Why a cheaper iPhone model makes economic sense

The iPhone 5 hasn't even been out for a full four months and the iPhone rumors are already rolling in at full throttle.

The iPhone 5 hasn't even been out for a full four months and the iPhone rumors are already rolling in at full throttle. But lately, the word from the rumor mill hasn't been focused on the iPhone 5S or the like, but rather on reports that Apple may release a lower-priced iPhone to make inroads in emerging markets.

The first report came via Digitimes which noted that this rumored new iPhone will come with a larger screen (perhaps 4-inches like the iPhone 5) and may even showcase a completely new exterior design.

Growing sales of the iPad mini, particularly in China and other emerging markets, may have served as an impetus for Apple to roll out a low-cost iPhone to repeat its success gained on the sale of the iPad mini, the sources commented.

There's no denying that the iPad Mini has been selling exceedingly well, and it does stand to reason that the economics could work out so that Apple might make more money selling an iPhone with cheaper materials at a lower price point than it currently does selling previous-generation iPhones at a discount. 

The Digitimes report was followed up by the Wall Street Journal which also relayed that Apple may release a cheaper model iPhone by the end of this year.

The cheaper phone could resemble the standard iPhone, with a different, less-expensive body, one of the people said. One possibility Apple has considered is lowering the cost of the device by using a different shell made of polycarbonate plastic. Many other parts could remain the same or be recycled from older iPhone models.

Interesting stuff. Assuming that this is all, in fact, true, one has to wonder if this lower-cost iPhone would come with a non-Retina display. It seems very un-Apple-like that they'd revert back to a non-Retina display, but cheaper housing materials does seem rather plausible.

Initially, I was inclined to take these reports with a grain of salt. After all, rumors of a cheaper iPhone model have been permeating through the blogosphere for years now.

But then I came across a Tweet from Jeremy Horwitz of iLounge, a man with nearly unmatched credentials when it comes to Apple rumors and news. Indeed, I can say quite confidently that no site/person has been more accurate in such a regard than Horwitz has been over the past few years.

That said, Horwitz tweeted the following on Tuesday.

What we heard (still early) re: new budget iPhone model - not a "larger" 5" screen, but rather unified 4" screens for 5S/5/new budget model.

And the more I thought about it, the more the economic calculus started to make sense.

As it stands now, Apple offers the iPhone 5 as its flagship device. At the same time, the iPhone 4S is available for $99 with a plan while the iPhone 4 is free with a contract.

Apple is still making a profit on those older models as they remain subsidized by carriers, but remember that both models used to be Apple's top-of-the-line products. That is to say they utilize the same top-of-the-line materials as they always have. If Apple, perhaps in conjunction with or in place of selling previous-generation iPhones decided to offer a budget iPhone for $149 with less storage and cheaper materials, it would provide a surefire way to appeal to cost-conscious consumers while simultaneously increasing their profit margins.

What's more, such an offering might have a psychological benefit to the extent that consumers won't feel as if they're getting "last year's" iPhone model, but rather that they're just getting the cheaper version of the latest model.

One of the many things we gleaned from the Apple-Samsung trial is that Apple goes through a multitude of iPhone prototyping. Indeed, the vast majority of iPhone prototypes Apple develops from within the confines of the secretive walls of 1 Infinite Loop never see the light of day. That said, it stands to reason that Apple has, in fact, been experimenting with lower-cost iPhones in its labs.

Perhaps now, with Samsung devices selling like hotcakes coupled with the success of the lower-cost iPad Mini, Apple has deemed it the right time to unleash a more economical iPhone model.

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