UPDATE: Will Apple introduce a lower-priced iPhone?

Meanwhile, new retail options boost affordability

Apple is moving ahead with plans for a less expensive iPhone, possibly with a plastic instead of metal body, according to a new report. But a top Apple executive this week flatly says that "Despite the popularity of cheap smartphones, this will never be the future of Apple's products."

Apple is moving ahead with plans for a less expensive iPhone, possibly with a plastic instead of metal body, according to a new report. [Update:] But a top Apple executive this week flatly says that "Despite the popularity of cheap smartphones, this will never be the future of Apple's products."

[Update 2:] The comments, by Apple senior vice president Phil Schiller in a Shanghai newspaper interview that was widely linked to and commented on, have now been changed by the newspaper, according to a Reuters story

At the same time, new retail options for consumers already are making even the flagship iPhone 5 more affordable.

BLOG POST: Phil Schiller puts damper on cheap iPhone rumors

MORE: Why a cheaper iPhone model makes economic sense

Citing "people briefed on the matter," The Wall Street Journal this week reports that while the idea for a less expensive iPhone model has been talked about at Apple for years, the plan for one now "is progressing" and could result in a product launch later this year, according to one of the people briefed.

The speculation is that Apple could hold down costs by switching from the all-aluminum unibody, re-introduced with the iPhone 5 in September after moving away from the all-metal original 2007 iPhone, to a material such as polycarbonate plastic. Nokia's Lumia smartphone line uses the same material and has won praise for its build quality. The iPhone 5 is rare: Nearly all smartphones still use some kind of plastic or plastic and glass combination for their bodies.

But in an interview with the Chinese newspaper Shanghai Evening News, published Wednesday, Jan. 9, Apple Senior Vice President of Worldwide Marketing Phil Schiller directly addressed these rumors. (The interview was noted by 9to5Mac.com and iDownloadblog.com; these quotes are from a translation provided by TheNextWeb.com.) 

Talking about Apple's products in China, Schiller said "every product that Apple creates, we consider using only the best technology available. This includes the production pipeline, the Retina display, the unibody design, to provide the best product to the market."

"At first, non-smartphones were popular in the Chinese market, now cheap smartphones are more popular and non-smartphones are out," Schiller added later. "Despite the popularity of cheap smartphones, this will never be the future of Apple's products. In fact, although Apple's market share of smartphones is just about 20%, we own the 75% of the profit."

Let's repeat that: With roughly just 20% of the smartphone market in units, Apple has 75% of the entire market's profit.

In a brief comment on the interview, at his DaringFireball blog, technology writer and Apple watcher John Gruber, observed, "This doesn't mean Apple isn't going to produce a cheaper iPhone. Schiller is simply stating what should be -- but clearly isn't -- obvious to everyone: Apple goes for profit."

Schiller's comments still leave open the door for Apple to create a lower-priced iPhone. But it will do so on Apple's terms: maintaining first extremely high design and build quality, which are essential in Apple's commitment to creating not just functional but beautiful products, and second the profitability of the products it sells.

As more vendors have introduced more advanced smartphones, Apple's share of the global smartphone market has declined. According to the IDC figures cited by the Journal, Apple's share of the worldwide smartphone shipments in the 2012 third quarter was 14.6%, down from a peak of 23% in the fourth quarter of 2011 and the 2012 first quarter. By contrast, Samsung Electronics' share rose sharply from 8.8% to 31.3% from the 2010 third quarter to the 2012 third quarter.

Apple's products are often seen as being priced 'at a premium.' ... As a result, when competitors launch lower-priced products there is a tendency to expect Apple to react and reduce its prices to compete."

— Horace Dediu, Asymco

Samsung's Galaxy S smartphone line has been one of the few single models to challenge the iPhone's sales. Samsung, and other smartphone vendors, offer a wide range of smartphone designs and capabilities, using different materials, different processors, varying amounts of RAM and storage and other tradeoffs to cover a wide range of prices.

This drop in Apple's market share is widely interpreted as creating pressure for Apple to make the iPhone more affordable, meaning to create new models that carry a lower retail price tag. That's especially the case in non-U.S. markets, where carriers do not subsidize the phones they offer, so customers have to pay the full retail price.

So far, Apple's customary response, with its carrier partners, has been to lower the prices (both on- and off-contract) of two earlier iPhone models with each new iPhone release. Today, for example, iPhone 5 with a two-year contract is priced at $199, $299 and $399 (for 16GB, 32GB and 64GB models). Without a contract, the prices are $649, $749 and $849.

The iPhone 4S 16GB model now sells for $99 with contract, and $549 without. The 8GB iPhone 4 is $0 with contract, and $450 without.

Neither Apple nor the carriers have revealed sales numbers for the older iPhone models.

And there are other alternatives emerging as Apple forges links with prepaid carriers, such as Virgin Mobile, and with mass retailers such as Walmart. On Jan. 11 Walmart, in its exclusive partnership with Straight Talk, a mobile virtual network operator that's a unit of TracFone, will offer the 16GB iPhone 5 for $649 (the same price as Apple's website) but with an installment plan that lets you pay it off at $25 per month, and an unlimited voice/text/data plan for $45 per month. Together, the total monthly price is lower than the cheapest monthly plan most major carriers offer with a subsidized iPhone 5. Also part of this offering: the 8GB iPhone 4, at $449, with the same installment and monthly contracts.

Walmart also currently offers the iPhone 5 online with a two-year AT&T, Sprint or Verizon contract (or upgrade) at $187, slightly less than the Apple Web price of $199. But if you buy the phone at a Walmart store with a Walmart Wireless Center, the retailer will discount another $60, so the final price with contract is $127.

And subscribers won't have to settle for a second-class network. In this July 2012 9to5Mac review by Mike Beasley, who tested his iPhone 4S on Straight Talk, the MVNO is relying on AT&T's nationwide HSPA+ network. "[S]o you get full-speed access to nationwide HSPA+, unlimited calling, texting, MMS, and data for less than the cost of a far more limited plan with a post-paid carrier (as well as the convenience of never having to sign a contract)," Beasley concluded. "There are a few downsides to using an unofficial carrier, such as the lack of visual voicemail for those who rely heavily on that feature, but the benefits and price seem to far outweigh the downsides."

Outside the U.S., the iPhone pricing issues are complicated by the fact that 3G networks, though expanding rapidly, are not yet ubiquitous in markets such as China and India. So even where people are willing, even eager, to pay Apple's retail price for the iPhone, they can't use it without a 3G network. In a March 2012 blog post, industry analyst Horace Dediu called this "one of the most important constraints on the purchase of iPhones ..."

A related issue has been the relatively few carriers offering the iPhone, though that's been increasing rapidly each year, with iPhone 5 the most widely released iPhone model, in terms of the number of countries and carriers.

Apple's phone and tablet pricing has been long and heatedly debated. Critics have argued that Apple's prices make its products luxury goods, and these will fall prey to competitors who offer "good enough" smartphones or tablets at cheaper prices, said technology blogger Gruber in a December post reviewing why the conventional wisdom predicted the utter failure of Apple's retail store initiative.

Gruber argues that Apple's critics make a number of questionable assumptions. One is the "insistence that broad mass market appeal and an insistence upon superior design are mutually exclusive. Apple's brand stands for both quality and inclusiveness," Gruber wrote. "It's a luxury brand for the masses. ... What Apple understands and its critics did not (and still do not) is that many people, from all walks of life, simply appreciate nice things."

In his review of the iPhone 5, Gruber returned to this same point: that Apple's emphasis on "quality" is seen by customers as a tangible good. "[With the] iPhone 5 in my hand, this talk [by Apple] of micron-precision, fine watch craftsmanship, and the computerized selection of best-match inlays sounds not the least bit ... blustery. It simply sounds like an explanation of the level of obsession that it takes to create a mass-produced device that feels this, well, nice," he wrote. "[T]here is no benchmark, no tech spec, to measure nice. But you can feel it. And that is what resonates with millions of people around the world."

There is some data to support Gruber's more impressionistic argument. One year ago, Asymco's Horace Dediu examined Apple's historic prices for a range of products. Charted out, the data shows remarkably consistent prices, moving inside a very narrow range.

"Apple's products are often seen as being priced 'at a premium," Dediu wrote. "This is mostly a matter of perception, but in certain categories Apple's products are priced above the industry average (though probably still affordable to sufficiently large populations). As a result, when competitors launch lower-priced products there is a tendency to expect Apple to react and reduce its prices to compete."

His conclusion, referring to the chart of prices, was that that expectation is always wrong. "However, the data we have from Apple on their pricing shows no concessions to competitive price pressure," he concluded. "The evidence I see is that Apple does not change pricing but rather stakes out a specific price point as resonating with consumers given their positioning. They then doggedly stick to it. Competitors tend to exploit open price points or try to position with specs on the same spots Apple occupies. That's not a game I observe being played by Apple."

Apple could still decide that segmenting the iPhone market with a lower-priced version is desirable, or necessary, even if such a move depresses the company's historically high margins. But for the past six years, Apple has been undeniably successful in creating a premium, global mass brand that with each iPhone, and iPad, iteration seems to be more firmly and widely embraced by global consumers.

John Cox covers wireless networking and mobile computing for Network World. Twitter: @johnwcoxnwwjohn_cox@nww.com

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