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The iPhone at four; growing up or just growing?

Ever since the iPhone launched four years ago (to the day), the question on everyone’s mind has been: When will Apple expand the portfolio to reach into all market segments? I remember thinking in 2007 whether it would be in six months or a year that they would create a “mini”, “nano” and “classic” line-up which served them so well with the iPod.

Apple however took a different approach. To their credit, they focused on the platform and built a consistent experience around a fixed screen size to nurture an ecosystem. They also improved the power of the device so that experience would improve to be better and more robust. In other words, they treated every iPhone as not being good enough, needful of every megahertz of power, every pixel of screen and every minute of battery life. They polished the OS constantly and added APIs by the thousands.

In other words, they acted like a computer software company, not like a “device vendor” or like a handset manufacturer which was everyone’s (including mine) frame of reference.

Having expanded from iPhone to iOS and built the platform into non-cellular centric computers like iPad and iPod touch, they clearly showed a nonchalance about the operator channel and the amplification power it offers (an amplification which comes with a hefty price of dependency and strategic illusion.)

But the mind always wonders back to the question of portfolio. Now that the product is maturing, the hardware is getting nearly “good enough”. Perhaps even Apple might now consider letting go of the “frontier” of what’s technologically possible and consider expanding its reach to the broader audiences it has willfully kept out of reach.

And broad they are.

Based on data published by Deutsche Bank and the ITU, we can calculate roughly how many customers Apple’s current iPhone positioning has left unserved. I chose to use pre-paid/post-paid split as a proxy for unaddressed/addressed. This is an imperfect proxy but a pretty good one as most pre-paid subs see a full price for the iPhone (retail around $700 to $1000) vs. post-paid customers seeing a price of $200 or below. The $200 happens to be an important psychological price inflection point where volumes increase dramatically.

The first chart shows the global split between pre-/post-paid subscribers as of 2010. Roughly 1.5 billion are post-paid and 3.7 billion are pre-paid. That means that nearly 70% of the world is not being addressed by the iPhone as it currently stands. Put another way, a shift in positioning might result in a 250% increase in addressable market.

Tim Cook alluded to this in the last conference call when he said pre-paid markets, especially in China, are huge with share figures “starting with a nine“. He also said separately that they would not be ceding any market–a hint if there ever was one, given the broadening of Android into previously feature-phone price bands.[1]

We can even see the situation more clearly on a regional scale. The following chart shows the same pre-/post-paid split by region.

You can visualize the iPhone having spent the last four years penetrating into the blue areas of the chart through the expansion of carrier agreements. With half the US & Canada area being finally filled in this year, most of the blue is now more-or-less within reach.

Given the constraints on production, and given the improvements in the product and the improvements in the hardware (learning curves and price points) it may mean that Apple could finally be turning its attention to those orange areas.

The time may be soon at hand that maturity coupled with limits of organic growth are leading the four-year-old iPhone to finally be re-defined as more than a post-paid skimming entrant. It may be time for the iPhone to more than just grow. It may be time for it to grow up and take on the whole market. Five billion people are waiting.

Notes:

  1. Contrary to a commonly held belief, Apple does not shy away from market share. In the case of the iPod and even the original Apple 2, the company sought and obtained the top share ranking. In fact, the decision to pursue share vs profit is “context sensitive”. Steve Jobs, at least, thinks so.
  • John Wilson

    Wow, I had no idea the prepaid market was so large. One thing, though: How would the prepaid market best be addressed? Just an iPhone lite? And how would it fare in the US?

    • r00tabega

      I'm guessing that reasonable prepaid data is the thing that will make or break this concept (as an iPhone without mobile data is a bit gimped).

      I could live with pre-paid phone if I could forego the data plan or get pre-paid data at a reasonable rate (no data plan = ipod touch phone app plus cell radio).

      Even better would be the iPad innovation: data-as-optional, with realtime activation on-device (I'm lost in a new city with my prepaid "iphone lite" and want cellular data – I goto settings and sign up for a month of data immediately so I can use Maps and get where I need to go).

      • Tubby Bartles

        Most countries have great pre-paid plans already. My data plan in Italy, for example, drew down 70 eurocents a day (about $1) for any day on which I used data (and 0 if I didn't, like when I was traveling or at home for the weekend) and allowed up to 120MB free with that. Do the math and about the same as what AT&T offers during regular usage ($30 a month or so for 3GB) except that it doesn't kick in when you aren't using it. Pretty cool.

        It's just the US that lags in this area, so that's why the prepaid market would already be there for the rest of the world.

      • http://twitter.com/qka @qka

        Actually, iPhone without data plan = iPod Touch phone app + cell radio + GPS.

        GPS is the biggie in this setting.

      • Kris

        iPod Touch is good to point out, because it is in that price range and it demonstrates that Apple is already in there. They only need to do "little" to make "iPod Touch Phone" that has the horsepower to do the apps and calls.

    • Addicted44

      I knowcmany people in india using the iPhone without a data plan.

      If apple releases a 3-400$ iPhone without contract in a country like india (current prices are well over 800 with a contract) sales will go through the roof. More importantly, china has similar dynamics and a much larger addressable market.

      I bet apple could double sales in a matter of months by addressing these markets appropriately (and not using the us model).

    • kevin

      My teenage daughter is on Virgin Mobile – $25 (total $26.88 with tax and fees) – for 300 min voice, unlimited data, unlimited text. Great plan, only drawback is poor selection of phones. She has an LG Optimus V, which is an Android 2.1 phone. It was selling for $199 back in Feb but we got it on a sale for $149. If she could've had an iPhone (3GS quality or above) for $349, it likely would've been the choice.

  • Rose

    Do you have evidence for this:
    "The $200 happens to be an important psychological price inflection point where volumes increase dramatically."

    Are you referring to most Smartphones starting at that price, post-paid? Seems like $99 would be an even more important price point.

    • asymco

      None that I can share, but I've plotted volumes vs. price points for phones many years ago (before the iPhone) and the curve does inflect precisely at $200.

      • http://rashomon-speedcafe.blogspot.com/ rashomon

        Apple has alluded to this price point with the pricing of the iPod touch in a conference call some time ago.

      • AaronS

        I would be curious to know the conference call you were referencing about this $99 price point statement

    • JamesW

      I work in the graphics card industry. The $200 price point is very powerful. It's the price point people care about the most.

  • http://patrickyan.net Patrick Yan

    In pre-paid markets, users already have the habit of paying the full price of a smartphone for the convenience of. E.g. I was on the O2 simplicity iPhone plan on the UK. “Post-paid” plans in Korea are actually just payment plans for the full price of the phone. In China, people are used to paying above-market-price for gray market phones.

    Since pre-paid implies unsubsidized and unlocked, the only way I see Apple entering this market is with a smaller and less capable phone. Yet the iPhone as we know it is defined by the capabilities and design it has. Basically it would be an iPod touch with an antenna. Sure it could be thinner, smaller, and cheaper than a full iPhone, but it seems quite boring of an idea.

    • http://www.loudscreen.com vinner57

      It doesn't have to be 'exciting' – it's the value proposition of an incredibly desirable product

      Sales would be explosive – and I suspect that's a potential problem. With a smaller margin product Apple would not want to ' leave any money on the table'. The manufacturing pipeline needs to be bullet-proof and flexible. That's probably where the effort is being expended at the moment. They won't launch until that's in place.

      • Drew

        "Sales would be explosive – and I suspect that's a potential problem. With a smaller margin product Apple would not want to ' leave any money on the table'. The manufacturing pipeline needs to be bullet-proof and flexible."

        Any reason Apple could not turn the 3GS into a prepaid device? It would require adaptation of the manufacturing process, but not an entirely new pipeline. I doubt, however, that Apple could get the price to $200. Maybe $299?

    • FalKirk

      "Since pre-paid implies unsubsidized and unlocked, the only way I see Apple entering this market is with a smaller and less capable phone."-Patrick Yan

      This is what I am struggling with. I see the importance of the pre-paid market, but I can't see how Apple can get there. People often point to the iPod Nano, but that is a totally different situation. The Nano had a lower price, true, but it's smaller hard drive was no loss at all to its target market and the convenience of the smaller size and lower weight was an absolute boon to its many customers.

      Similarly, I can't see Apple "crippling" the user experience of a pre-paid phone. Yet one would think that they would have to do this both to reach the described price points and to differentiate the proposed new phone from the original iPhone.

      In my opinion, if there is a solution, it has nothing to do with size and, like the Nano, everything to do with making a product that has less, but provides more. I haven't seen anyone come up with a suggestion that even remotely fits this bill. And I'm certainly not clever enough to figure out how Apple is going to do this either. Fortunately for Apple and for the rest of us, its Apple's strategic insights, not mine, that matter.

      But damn it, that still doesn't mean I don't want to figure it out!

      • Ted Cranmore

        I've argued against the iPhone nano for years, but now is the time I'm ready to give in. I think tim cook's cues were too clear. Like when steve said 'they had ideas of how to deal with the netbook' . We were pretty sure we knew the tablet was coming.

        For the pre-paid phone, I'm not looking for anything with a different form factor, though you will be able to know the difference at a glance somehow. They will only slice off a few mm if they can maintain all the add-on devices, but I doubt it. Slower CPU, no retina display, less storage, weaker camera, perhaps no gps, and it may emit a smell like old cheese. Otherwise, it will still be the best phone any post-paid owner has ever touched. There will be enough left out that this owner will be highly likely to save for the full iPhone next time as well!

      • Addicted44

        The prices of the iPod dropped from 400 to 250 within 2-3 years while constantly adding features. The prices of apple laptops have also dropped considerably since just a few years ago. I would postulate that the iPhone is unique in not having seen any price drops in over 4 years (the headline price simply masked the amount payed in monthly payments). The reasons were twofold. A complete lack of competition and supply constraints.

        The competition one exists and is only heating up. I think the only limiting factor to apple dropping iPhone prices now is their ability to manufacture the volumes they need to sell to make up for the lost margins. If apple can do that I am sure that the price will certainly drop to below 400 unlocked and without contract. Steve jobs has said in the past that the biggest mistake apple made with the Mac was foregoing market share to protect margins. I don't think he is going to make the same mistake again.

      • FalKirk

        "Like when steve said 'they had ideas of how to deal with the netbook."-Ted Cranmore

        Many people are expecting the iPhone Nano (or whatever) to be a smaller, cheaper iPhone. I expect it to be as different from the iPhone as the iPad was from the netbook. In other words, I think Apple may address this market, but not at all in the way that we are expecting.

      • asymco

        I agree. Cook did say they were being creative…

  • Bruce

    I agree that smart phone hardware is getting "good enough." I think smart phone software is coming closer to reaching a "good enough," commoditized state as well. Perhaps Apple adopting OS features from Blackberry and Android means that they are embracing this commoditization. I think you mentioned this in one of your podcasts. :-)

    Is there good data that shows how many people have phones but not computers? The untethering of phone and computer announced for iOS 5 may be another signal that Apple wants to sell their phones to a broader range of people.

    • name99

      "I think smart phone software is coming closer to reaching a "good enough," commoditized state as well"
      Not even close. This is like saying minicomputer software is a solved problem on the eve of the PC revolution.

      The next frontier (at the high end, not in the pre-paid market :-) is NOT ultra-super-phones that are so good you will not own a laptop. that vision makes no sense because one wants different sized devices to conform to the human body and different levels transportability. The next frontier is ensuring that the user of a cloud of devices (ipod, iphone, ipad, macbook, imac) has his devices always in sync and able to communicate easily with each other.

      This is not a trivial problem, and it it NOT the technical problem of "how do I sync content between two devices" (the Ray Ozzie problem). The interesting issues here have to do with things like user interface metaphors and APIs. Apple, in particular, more so than Google or MS, seems to understand that this is not a solved problem, which is why, in spite of what has been reported, iCloud, at its heart, is NOT a hard drive in the sky, rather it is a set of APIs. iCloud is a language that allows developers to express their intentions as to what parts of an app (preferences, state, etc) the developer wants to share with other devices.

      There will undoubtedly now be a period of at least a year, maybe a few years, as different developers explore different amounts of what is shared, and what the UI metaphors are for expressing and controlling this. The point is that
      [a] most people WANT some level of different things on different devices. think of this, in simplified terms, as different playlists for your iPhone, iPod, iPad. Maybe I want my audio books on my iPod, but not on my iPad.
      [b] at least right now, and probably for a long time in the future, there is not enough storage on most devices or on the iCloud storage, to hold everything. We've already seen that Apple has some special rules for photos and music. Video is not even addressed in what Apple has told us.

      Given these realities, apps that adopt the simple-minded model of "share everything across all devices" may find themselves despised by users, wasting device space, iCloud space, and bandwidth. Rather, apps will need to think carefully about exactly what users want, and how to allow them to choose — which means a lot of experimentation.

  • http://stevereads.com/ Steve Laniel

    In which markets is $200 an important inflection point? In developed Western economies? $200 is about a day and a half's wages in the U.S. In India it's about two months' wages. ( http://goo.gl/V96JB ). If $200 is an inflection point in the U.S., and the rest of the world has an inflection point at the same relative wage, then the claim would be that there's an inflection point in the rest of the world when phones are priced around $5.

    Anyway, before I get too far off in the weeds, I'm curious whom this $200 inflection point applies to. Given the widely reported number that about half the world lives on $2 a day, I don't know that a $200 phone is really going to penetrate Bangladesh anytime soon.

    • addicted44

      Steve, using the average incomes of a country of over a billion people hides a lot of reality.

      There are MANY MANY people in India and China whose income exceeds the average American income.

      Just because there are many poor people who cannot afford the iPhone, does not mean there are not many rich, and middle class people who CAN afford the iPhone.

      • davel

        I agree.

        In these developing countries where there are millions of dirt poor people with no appreciable income there are also millions of very well off people from middle class on up.

        In India there is a large group of people who are employed by the outsourcing industry that make quite good money. Affording a $200 phone is nothing to them.

    • name99

      Just to add to what has been said, I, for example, have Asian friends who ask me to buy them US devices (eg iPad2s) because their countries don't yet have them in stock. Apple is not even especially interested in the lowest end of the US market. They're quite happy to leave it to Nokia, and now some Chinese brands, to try to claw a dollar of profit per device sold to the bottom billion. (And good for Nokia for doing that — that's a valid market, and for all Nokia's faults, their attempts to try hard to serve that market earn them some major good karma; but it's silly to imagine that Apple will attempt to compete on that front.)

    • asymco

      The $200 inflection is for the US market but that market is also distorted by subsidies so it may not imply that a lower price is necessary in lower income countries. As a percent of income, people in developing countries spend a lot more on phones than their richer counterparts in the developed world. The reason is that a phone is far, far more important when your access to information is much more restricted. For this reason it's quite possible that smartphones will be even more popular in countries with low PC penetration.

  • Ross

    The move to a September launch makes a lot more sense for a cheaper unlocked iPhone. This will be an absolutely huge seller as Christmas gifts to the teenage market (who basically grew up on iPods) and non-dependent relative/friends market. The ability to gift someone a phone without burdening them with a PostPaid plan will be huge.

    I suspect that Apple may have always planned to do a cheaper iPhone launch in September for the holiday season and still have a traditional "premium" launch in June. The premium launch was probably held up because the 4G chips or iOS 5 software was not ready to roll. So this is why we may get both phones in September.

    The recent move to selling the existing iPhone 4 as an unlocked phone in the US can also be seen as Apple testing the waters for a cheaper iPhone for the PrePaid market in Asia and Africa via the grey market. This move was possibly made to soak up some of the PrePaid grey market demand prior to the actual September launch of the "cheaper" iPhone so that availability will not be overly constrained.

    • JessiDarko

      It also gives Apple and the manufacturing partners a 15 or 16 month period between launches rather than the usual 12 month period. In phone terms this is really long– over a year– when most phones (eg: android phones) only last a few months.

      I think this is an indicator of a shift in manufacturing strategy as well.

  • SteveL

    I think people will buy a $299 unlocked iphone 3GS

  • Ziad Fazel

    I suspect carriers in the developed world would offer the cheaper phone with post-paid plans too. But rather than lowering the monthly cost of the plan to reflect a lower subsidy at the $199 price point, I suspect the carriers will keep the subsidy constant and drop the price of the phone to $99 or even free with a 2 or 3-year plan. This protects the iPhone monthly plans as the carrier's high-margin product, regardless of whether the end user is using Apple's premium phone or cheaper phone, but is likely to grow their number of users of such plans.

  • Walt French

    The whole phone — battery, screen, assembly, etc — doesn't need to observe projections that track Moore's Law, that would have the CPU, RAM & Flash dropping roughly 30% in price each year.

    That said, a phone roughly the power of the original iPhone would seem to be a winner against feature phones at a price of $150, a quarter of the original price ((100% – 30%) ^4).

    If I had to design that phone in 5 minutes, I might emphasize battery life more than Flash memory, sacrificing multi-tasking speed against the cost of RAM, but nominally carrying the full iOS 5. I think it's a good guess Apple knows how to do better than I would. One might presume them to give up a bit of gross margin in order to triple the adressable marketplace, but I don't know why they'd give up a bunch.

    (PS: Happy 4th birthday, iPhone! Many more!)

    • Laurent Giroud

      "If I had to design that phone in 5 minutes, I might emphasize battery life more than Flash memory, sacrificing multi-tasking speed against the cost of RAM, but nominally carrying the full iOS 5. I think it's a good guess Apple knows how to do better than I would. One might presume them to give up a bit of gross margin in order to triple the adressable marketplace, but I don't know why they'd give up a bunch. "

      Although I subscribe to Horace's underlying assumption that Apple may be preparing lower cost phones I have a hard time figuring out which "features" Apple would be wiling to forego.

      Changes in the Software seem risky since users might expect an "iPhone nano" to run the same apps as a normal one, although if there's a company who would figure how to reduce features and still sell products that's clearly Apple so maybe they'd allow only a select categories of apps to run on such phones?

      The hardware is the simplest adjustment variable: older CPU, older or smaller but half resolution screen, possibly older 3G chip would allow for lower prices at the cost of an obviously degraded experience: slower apps, slower downloads/updates and worse graphics, but would this be acceptable without reducing the range of apps which can run satisfyingly on these phones? I would answer no but that then raises the questions of the app selection criterion and of how to manage to make the idea of a less capable phone still attractive to users.

      I am relatively confident though that Apple would figure it out better than (and before) their competitors.

    • Hamranhansenhansen

      If I had to design a cheap iPhone, I would not start with an iPhone, I would start with an iPod touch, which is already a cheap iPhone. You take the $229 2010 iPod touch and you put in a 3G modem and $30 per month data plan and you enable FaceTime to call phone numbers and iMessage to send SMS and at the end of it all, you could probably get that done for $249, given that it is now 2011 and the 2010 iPod touch components are cheaper.

      Or, you could start with the iPod nano and add about 20 more little "nano apps" and release a few new apps every quarter with a firmware update, giving the user a very simple iPhone-like experience for a very low price, possibly under $200.

      Or Apple could do both.

      • eyez00

        >>iPod nano <<

        i'm seeing the "iPhone Nano" the same way.

        Far fewer apps, maybe only pre-installed, that don't use a lot of battery life.

        Smaller form-factor, smaller App-footprint, smaller app storage, smaller price. Makes sense to me.

  • Hamranhansenhansen

    > Contrary to a commonly held belief, Apple does not shy away from market share.

    Apple has 90% of high-end PC's … even in PC's they are a market share machine.

    • Peter Evans

      That 90% is for retail and over $1000. Doesn't include the PCs sold to business, which is quite a few and well over $1000 a seat.

  • JessiDarko

    The crux of the issue, as I see it, is how could apple scale up manufacturing to keep up with such demand?

    The post-paid high-price, high end approach has worked to moderate demand somewhat, and still Apple is manufacturing constrained.

    This means that a cut-down phone would be unlikely as two different models would result in twice the supply chain complexity, etc.

    I think the next phone will be a slightly refreshed iPhone 4, with a CPU and battery bump, a bit more easy to manufacture, and differentiated by flash capacity. An 8GB version for pre-paid prices ($299 or $199) and 32GB and 64GB versions at post paid prices $499 / $599. All of which will be offered unlocked at these prices, and locked under contract for Free/$99/$199.

    Apple will rely on the innovations in iOS 5 to make the "new iPhone" a compelling proposition compared to last year, though I expect some changes to the look of the iPhone 4 to differentiate the new model– fashion must always move forward– even if the underlying differences make the device easier to manufacture, rather than harder.

    And this simpler to manufacture design will be produced by a variety of companies… with foxconn doing everything they can in high volume, particularly the complex-yet-automatable tasks of PCB stuffing and aluminum machining… with a variety of secondary and tertiary companies doing the manpower intensive assembly. I believe foxconn can scale up in robots faster than it can people, not because there's a shortage of people in china, but a shortage of infrastructure to support them (dorms, assembly lines, cafeterias, etc.)

    On the other hand, foxconn will have had a year to plan for this, so they may have been preparing and be able to triple output while still doing everything in house.

    Bottom line: Apple knows they are manufacturing constrained, and Apple does not want to lose to android. They are not a company that I've seen rest on its laurals when faced with a challenge like this.

    Previously I expected a repetition of Steve Jobs fancy automated Macintosh and NeXT manufacturing facilities, but I think Jobs really respects the guy who founded foxconn (whose name is slipping my mind) and the next step in scale is going to be done as a partnership.

    Consequently there is going to be something surprising about the next design– don't now what it is– but I bet it will be manufacturing driven, and I bet Apple will pitch it as a feature, and I bet the android fans will laugh and say that it proves how Apple is evil, or stupid, and I bet in 9 months it will have made this device an even bigger hit. The press will attribute the success to this feature, but they will be like a stopped clock– right but for the wrong reasons– it will be the increased manufacturing capacity and lower costs that will cause the success.

    I have no clue what that feature will be, though. That's the kind of surprise Apple is unique in being able to produce.

    I think the next iPhone is going to be a global phenomenon, where the iPhone breaks out of the "niche" status it has held until now. (niche by comparison to what's coming, anyway.)

    • davel

      You make a good point about production constraint, but as I wrote above I believe Apple needs to do a cheaper phone this year to put their mark in a part of the market they do not serve.

      I like Horace thought Apple would create different models by now which they haven't.

      Apple is rumored to be lining up different and more component makers to bolster its supply chain. What if it is doing that not just to push more product out the door but also to gear up so they can add new models?

    • Eric D.

      I completely agree with you. What was keeping the cost of the iPhone high? The complexity of manufacturing and the scarcity of key components. That was normal for such an innovative device, but going forward, those factors will lessen

      Apple and Foxconn are undoubtedly developing simpler form factors that may be less elegant but more adaptable to fully-automated assembly. They will segment the iPhone line, just like the iPod did before, to create entry points for consumers at different levels.

      Likewise, the increasing commoditization of touch screens and high-resolution displays will help bring costs down on the supply side. Apple sticking to just one or two chips to run every device they make brings an ever-increasing economy of scale, especially as they spread manufacturing across more vendors.

      Nor will they need to spend much on marketing, compared to Nokia/Windows 7 or any of the Android makers trying to distinguish themselves from the pack. Consumer awareness of the iPhone is very high and will only grow.

      Larger numbers iPhones and other iOs devices will just do that much more to grow the flow of app development and adoption. The moat will get deeper and wider. And based on Apple's copycat suits against Samsung, it will be filled with litigating crocodiles.

  • Sander van der Wal

    I am quite sure that mobile software developers are using a computer software company frame of reference. That frame of reference made it easy to see the mistakes Nokia for instance was making. Not that they would listen when you told them, but that was their problem.

  • http://stormcontrol.tumblr.com Pablo Carlier

    I believe the most important part of this article is the observation that Apple followed a completely opposite way from Android. Instead of immediately fragmenting its environment with different screen sizes (the most immediate constraint to developers at the very design stage), they kept a fixed size for designs to work. Then when the platform's mature, they can afford to start different lines.

    Google went the opposite way, and it'll be hard to replicate the quality in the apps with such a fragmented platform. Still haven't managed to reach iOS's level of excellence.

    On Sander's comment, I think mobile software developers have turned into "software developers" without the mobile part. Now you are a platform developer, not a device developer, which enormously changes your perspective. It's not the same to develop a zillion versions of the same software to adapt it to the zillion terminals Nokia has, than to invest all that effort into one single version that'll run across millions of devices.

  • http://twitter.com/akarpo @akarpo

    it's the screen folks; it takes quite a bit more power to drive a retina display than it does a pre-retina display.

    1/2 the RAM, pre-retina screen, prior generation processor (so if A5 is being used in the September phone, A4 would be in the iPhono lite). Runs the same OS as the full feature phone, maybe a tad bit slower.

    Apple will not fragment the OS, that's one of the strength Apple has in iOS over Android. It has to run the same OS. So how do you accomplish that w/o losing core features of the OS? Pixels. And maybe limiting the multi-tasking a bit as well.

    that's about $350 out the door.

    • davel

      I think you keep the A5. Perhaps throttle it down a bit, but keep the CPU. Else you threaten to shorten the lifespan of the product which cheapens it. Apple does not want to kill the value proposition. If you look at the computers they have always differentiated on RAM, CPU speed, Screen size and disk.

      I expect the same rationale for mobile.

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  • MattF

    I agree that the iPhone 'brand' is due for segmentation into higher and lower tiers– but speculation about the hardware features that might or might not be left out in a cheaper model is misguided. Making a cheaper model by leaving stuff out is not the way Apple does things– instead, they look at what a specific set of users need and build a solution for that set of users. This suggests to me a gizmo that's radically simpler (and radically cheaper) than the current iPhone– say, pre-paid gadget with phone + text + notification functions for $49.

    • davel

      True, but you can use older versions to give same functionality but less performance. This will allow the same software to run but at a slower rate.

    • Fake Jeff Bezos

      I think a simpler iphone should have one screen of built in apps and no App or Music store.
      No rearranging apps. no deleting apps. No folders. No Spotlight search. Just one screen of standard apps.
      The simple iPhone should have a 3MP camera that does not shoot video.
      This would greatly simplify the OS and 4GB of storage would be plenty.

      It would still be attractive to folks who don't want a "complicated" smartphone.

      • name99

        This makes no sense.
        Apple's strength is the eco-system, the apps and music. Cutting those of is insane.
        Even if Apple doesn't expect low-end buyers to buy MUCH music or apps, it wants buyers to at some point move on to doing that.

        More likely, I think, would be to open Chinese and India music stores, with music and movies appropriate to those locations and appropriately priced. There will undoubtedly again be fights with rights holders.
        The western rights holders will balk at selling songs for 5c.
        Apple will tell them only Indian/Chinese customers will be able to buy from those stores.
        The western rights holders will say it makes their US prices look bad.
        Apple will say "Look, we went through this ten years ago. You can have a business model that matches reality, or you can sell NOTHING and cede the entire market to street vendors and 'pirates'."

        Who knows which will win, but my guess would be Apple will start those stores.

        And Apple will not take away features (search, video) that cost NOTHING to provide — if not for benevolence, then because their competitors will supply them. That's the meaning of "costs nothing to provide". A low-end camera, yes that makes sense. No video? That makes no sense, given the existing chips and sensors.

    • http://twitter.com/Marcos_El_Malo @Marcos_El_Malo

      "Making a cheaper model by leaving stuff out is not the way Apple does things"

      Not true: Apple has done this for a long time with their desktops and laptops to create differentiation between the various models. Example: For a long time, iMacs wouldn't support a second screen. Example: for a time, Apple's took away Firewire from the low end Macbook. Those are just off the top of my head.

      • unhinged

        While I agree with the main point of your comment, your iMac example does not really hold water. The iMac was an evolution of the Performa line, which also did not support external monitors.

        I think the better way to explain it is that Apple eliminates the unnecessary in order to meet its design goals, only one of which is reducing the price. However, this is only when creating a new product or significantly revamping a design: the iMac lost the floppy drive, the MacBook Air lost the optical drive and wired networking, etc, etc. While a product is in maintenance mode, Apple's process is to steadily increase the performance of the existing features and add any features that make sense (especially in software, because adding features in software is a _lot_ cheaper than adding features in hardware).

        Now, I'll admit that on rare occasions Apple will eliminate features from a product in maintenance mode – the MacBook losing FireWire being the only example I can think of. But the MacBook was then EOL'd altogether and only the MacBook Pro remains. So I think that's a special case. And Apple will drop FireWire as soon as Thunderbolt takes off (or sooner, if they think that will drive Tb adoption like the original iMac drove USB adoption) but that to me is an improved feature, not the elimination of a feature.

        I think the original poster was trying to say that Apple does not leave things out FOR THE SOLE PURPOSE OF making a cheaper product. I think minimising price is only one of Apple's design goals; if they make something cheaper it is as a result of an holistic approach to the design of the product.

        I think the above holds true for software products as well, by the way: iMovie had features added with successive releases until a major revamp (which admittedly a lot of people disliked), the same with Final Cut Pro (and the vitriol is really pouring out on that one). Apple does not cut features unless it has to, but when it has to the move is decisive.

      • Walt French

        along with @unhinged, I salute your first sentence but am wary of your specifics.

        Gruber just linked (twice) to the 1997 WWDC where Steve Jobs repeatedly said, “No.” To an audience that desperately wanted to hear, “Yes.”

        My favorite quote along these lines is,

        A designer knows he has achieved perfection not when there is nothing left to add, but when there is nothing left to take away.

        Antoine de Saint-Exupery

        I think this is a Jobs favorite as well.

    • kevin

      The iPhone brand stands for a gadget that has a phone, iPod, and Internet communicator. Apple has since added the App Store to that definition. So a gadget with phone + text + notification functions is not an iPhone.

      An iPod touch sells for $229. Adding phone capabilities shouldn't drive the price up beyond $349, but they'd be better off if they could hit $299, as prepaid Androids are selling at prices between $149 and $249 in the US.

  • Peter Evans

    Where I am (Australia) most iPhone's are bought on "cap" plans, which are really just just pre-paid plus phone repayment, but paid monthly over 24 months. There are some very good pre-paid (and post-cap bring-your-own-phone) pans around, so if you do the maths there is very little difference between a 24 month contracted cap plan and buying the phone outright and buying a pre-paid cap. And the latter has more flexibility since you can change at a months notice. Also, the iPhone has been available to buy outright since the iPhone 3G was released here in 2008, and plenty of people do buy it that way and go pre-paid.

  • Venkatesh

    Apple has launched an unlocked iPhone 3GS 8gb phone for $350 in india. That points to lower priced iPhone in the future. Some how that is not getting any attention in tech circles. What are your thoughts on that ?

    • Drew

      Can you provide a link to that price? I read the price was recently reduced to Rs 19,990. That's around $440? Definitely lower price, but not quite low enough yet.

    • name99

      This is interesting Venkatesh. Tell us more.
      – Is there an Indian app store and an Indian music/video/book store?
      – If so, are their prices in line with the costs for music. videos, etc on the street and in other retail outlets, and are they popular?
      – Does this iphone support Indian scripts well?
      – Are these iphones selling well and considered an aspirational item, or are they considered too expensive compared to some flashy Chinese clone running Android?

    • iosweekly

      Yes your right Venkatesh – this should be a much bigger story, it is HUGE news.

      Apple almost halved the price of the 3GS in india. This is the beginning of apples push into the mid-tier, prepaid handset market (before this it was just in the high-end prepaid market, which is very small segment in Asia).

  • Alan

    Well we can be pretty sure that Apple could make such a device profitably – they make the iPod Touch with retina display and A4 for $229. It's clear they could add in a 3G chipset and GPS for less than $100 and make good margins. (And yes, the Touch has lesser cameras, smaller batter, and maybe less RAM?).

    So besides manufacturing the other consideration is market segmentation – if there is a $300 iPhone why buy the $700 version? Usually Apple tiers them up so you can start with the base and add more memory or other extras until you pretty much reach the cost of the 'pro' model (see iPods and Macs for examples).

    Is Foxconn also the manufacturer of the iPod Touch?

    • Kris

      "Is Foxconn also the manufacturer of the iPod Touch?"

      Yes it is.

  • http://www.apple.com Fake Tim Cook

    For a high percentage of our future pre-paid customers, their iPhone will be their only computer.
    This is why we wanted to have iCloud in place first so that this segment would also have a great user experience.
    Without iCloud and iOS 5 this segment would be unable to upgrade their phones or backup their devices.

  • davel

    Really?

    They still make the GS? Does iOS5 run on the GS?

    • http://twitter.com/Marcos_El_Malo @Marcos_El_Malo

      Yes and Yes. Contrast that to current and very recent phones using some other OS that aren't upgradeable to the latest release.

    • iosweekly

      Yes it does, and thats why apple just relaunced it in India for $440.

  • http://twitter.com/Niilolainen @Niilolainen

    Nice data. Really shows how N,America is the exception, not the rule

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  • Shrike

    No no no. Think iPod touch + radio parts. Not iPhone 3GS. They currently sell an iPod touch with current generation A4, 960×640 screen for $229. Radio parts are much less than the $129 that Apple charges in the iPad line, but just using that number gets you $360.

    They can get there with an A5 w/512 MB RAM, 960×640 screen, 4-band HSPA radio, and other parts. It just won't be IPS, or have a brighter battery sucking backlight, have LTE, be dual-mode GSM-CDMA, aluminum or good plastic or premium materials, or BSI camera module, etc.

    The question is always is Apple always willing.

    • asymco

      Keep in mind that the average selling price (i.e. what Apple receives) for an iPhone and an iPad is almost the same ($644 vs. $628 respectively in Q4) and consider the vast difference in cost of components.

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  • Jaquin

    I can't help playing stump the band trying to foresee where Apple will bend the system to bring cost down.
    Do they do it in hardware? Cheaper screens, cheaper radios 2G rather than 3G, physical keys?

    Do they do it in Software? Will would freemium apps work down market? Would apps be served by third parties or Apple takes the whole pie. Will there be iCloud over all the post paid areas?? Wouldn't that need new Server Farms Of Unusual Size?

    Can they make it in manufacturing. Can economies of scale be brought to bear, what would the ramp up look like, how much do you commit initially.

    The only thing that feels right to me is a 2G radio. Everything else seems way too threatening to the Iphone brand. Do they something closer to Rokr or more like iphone original.
    Which would you buy for your second cousins 14yr daughter.

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  • Walt French

    Brightness and power, ever so much more than resolution, determine the screen's battery use. Resolution has an impact on other circuitry's use but that is secondary.

    The screen (quality) and memory chips are the primary cost determinants that look ripe for value engineering. Slower CPUs won't save you much, both because process advances make new chips more efficient and because it takes a fixed number of cycles to accomplish any given function. Packaging could be streamlined for faster/cheaper/less specialized assembly.

    • Laurent Giroud

      Older CPUs bring no advantages in term of battery life but they bring costs down significantly. However, that means that the performance of entry level iPhones is likely to pale in comparison to an iPhone5. This, in my opinion is bound to limit the range of apps (read: games) that one can expect to see running smoothly on such device. How Apple would present such a restriction in a way that is acceptable (and possibly marketable) to the target market is the one question on my mind.

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  • Ralphdtx

    Jobs has repeatedly say that they will not sell junk. To develop and sell an affordable phone targeting the prepaid in the majority of the world is not profitable. A few individuals on here have argued that there are rich individuals within those country where the average incomes is $2/day. Well those that are well off are the ones that use the post paid iPhones already sold in those countries; perhaps China being an important exception, but then their incomes is higher that $2/day too, and the "status" of the more expensive post paid iPhone would most likely outweigh the savings on a cheaper phone.

  • iosweekly

    The $440 iphone 3GS is likely to be a big seller in India once it goes on sale tomorrow, and apple obviosult means business re-introducing it at the 19,990 r price point (obviously thats a price they felt they needed to hit.)

    People in these developing countries obviously dont have the income for a expensive monthly contract that would provide them with a discounted iphone 4 at its current price, but there are many cheap prepaid plans whereby they can use minimal data/voice etc as long as they prepay for the device. And iOS 5's imessage service actually will reduce the cost of SMS texting for potential users.

    At $440, apple is still making huge margins.

  • Bazz

    I replied to a post at another site that Somalia has a functioning (monopolist) cell phone system in a failed pirate state! Smartphones are not needed for sending of demands and instructions for return of ships nor phone plans so prepaid the the only way to circumvent nonpayment of accounts. Its a monopoly because the company sets all the costs and the criminals protect it for their own needs!
    Now I'd like to see an Apple Store opened in the capital!

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  • Apple7

    Apple has never gone down market with computing devices. I don't think anyone considered the iPods to be computing devices, just music players. The iPods resulted in more macs being sold because of the iTunes tie to the macs. So, I don't agree with your analogy of iPhones to iPods. What apple should do is offer a super great iPod touch that can connect to any carrier or data service on a prepaid basis. Forget voice. Almost everyone can do without voice.

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  • Waveney

    Horace, I'm wondering if Apple need do much at all outside of the richer nations. With the shift in wealth creation away from it's 200 year old traditional geographical roots, Apple need only follow the money to these emerging nations. I remember when they launched the iPhone in China, everyone and his dog said 'Apple must change it's modus operandi to be successful there'. In reality Chinese society evolved pretty much in line with western tastes and predictably took to the iPhone – all without Apple doing much, differently. The same is now being repeated about the Indian market.
    These markets will(in time) provide many extra billions in revenue for Apple and sustain future R & D.
    I think the real problem might lie at home, which is where the 'next big thing' will – and of course 'has to', emerge. And yes, I agree, they will be creative and disrupt their own home market with radical thinking. But stressing the untapped prepaid segment as particularly important would seem to be a bit of a red herring if it means reducing margins and undermining a more profitable segment. Far better a new concept than a new form factor, to address these other spending-pattern users.

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