$399 low-end iPhone predicted to grow Apple's user base without affecting margins

Posted:
in iPhone edited January 2014
If Apple were to offer a new unlocked iPhone priced at $399 without a service contract subsidy, the company would be able to grow its install base without deteriorating its gross margins, one analyst has projected.

Huberty


Estimates published on Monday by Katy Huberty of Morgan Stanley peg the cost to Apple of a 16-gigabyte low-end iPhone at $244, including bill of materials, manufacturing, warranty, and other factors. Her assumptions are based partly on checks within Apple's overseas supply chain.

Based on her estimates, a low-end iPhone priced at $349 would be neutral to Apple's total gross margin dollars. And if Apple were to reach $393, a low-cost iPhone would be neutral to its current gross margin percentage.Katy Huberty of Morgan Stanley believes a $399 low-cost iPhone could actually result in a slight increase to Apple's overall margins, and would signal the end of the iPhone 4 and iPhone 4S.

Huberty's analysis is meant to ease concerns among investors who believe that a low-cost iPhone could drastically reduce Apple's gross margins. Instead, she has argued, such a product could in fact increase Apple's margins slightly if it were priced at $399.

She expects that Apple will launch a low-end iPhone later this year, and in the process will likely discontinue the legacy iPhone 4S and iPhone 4 models. Her prediction is based on the assumption that Apple will borrow the same strategy Apple employed in releasing the iPad mini in late 2012 for $329, or $170 less than the latest-generation full-size iPad.

Huberty


"We now see the most likely starting price for the low-end iPhone at $399, as supply chain components appear similar to the current iPhone lineup and the low-end iPhone would replace the iPhone 4/4S sold in the $450-$549 range before recent discounts," Huberty wrote.

"At this price point, even with a 50 percent low-end volume mix, the low-end iPhone is 5 percent accretive (to) total company revenue, 6 percent accretive to gross profit dollars, and 10 basis points accretive to ross margin versus our current (second half of calendar 2013) estimates."

Based on her models, the $399 16-gigabyte low-cost iPhone would carry a gross margin of 35.7 percent ??still well below Apple's premium iPhone lineup, but in line with other products sold by the company. Margins would increase to 42.3 percent for a $499 32-gigabyte model, and 44.9 percent for a $599 64-gigabyte option.

By the end of 2013, she believes Apple's lineup will include a high-end "iPhone 5S," the low-cost iPhone, and an 8-gigabyte iPhone 5 model that would be sold for $549 unlocked and without a service contract. She believes the unlocked "5S" prices would remain as they are for the current iPhone 5 lineup: $649 for 16 gigabytes, $749 for 32 gigabytes, and $849 for 64 gigabytes.

Last month, after a visit with tech suppliers in Asia, Huberty signaled to investors that she believes Apple will build multiple new iPhones in the June-July timeframe. It's expected that Apple will unveil a successor to the iPhone 5, as well as potentially expanding the iPhone lineup with a new low-end model, this fall.
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Comments

  • Reply 1 of 30
    andysolandysol Posts: 2,506member


    It seems like this is the most traction this rumor has ever had.  Curious if this is the year we see it (No 4 or 4S)

  • Reply 2 of 30
    19831983 Posts: 1,183member
    Has to be priced no higher than $349 to be a contract free high volume sales hit I reckon.
  • Reply 3 of 30
    carthusiacarthusia Posts: 561member
    I think $399 for a new value model unlocked is the right price, all things considered. Any less and they'll be leaving cash on the table, any more and there will be a psychological pricing barrier.

    Design-wise, they could use the same unibody aluminum iPhone case, 4" Retina display, include LTE, have a cheaper camera and NAND, offer 16 GB storage capacity only, etc. The 4 and 4S will be axed and this new model will get the last gen iPhone's one-year-old guts. (I think the chassis material is still a big unknown among big unknowns. Polycarbonate may or may not be significantly cheaper, overall.)

    In terms of financing, I'm not sure how they'll justify a $250 price differential between this model and the premium latest-gen model.

    Combined with more of their new and aggressive financing options, especially in developing markets, this new model will be affordable to a larger portion of their unaddressed markets. In my view, if someone cannot afford $399, he or she simply cannot afford an iPhone; that device is a luxury, not a necessity.



  • Reply 4 of 30
    noirdesirnoirdesir Posts: 1,027member


    The iPhone 3Gs was sold unlocked for $375 until last September:


     


    http://www.macrumors.com/2012/09/06/apple-to-drop-iphone-3gs-introduce-8-gb-iphone-4s-next-week/

  • Reply 5 of 30
    carthusiacarthusia Posts: 561member

    Quote:

    Originally Posted by 1983 View Post



    Has to be priced no higher than $349 to be a contract free high volume sales hit I reckon.




    Many, many people on this forum said that the iPad mini needed to be no more than $249 to be a hit. I disagreed whole-heartedly. Their pricing suppositions proved to be very, very wrong. No offense to those who are strapped for cash, but if $50 spread over a 2-3 year life of a smartphone is too much to bear, he or she should seek out a different option.

  • Reply 6 of 30
    realisticrealistic Posts: 1,141member

    Quote:


    Her assumptions are based partly on checks within Apple's overseas supply chain.



    Partly based on supply chain check but mostly her assumptions are SWAG. Scientific Wild As* Guessing.

  • Reply 7 of 30
    irelandireland Posts: 17,616member
    [quote name="1983" url="/t/157830/399-low-end-iphone-predicted-to-grow-apples-user-base-without-affecting-margins#post_2337663"]Has to be priced no higher than $349 to be a contract free high volume sales hit I reckon.[/quote

    It's an iPhone. If it's a new non-old model they'll get away with $399 in the marketplace.
  • Reply 8 of 30
    irelandireland Posts: 17,616member
    noirdesir wrote: »
    The iPhone 3Gs was sold unlocked for $375 until last September:

    http://www.macrumors.com/2012/09/06/apple-to-drop-iphone-3gs-introduce-8-gb-iphone-4s-next-week/

    Yes, but that wasn't a NEW phone. This would be a $399 new phone.
  • Reply 9 of 30
    rayzrayz Posts: 814member

    Quote:

    Originally Posted by Realistic View Post


    Partly based on supply chain check but mostly her assumptions are SWAG. Scientific Wild As* Guessing.



     


    So very true.

  • Reply 10 of 30
    apple ][apple ][ Posts: 8,680member


    So, somebody who is so broke, that they can't afford the regular iPhone, which was as cheap as $579 at T-Mobile recently, is going to spend $399 on a low-end, compromised model instead? Well, ok...............image

  • Reply 11 of 30
    lkrupplkrupp Posts: 7,154member

    Quote:

    Originally Posted by 1983 View Post



    Has to be priced no higher than $349 to be a contract free high volume sales hit I reckon.


     


    The problem with all this is that all those analysts telling Apple what to do have never owned or run a business in their miserable lives. That's the same problem with the advice given by the above poster and others like him. I'm absolutely sure Apple has the brain power available to analyze their business and what they want to do with it. Long ago I was in the Rotrary Club with a professor of business at Southern Illinois University at Edwardsville, Illinois. He had decided to open a sports bar and grill to show his students what running a business was really like.


     


    It lasted about a year and closed.

  • Reply 12 of 30
    pedromartinspedromartins Posts: 1,333member


    399 and call it low end?


     


    F*ck you, analyst morons.


     


    There's nothing low end on an iPhone, or any other phone at 399. These analysts and most consumers are always so retarded. If Apple releases an iPhone that does space traveling and calls it 5S, it will be a disappointment. Call it 6 and change nothing, it will be a hit. 

  • Reply 13 of 30
    tallest skiltallest skil Posts: 43,399member


    $399? That's believable. I'm all for it. It'll shut up the people who demand a $199 iPhone, at least.

  • Reply 14 of 30
    pedromartinspedromartins Posts: 1,333member

    Quote:

    Originally Posted by Tallest Skil View Post


    $399? That's believable. I'm all for it. It'll shut up the people who demand a $199 iPhone, at least.



    I demand a 199 dollar iPhone with qwerty physical keyboard.


     


    If Apple doesn't release one, they better pray to survive another year.


    Oh, they are innovating 0. If they don't release a qwerty iPhone, I will sell my macbook air for an ASUS zenbook.

  • Reply 15 of 30
    rob53rob53 Posts: 2,047member
    And we should believe anything this person says? What's her angle?
  • Reply 16 of 30
    jungmarkjungmark Posts: 6,705member
    If apple releases a new low cost phone with the same internals as the 4, WS would cheer. If they release the 4 at the same price, WS will cry.
  • Reply 17 of 30
    MarvinMarvin Posts: 14,223moderator
    Katy Huberty of Morgan Stanley

    Katy again, the Digitimes of analysts.
    Based on her estimates, a low-end iPhone priced at $349 would be neutral to Apple's total gross margin dollars. And if Apple were to reach $393, a low-cost iPhone would be neutral to its current gross margin percentage.

    A cheaper iPhone fails to take into account the effect that has been happening with their current setup. By selling the older models, they drive people to the higher models. A device like an iPad Mini doesn't do that quite so well. A cheaper iPhone would lower the average selling price significantly and they'd have to make that up by nearly doubling the volume of the lower models. They may well do this in markets where they would only want the cheapest smartphones but $350+ isn't going to do that because smartphones there start at around $100.

    There is a problem with their current setup and that is that eventually they will have to sell an iPhone 5 at $450 and maybe the cost of goods won't be good for the margins, which is likely why they usually have to drop to 8GB. Having a setup with a cheap model and premium model allows them to predict their margins better. I think it will be harder to market though. What do they call the crappy one?
  • Reply 18 of 30
    wizard69wizard69 Posts: 12,826member
    carthusia wrote: »

    Many, many people on this forum said that the iPad mini needed to be no more than $249 to be a hit. I disagreed whole-heartedly. Their pricing suppositions proved to be very, very wrong. No offense to those who are strapped for cash, but if $50 spread over a 2-3 year life of a smartphone is too much to bear, he or she should seek out a different option.

    It really isn't that simple. One has to balance the price of a low end iPhone against what is currently offered in the mainstream iPhone. Price it too high and people will dismiss it in favor of the low entry point of an on contract phone. Of course much of that depends upon exactly what features the low end model has.

    I really think that an off contract, low end iPhone could do wonderful things for Apple. It is about having real options instead of this years model or last years.
  • Reply 19 of 30
    pfisherpfisher Posts: 758member

    Quote:

    Originally Posted by Apple ][ View Post


    So, somebody who is so broke, that they can't afford the regular iPhone, which was as cheap as $579 at T-Mobile recently, is going to spend $399 on a low-end, compromised model instead? Well, ok...............image



    It's wouldn't be expected to be treated as "low end". Mid-priced.


     


    Anyway, most consumers don't do a lot of analysis and hang around rumor boards finding out what phone they want. They see a price and they grab it. Especially in  parts of the world that can't or won't spend $700 on a phone.

  • Reply 20 of 30
    wizard69wizard69 Posts: 12,826member
    apple ][ wrote: »
    So, somebody who is so broke, that they can't afford the regular iPhone, which was as cheap as $579 at T-Mobile recently, is going to spend $399 on a low-end, compromised model instead? Well, ok...............:no:

    I wouldn't characterize people interested in this phone in the manner you just did. I'd seriously consider such a phone as a few years of using both my iPad and an iPhone has taught me a few things. I only need a few features from the iPhone as my regular use now focuses on the iPad. The reality is a high end iPhone with the corresponding contract is a waste of money for me. If I can get a no contract iPhone with a decent data plan it may be good enough.

    It is hard to say for certain that this low end iPhone would be good enough. Obviously we don't know all of the details. The thing is such an iPhone could save me enough money each year to basically cover my iPad purchases. Or close to it depending upon which iPad I buy. The goal would be to save at least $40 bucks a month. Of course this depends on finding a carrier that wants to offer a good deal on such a phone. Personally I'd like to see the phone come in under $350 but hey you never know. In any event it is the contract that causes one problems.

    Now you may ask why I'd want to save money in this way. It is pretty simple really, I use my iPad far more than I use my iPhone right now. In fact with some struggle I could get buy with just a few apps on the unit. IPad has had a big impact on how I see the iPhone in my life. As such when it comes time to upgrade my iPhone 4 I will be looking at total costs far more closely than in the past. I might even change carriers to get low cost basic coverage. You need to realize that over the course of a few years iPhones end up costing an individual a lot of money. If I'm going to spend that money, with a cellular carrier, I'd much rather it go to support of an iPad.
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