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

Posted:
in iPhone edited January 2014
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."
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Comments

  • Reply 1 of 44
    SpamSandwichSpamSandwich Posts: 33,407member
    Oh, those analysts... Never a dull moment.
  • Reply 2 of 44
    cvaldes1831cvaldes1831 Posts: 1,832member
    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."
  • Reply 3 of 44
    frugalityfrugality Posts: 410member
    A cost break-down of a product that doesn't exist. Gottaluvit.
  • Reply 4 of 44
    shadashshadash Posts: 470member
    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.
  • Reply 5 of 44
    roberteroberte Posts: 10member
    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.
  • Reply 6 of 44
    mlayermlayer Posts: 23member
    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.
  • Reply 7 of 44
    desarcdesarc Posts: 642member
    if you want an unsubsidized iPhone buy used & jailbreak.
  • Reply 8 of 44
    mrtotesmrtotes Posts: 760member
    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.
  • Reply 9 of 44
    mbarriaultmbarriault Posts: 237member
    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).
  • Reply 10 of 44
    prof. peabodyprof. peabody Posts: 2,860member
    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.
  • Reply 11 of 44
    jeffdmjeffdm Posts: 12,953member
    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.
  • Reply 12 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!
  • Reply 13 of 44
    macvictamacvicta Posts: 346member
    Hasn't Apple already tackled this issue with the iPod touch? Who says it has to be a phone?
  • Reply 14 of 44
    Quote:
    Originally Posted by [email protected] 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!
  • Reply 15 of 44
    kaylekayle Posts: 8member
    "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.
  • Reply 16 of 44
    mark2005mark2005 Posts: 1,158member
    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.
  • Reply 17 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.
  • Reply 18 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.
  • Reply 19 of 44
    mj1970mj1970 Posts: 9,002member
    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.
  • Reply 20 of 44
    constable odoconstable odo Posts: 1,041member
    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.
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