrier offers here in the US. I also am less and less interested in phone features and mostly want a data pipe that I can share between devices. Neither the Verizon or ATT deal is attractive here and NO i'm not willing to pay yet another data plan for my iPad as well.
post #7 of 44
I can't see this happening unless:
  1. Display technology becomes significantly cheaper (50%)
  2. Flash and DRAM prices also drop a similar percentage
  3. A much cheaper enclosure is used (easy)
  4. Further integration of currently discrete components
$250 is too high to be the magic number. $200? Now you're talking. Look at the demographic that might buy these phones: are they more likely to buy apps and content or will it be more like Android? Probably the latter, which makes me wonder what's in it for Apple other than a naked play for market share.
post #8 of 44
if you want an unsubsidized iPhone buy used & jailbreak.
post #9 of 44
Quote:
Originally Posted by shadash View Post

Not every iPhone needs a Retina display. A prepaid iPhone could be a rebranded iPhone 3GS, and probably sell quite well. Apple isn't always adverse to lower margins in exchange for marketshare - see the iPod and iPad.

+1 the 3GS would be about right for the low end model, perhaps just bump the battery to bring it to 2011 tech.

There's probably a good number of iPhone users who use storage only 'cos it's there.

This said, the unlocked, SIM-free 3GS 8GB handset from Apple costs more than I'd have expected by now. At £428 it's a fair investment: the £510 16GB iPhone 4 is much more appealing but hardly entry-level. With iPad 2 advertised alongside this at £399 it feels expensive.
post #10 of 44
There's lots of ways they could cut costs to make an unsubsidized iPhone. No retina display, use a lower-end rear camera, if iPhone 5 is to get a bigger screen then keep the same 3.5", ditto on LTE, etc. It would also make an excellent differentiator between models, much more than there is even now (and vastly more than the array of Android devices from single manufacturers).
post #11 of 44
Quote:
Originally Posted by AppleInsider View Post

Given the current cost of components, a prepaid contract-free iPhone with less internal storage would likely earn Apple only about 16 percent gross margin if it were priced at $300, a new analysis has estimated...

The problem I see with this analysis is it assumes cost cutting measures as applied to the current iPhone design. It's been patently obvious from the start that a slightly smaller, or slightly cheaper iPhone is really not worth pursuing for these reasons and many more. It's not rocket science to see this is a bad idea and not worth a whole report.

If Apple *did* want to enter this part of the market, the smart thing to do would be to do an entirely different design, not just make a crappy cheaper version of the existing one. What the analyst is completely missing out on is that the market for the cheaper feature phones is made up mostly of people who (by definition), don't need a smartphone. They don't need the ability to run apps, or download movies or most of that stuff. That's why they are currently using a feature phone.

I still think it's do-able for Apple to make a feature phone with just a few standard, built in apps, no app store, and make it smaller (T9 instead of keyboard), and cheaper, (mass produced small memory requirements). It would be a re-imagining of the standard feature/flip phone though, not a dumbed down iPhone.
post #12 of 44
I don't think going from 16GB to 4GB would save as much as $30. They might save a bit by going with the cheaper screen from the Touch. I would expect that last Junes' component pricing would be less this June. The iPhone 4 chassis might be a bit expensive, dial that back to a 3GS style case and you might drop the costs enough.

But this is just a mental exercise, I wouldn't expect it to happen. If it does, then that's great for the people that want it.
post #13 of 44
What about a Apple phone that integrates with either an iPod or iPad. It could just an add-on to an existing non-telephonic device, but integrates with the Contact application for dialing. E-mail would be with the existing device using Wi-Fi as people do now. This gets away from having to have a screen, but enables someone to use an existing Apple product if they own one. The "iPhoneMini" would be able to be sync'd up with a Contact-enabled device so entries don't have to be manually keyed in. The Contact-enabled device can be a Mac, iPod, iPad, or even another iPhone (a cheap way to have a family-plan with shared Contacts).

Apple could put this out for $100.00 or less and it could work as a stand-alone device (with manual contact entry) or a stepping-stone to another Apple product.

Think out of the box!
post #14 of 44
Hasn't Apple already tackled this issue with the iPod touch? Who says it has to be a phone?
post #15 of 44
Quote:
Originally Posted by skavanag@yahoo.com View Post

What about a Apple phone that integrates with either an iPod or iPad. It could just an add-on to an existing non-telephonic device, but integrates with the Contact application for dialing. E-mail would be with the existing device using Wi-Fi as people do now. This gets away from having to have a screen, but enables someone to use an existing Apple product if they own one. The "iPhoneMini" would be able to be sync'd up with a Contact-enabled device so entries don't have to be manually keyed in. The Contact-enabled device can be a Mac, iPod, iPad, or even another iPhone (a cheap way to have a family-plan with shared Contacts).

Apple could put this out for $100.00 or less and it could work as a stand-alone device (with manual contact entry) or a stepping-stone to another Apple product.

Think out of the box!

...oh and it would really goose the sales of the existing iPod Touch line...and the margins would be goose fat too!
post #16 of 44
"Radical" idea: base a cheap iphone on the (sixth gen) ipod nano.

Make it a little larger to add a speaker and a slide out microphone pickup.

Semi-radical idea: base a cheap iphone on the fifth gen ipod nano. Put keypad in place of click wheel.
post #17 of 44
Why would an iPhone lite have a retina display? It wouldn't, instead it would have a 3GS quality screen, updated with some of the iPhone 4 level internals. So its costs would be less than the $188 starting point.
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post #18 of 44
I'm not smart enough to figure out how Apple would do it but I do remember the Keynote where Stevo introduced the original shuffle based on flash.

The iPod had 75%-85% of the non-flash MP3 market and zero market share of the flash MP3 players. I think by that weekend Apple had 75%-85% of all MP3 players!

If anyone can do it, it would be Apple. I do think the App store, Facetime, iPod, video, GPS, email and internet will be part of the mix though. I don't see a flip phone from Apple or a physical keyboard, either.

Best.

PS. I would love the iPhone to be as thin as the iPod Touch....I know, I know. Difficult to do with all the radios needed in the phone.
post #19 of 44
Go to Nokia's website.. they have 22 models of phone!

Apple has 1. You can't buy the wrong one. They only sell their best phone.

Once drive space get's cheaper.
- The iPod shuffle will go away (apple's not making app store money from it)
- The iPod classic will go away (apple's not making app store money from it)
- I bet we'll see "nano gadgets/apps" or something you buy for them.

I'm surprised the Macbook still exists. and it's not just the Pro's and Air.
post #20 of 44
Quote:
Originally Posted by GelfTheElf View Post

Go to Nokia's website.. they have 22 models of phone!

Apple has 1. You can't buy the wrong one. They only sell their best phone.

Once drive space get's cheaper.
- The iPod shuffle will go away (apple's not making app store money from it)
- The iPod classic will go away (apple's not making app store money from it)
- I bet we'll see "nano gadgets/apps" or something you buy for them.

I'm surprised the Macbook still exists. and it's not just the Pro's and Air.

Hmmm. Interesting perspective. You seems to be saying that it's either 22 models of something or 1.

Apple very deftly expanded their iPod line from one to four over time. Eventually some of these might be dropped (e.g., classic and shuffle) and the line simplified again.

Same with the various Mac models.

But to assume that having 1 model is the best because "You can't buy the wrong one." and "They only sell their best phone." suggests a) the average buyer is an ignorant buffoon and, b) that they cannot have multiple models that are "best" for different things/customers/purposes.

I agree that 22 is probably too much. It probably reflects either a lack of understanding of customer needs and/or a fetish with market segmentation.

Apple will do another iPhone at some point. They will find a way to make this happen.

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post #21 of 44
Quote:
Originally Posted by cvaldes1831 View Post

16% GM = ain't gonna happen

Apple pursues profit, not market share. Companies like Acer pursue market share. Well, until their CEO quits and their founder says, "Sorry, we effed up our business model and we did not significantly increase shareholder value by chasing market share."

I don't think Apple should do something like lowering their GM because they'd be committing financial suicide. I remember when Apple takes even minor cuts of GM like when starting a new product design. The analysts will quickly say that they'll have to downgrade Apple because they're going to take a GM hit and that's no good. Wall Street and analysts will say on one hand that Apple should sell more goods at a cheaper price to increase market share, but on the other hand they're telling investors not to invest in a company that's making less in the way of GM. Wall Street is very unforgiving when it comes to losing profit.

I definitely do not want Apple lowering their prices to suit some idiot analysts that believe Apple will automatically get huge market share for lower quality goods or by cutting corners. If Apple never gets more than 30% global smartphone market share, as a shareholder, that's fine with me. Everyone in the world does not need an iPhone if they can't afford to pay for it at current prices. That's a consumer's ignorance if they can't discern quality and that quality comes at a price.
post #22 of 44
we don't see it, we focus on the usual, we will be surprised by "clever"
also apple has huge economies and are tops in design.
what is the high end price for a contract phone......IN CHINA

that's where they want to be as well as europe, india, also big on contract phones

they also have to have enough stuff inside to allow all to use the same os, that way won't be fragmented
3gs might work, but i think that item is too long in the tooth, so i feel it will be startlingly clever
how i don't know, but present nano with phone capabilities would be clever
there has to be ways to use an arm band--
apple wants to be "clever" that means to me, something truly untried

Cook reportedly said that Apple is planning "clever things" to compete in the prepaid handset market. He also stated that Apple is "not ceding any market." He also referenced China, where Apple has found great success of late, and noted that it is a "classic prepaid market."
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post #23 of 44
I don't think it's that crazy to consider that Apple might release a lower-GM phone. There is the App store and iTunes that will continue to earn Apple money for a long time to come. Microsoft and Sony use this model in their video game devices; in fact, they actually lose money on each console they sell, and regain it (hopefully) in the sale of licenses for publishers to sell their games on the hardware. However, I've heard numbers that only 66% of people are using the App Store. I don't think Apple would accept a scenario where they sell the iPhone at a lose, and rely on 66% of customers to pay off the lose made by everyone. Seems like charity. But when things like NFC payments take off, this might become more plausible, as Apple might make a small fee for each transaction (like exists for ATM cards). But it's not like people don't already want the iPhone.

As for these numbers like $188 for the iPhone materials +$100 for other costs. This seems totally wild. I can't imagine a product having a 232% margin. The Macs have about a 20% margin, from what I have heard. I imagine the mark ups are more in mobile, but that much more? And wouldn't we be able to get some idea about the markup from quarterly Apples earnings information? I'm hoping someone can help balance this claim.
post #24 of 44
Quote:
Originally Posted by Constable Odo View Post

That's a consumer's ignorance if they can't discern quality and that quality comes at a price.

Absolutely, but a large part of the iPhone's price is the service, of which you only have one price available since in the USA both Verizon and ATT are about the same on plans (and it sounds like prepaid is preferred method in China). With ATT buying TMobile, that reduces options for carriers, assuming the iPhone would ever get there.

Android or whoever can go prepaid while Apple can't. And while Apple shouldn't be chasing market share, they shouldn't be forced to give up mindshare, or types of wallets available for that matter. Because some folks like prepaid, why not let them do it?

They can build a cheaper iPhone with the old resolution screen (which most or all apps still support) for a cheaper price point than the iPhone 4 or 5, and I think they should. Its necessary that they do for the prepaid market, which shouldn't be overlooked because there's money to be made, and why should Apple care about the carrier's bottom line if they can still profit?

I say a slightly modified 3GS should fit the bill nicely. I have one and it still works very well.
post #25 of 44
I think they are wrong about there not being a market for a smaller phone. I wouldn't be for me, but I think that Apple would sell a ton of iPhone Lites that didn't require a data plan. People would use them for phone calls, texting, photos, music, and possibly email (over WiFi). Sure, that would exclude a lot of apps, as well as Google Maps, but believe it or not, there are a lot of people out there that want an easy to use phone that isn't a computer.
post #26 of 44
Quote:
Originally Posted by jonro View Post

I think they are wrong about there not being a market for a smaller phone. I wouldn't be for me, but I think that Apple would sell a ton of iPhone Lites that didn't require a data plan. People would use them for phone calls, texting, photos, music, and possibly email (over WiFi). Sure, that would exclude a lot of apps, as well as Google Maps, but believe it or not, there are a lot of people out there that want an easy to use phone that isn't a computer.

I have said this since the iPhone came out, but I think the carriers are the ones who won't ever let this happen. They already require data plans on certain models, and I am sure the iPhone Lite would be included.
post #27 of 44
Apple absolutely needs to move on this. The prepaid carriers are going to cut the legs out from under the high end market and even the profit margins of those cell providers presuming eternal $30 per month data plans. Virgin Mobile right now is offering the LG Optimus V for $199 OFF CONTRACT and the required plan is $25 a month for 300 anytime minutes and unlimited texting and data.

StraightTalk is offering the Nokia E71 with unlimited everything for $45 a month.

Apple needs to make a move here.

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post #28 of 44
Quote:
Originally Posted by cvaldes1831 View Post

16% GM = ain't gonna happen

Apple pursues profit, not market share. Companies like Acer pursue market share.

tell that to the iPod. where it can Apple tries to increase market share. Also Tim Cook said he wanted a cheap phone.
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post #29 of 44
Quote:
Originally Posted by Constable Odo View Post

I don't think Apple should do something like lowering their GM because they'd be committing financial suicide.

Any penalising of Apple because of a slightly lower GM is gaming the market - the stock doesnt pay dividends. If the iPhones share of the market starts to decline rapidly ( which will happen as the next batch of smart phone customers are poorer) then the stock will collapse. The market accepts lower GM for market gains - Apple's is very high anyway.
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post #30 of 44
Quote:
Originally Posted by GelfTheElf View Post

...

Once drive space get's cheaper.
- The iPod shuffle will go away (apple's not making app store money from it)
- The iPod classic will go away (apple's not making app store money from it)
- I bet we'll see "nano gadgets/apps" or something you buy for them.

I'm surprised the Macbook still exists. and it's not just the Pro's and Air.

You're just making crap up here. You know nothing about Apple or their motives, nothing about product design and nothing about the financials of the situation.
post #31 of 44
Quote:
Originally Posted by GelfTheElf View Post

Go to Nokia's website.. they have 22 models of phone!

Apple has 1. You can't buy the wrong one. They only sell their best phone.

Once drive space get's cheaper.
- The iPod shuffle will go away (apple's not making app store money from it)
- The iPod classic will go away (apple's not making app store money from it)
- I bet we'll see "nano gadgets/apps" or something you buy for them.

I'm surprised the Macbook still exists. and it's not just the Pro's and Air.

I think you are forgetting iTunes here - there are music sales aplenty to keep the above devices viable - now as for a cheap cellpone?

How about the ipod phone? a classic with a keypad... (not a qwerty, just numbers)
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post #32 of 44
Quote:
Originally Posted by Prof. Peabody View Post

What the analyst is completely missing out on is that the market for the cheaper feature phones is made up mostly of people who (by definition), don't need a smartphone. They don't need the ability to run apps, or download movies or most of that stuff. That's why they are currently using a feature phone.

I still think it's do-able for Apple to make a feature phone with just a few standard, built in apps, no app store, and make it smaller (T9 instead of keyboard), and cheaper, (mass produced small memory requirements). It would be a re-imagining of the standard feature/flip phone though, not a dumbed down iPhone.

I just want a phone and iPod (not Touch) in one package so I don't need to carry two devices. I bet there are tens of millions of iPod (not Touch) owners out there who would buy this device in a heartbeat.
post #33 of 44
If Apple can make an iPod touch with:
1 a Retina Display
2 two cameras
3 8GB RAM
4 A4 processor
for $230


Then they can make a 3G R (comes after S)
1 with the older display
2 one camera
3 4GB RAM
4 "A3" processor
for $300
post #34 of 44
Quote:
Originally Posted by asdasd View Post

tell that to the iPod. where it can Apple tries to increase market share. Also Tim Cook said he wanted a cheap phone.

I don't need to tell that to the iPod because the iPod told me (as a shareholder): the iPod's GMs are very high.

It is worth pointing out that there have been hundreds if not thousands of PMP models from Apple's competitors that were competitively priced that found no traction.

Apple did not come to dominate the PMP market by cost competition. They did it by building a big box online music store and providing a high quality end user experience.
post #35 of 44
I would think they'll do something like they did with the iPod. Come out with lower price points but have a very interesting interface of them. So I can see and "iPhone" that is essentially an iPod nano which already has a touch screen, so this would not be a full blown iPhone, but it would do itunes and maybe facetime.

Also, what is happening with VOIP? Is it gaining on cell telephone calls? If so, and with Apple's new big data center, maybe the internet becomes the backbone of an Apple telephone system? So one doesn't even need a carrier contract, just a wifi connection. And then the iPod Touch becomes an iPhone....
post #36 of 44
My vision of the "lite" iPhone would look like this:

A4 processor
Non-retina 3.5" display (similar to the one used in the 3GS)
Front and rear cameras (similar to the ones used in the iT4, not the better ones in the iP4)
8GB flash
A-GPS
Lower-cost materials
Updated styling (thinner?)
Modestly improved battery life (compared to the 3GS)
Wi-fi and GSM 3G-only (no support for CDMA nor 4G)

Key points are the use of the A4 processor and non-retina display. The A4 processor, having been shipped in such large volumes, must be dirt cheap by now. The other reason for using the A4 is the power savings over the "A3" used in the 3GS. Using the old non-retina display will cut costs and also provide differentiation from the premium iPhone. In addition, all existing apps will work (no fragmentation issue).

Some other notes:

-the reason for having a front camera is to promote Facetime
-to cut costs, it will have a plastic back. However, I believe that Apple will have to update the styling, perhaps take some cues from the iP4 (think plastic unibody MacBook). The 3G/3GS looks really dated and cheap now - they can't continue to use this design
-lack of 4G is to cut costs and also for differentation
-lack of CDMA is due to the focus on prepaid markets - most of these users will be on GSM (I could be wrong on this, however)
post #37 of 44
Quote:
Originally Posted by Prof. Peabody View Post

You're just making crap up here. You know nothing about Apple or their motives, nothing about product design and nothing about the financials of the situation.

Exactly!
Because I'm an analyst.
post #38 of 44
Why not just sell a completely unlocked version of the iPhone 3GS?

This way, people could buy it and use it with any prepaid GSM carrier they wish.

On top of this, if they wanted to go postpaid later, they could just sign up with AT&T and get a SIM card.

Hell, they should sell the iPhone 4 unlocked too. I've known of people who are more than willing to pay non-subsidy price for an iPhone 4 if it means not dealing with a contract and being able to go pre-paid. Hell, even I might consider it!
post #39 of 44
They already do this; in some markets, it is illegal to sell a carrier-locked handset.

However, the price of such an unlocked iPhone is typically $600-700. Apple certainly isn't giving up its margins.

You can buy an unsubsidized iPhone from an Apple Retail Store (US), they don't publicize it though. It's still carrier-locked to AT&T. You can jailbreak it to use on T-Mobile USA's network, but due to network standard differences, there is no 3G data if you use T-Mobile USA's network. You just get voice and 2.5G EDGE data.

International consumers are more used to buying unsubsidized handsets, and many of these work with different carriers' SIMs.

The problem isn't with Apple; it's based on the carrier/market when you purchase your handset.
post #40 of 44
Quote:
Originally Posted by cvaldes1831 View Post

I don't need to tell that to the iPod because the iPod told me (as a shareholder): the iPod's GMs are very high.

It is worth pointing out that there have been hundreds if not thousands of PMP models from Apple's competitors that were competitively priced that found no traction.

Apple did not come to dominate the PMP market by cost competition. They did it by building a big box online music store and providing a high quality end user experience.

We're all investors.

Apple, as the guy above you pointed out, sells an iPod Touch with an A4 processor for $230. Yet, they still maintain their high over all ASP, and iPod GMs because that model is underpowered and you pay a lot more for the incremental improvements in the higher models. And, clearly, people do. On the other hand the aspirational and the poor, can get an iPod Touch rather than a cheap substitute, because the entry model is cheap. Then there is the nano. Were it a few years ago, your argument against the iPod nano, were it rumoured, would be the same as the one you just made against a cheap iPhone: Apple does not do cheap. Clearly it does.

That iPod touch could be the basis for the new iPhone. If they can make a margin on it at $230 ( retail) then the thing to do is to put a phone radio in there, call it the iPhone Touch, and you're done. Or not. Thats the only question.

Why?, it is certain that Apple will release a cheaper model because Tim cook has already said they will. The only discussions are when, how, and how cheap.
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