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There has been a lot in the news lately about Apple (AAPL) releasing a cheaper iPhone.

When Apple releases a new iPhone, they drop the price on all previous models by $100. Currently the unsubsidized price of iPhones is as follows:

  • iPhone 5 $650
  • iPhone 4S $550
  • iPhone 4 $450

If Apple continued to drop prices $100 dollars per release they would reach the $250 dollar price point in 2 release cycles. The $200-$250 has been the rumored target price. In 3 release cycles, we could see something similar to:

  • iPhone 6S $650
  • iPhone 6 $550
  • iPhone 5S $450
  • iPhone 5 $350
  • iPhone 4S $250
  • iPhone 4 $150

I doubt they would extend beyond this in terms of generations to keep in production because the applications and iOS itself are going to continue to need more memory and processing power. The reason why the iPhone 3GS was not kept around in this manner was it lacked two things Apple considers crucial to any iPhone. The Retina display and front camera were 2 large changes in the iPhone between the 3GS and the 4. Since then the only major change has been the lengthening of the screen on the iPhone 5. Previously this would have taken 3 years to get to the $150 iPhone.

There has been signs that suggest Apple is starting to shrink the time between new product cycle from about 12 months to closer to 8 months. Besides the rumors of a new iPhone in late summer, Apple has demonstrated a shorter update on the last full-size iPad. The shortening of the development cycles to 8 months means that in less than 1.5 years the iPhone 4 could sell for $250.

Developing and making a new iPhone takes very large capital expenditures. It makes sense to pay for this development and capital expenditure with the high demand and high margin new phones. By the time a phone is in its 5th generation all of the capital expenditures should be depreciated.

How and when Apple decides to go after consumers wanting low price phones is going to be a continuing debate. What is almost certain is that Apple is going to try and get into the market sooner or later. When it does, there will be a large new audience to bring into the Apple ecosystem. These new customers will add to the value of the company and the stock.

Source: The Cheaper iPhone Is Already Here