Benedict Evans +44 7880 786 727 benedict.evans@endersanalysis.com @benedictevans 6 August 2013 [2013-071]

A cheaper iPhone has been discussed almost since the original launch in 2007, but we believe costs have fallen and the market developed to the point that it now makes sense for Apple to offer a $200-$300 (unsubsidised) model

We see a positive but fairly small financial impact on Apple. The key benefit would be defensive: by extending the ecosystem and  preserving  iOS  as  developers’ first choice, Apple would secure the whole portfolio

We believe a well-executed and distributed $200-$300 iPhone would sell double-digit millions of units – a significant challenge to Android OEMs and Google. However,  the  US  market’s  pricing  structure  might  limit  the  impact there

“They made outlandish profits for about four years. What this cost them was their future. What they should have been doing is making rational profits and going for market  share.”  – Steve Jobs on Apple’s  management after he was fired.

The  iPhone  is  expensive.  Apple’s  average  selling  price  (ASP)  has  been  in  the  region  of $600 since launch where the global average mobile phone price is $180, Android averages $250-$300 and the key price for Android in China is RMB1000 ($160). Handset subsidies mask some of this premium, but higher prices still mean higher contract prices in most markets, while around 50% of global mobile users are on prepay. Meanwhile, Apple’s  policy  of  selling  older  models  at  a  discount  appears  to  have had only a limited impact – a two year old iPhone 4 at $400 is still a high-end price.

A separate, cheaper line has been discussed almost since the original iPhone launched, and it is highly likely that Apple has been considering them for as long. However, we see three reasons why this could now be the moment that Apple would move from prototypes to shipping a product:

• Experience: Apple has always been unwilling to make devices with a poor experience in order to hit a lower price point. We believe costs have fallen to the point Apple could now make a phone with a good user experience at a $200-$300 price

• Opportunity: Apple’s share of phone sales continues to grow, but it sells 10% of global phone units where smartphone sales have passed 50%

• Defence: the growth of Android makes it increasingly appealing to developers, and if nothing changes we could see iOS becoming a second priority for the best new apps by 2014. This would be a major threat to the appeal of the whole iPhone franchise

Notes on a cheap iPhone