The firm's comments came as part of a research note responding to investor questions about a rumored deal that would see discount chain Wal-Mart offer a $99 4GB iPhone 3G a few days before New Years.
"While we are not sure of exact timing, we think a $99 Apple-branded cell phone is inevitable," analyst Shaw Wu wrote. "As we mentioned in our initiation report, we believe one of the key things Apple needs to do to drive broader iPhone adoption is to build a more complete product line like it has done with the iPod."
He noted that today's iPhone offerings essentially consist of one product with two storage capacity points (8 GB and 16 GB), while what's really needed is a complete family of iPhones that includes "true low-end, mid-range, and high-end" models.
Echoing a recent report from Needham & Co. analyst Charles Wolf, Wu argues that there's little stopping the company from taking such an approach with its existing iPhone design, which he believes is capable of supporting a $99 price point despite being perceived as a high-end device.
"The reason being the price of the hardware that customers pay is not the big driver of economics," he wrote. "It's really about the subsidies, revenue share and royalties."
More specifically, the analyst believes the average selling price of today's iPhones is close to $700, an estimate which likely factors in an approximate $550 wholesale price to AT&T and another $100 bounty for each of the devices Apple sells to new AT&T subscribers at its retail stores (details).
Therefore, he notes that Apple could easily absorb a modest $100 margin hit to drop a model based on today's design down to $99, but adds that it's also likely that the company's carrier partners would be willing to eat that cost on their own through additional subsidies due to the handset's ability to drive higher ARPU (average revenue per user) with $30-$45 data plans in addition to pricey voice plans.
"The payback period [for the carriers] is two to three months making this an easy economic decision," Wu told his clients. "We would like to note that already in some international markets, customers can get an iPhone for free or less than $199 USD when they sign up for a longer-term contract (three years) and a premium feature package."
The Kaufman Bros. analyst maintained his Buy rating on shares of Apple on belief that the company remains "one of the better names to own in this tough economy given its strong fundamentals."