Cheaper iPhone 4? Routine for Apple, says analyst

"Totally expected" that Apple will drop price of current iPhone when it launches next model

Talk of a lower-priced iPhone 4 sweeping news outlets and Apple blogs today isn't exactly a shock, an analyst said today.

"Totally expected," said Ezra Gottheil, an analyst with Technology Business Research, of the news -- first reported by Reuters Tuesday -- that Apple will launch a "lower-priced" version of the iPhone 4 "within weeks."

That Apple will downshift the iPhone 4 to a lower price point when it introduces the next-generation model, and slash its storage space from the current minimum of 16GB fits its practice, said Gottheil, pointing to the company's history.

When Apple debuted the iPhone 4 last summer, it did exactly the same with the previous year's smartphone, the iPhone 3GS. Then, Apple dropped the price of the 2009 model to $99 from $199 as it halved memory from 16GB to 8GB.

And the company did almost the same thing the year before. With the introduction of the iPhone 3GS in June 2009, Apple kept selling the previous year's low-end 8GB iPhone 3G, cutting the price to $99.

The 8GB iPhone 3GS now sells for $49; Apple and AT&T cut the price from $99 in January 2011.

Rumors of a specially-designed cheaper iPhone regularly surface, but have never panned out: Instead, Apple has simply dropped the price of last year's smartphone.

"Apple seems to be able to have it both ways," said Gottheil. "On one hand, it doesn't want to cheapen the brand and scare away people who will pay for the newest model. But on the other hand, it wants the breadth of distribution that a lower-priced iPhone provides."

The strategy of selling the newest iPhone at full price and last year's smartphone at a discount has worked, said Gottheil, who argued that there's no reason why Apple would change that practice.

"The iPhone's average selling price shows no downward trend," said Gottheil. "It's still north of $600. That means there's no substantial drop in the subsidy it's collecting from carriers for the lower-priced iPhones."

According to Apple's most recent quarterly earnings statement, each iPhone sold produced an average of $655 in revenue, down just $9 from the $664 average per iPhone sold of the previous quarter.

In other words, Apple's making about the same amount for its older-generation iPhones -- during the second half of 2010 and so far this year, on the iPhone 3GS -- that it earns from sales of its newest model, the iPhone 4.

"That's good news for Apple because they get to broaden the market," said Gottheil. "For people who wouldn't pay $200 for a new phone, now they have you as a customer [when you pay $99 or $49]."

The same goes for carriers, who make money not on the sale of the device, but on the long-term contract customers must sign to obtain a new iPhone. AT&T, for example, earns a minimum of $1,300 for each customer it signs up for a 24-month data and calling plan.

Most analysts, including Gottheil, expect Apple to introduce a new iPhone -- alternately dubbed the "iPhone 5" and "iPhone 4S" -- no later than October.

That's when Apple will take the existing iPhone 4, strip it of some of its memory and sell it for at least half the price, said Gottheil.

Gottheil said a clue that that date is fast approaching was Best Buy's one-day deal on Monday, when it gave away the iPhone 3GS to anyone willing to commit to a two-year contract with AT&T. (The only iPhone that works on rival Verizon's network is the iPhone 4.)

"That sounds like they're trying to get rid of [iPhone 3GS] inventory," said Gottheil of the Best Buy offer.

Some analysts believe that a less-expensive iPhone would help Apple boost sales in emerging markets, such as China.

But Apple has been doing quite well, thank you, in China using its current strategy. Last month, Apple said that what it calls "Greater China" -- the People's Republic, Hong Kong and Taiwan -- accounted for 13% of the company's revenues for the quarter that ended June 30.

Although Brian White, an Wall Street analyst with Ticonderoga Securities, believes Apple will roll out the new iPhone 5 as well as what he called a "simplified iPhone 4" in China this fall, Apple has other cards to play there besides a cheaper iPhone.

"With growing expectations that the iPhone 5 will be an October launch, we believe the international roll out could prove faster than previous iPhone releases," said White in a note to clients today.

By introducing the new iPhone to China faster than it did the iPhone 4 -- the latter hit China three months after the U.S. launch -- Apple will be able to reap more revenues at a quicker pace from the exploding Chinese smartphone market.

White has estimated that there will be 125 million subscribers to 3G data plans in China by the end of the year, and said the number could reach 250-275 million by the end of 2012.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His e-mail address is gkeizer@computerworld.com.

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Gregg Keizer

Computerworld (US)

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