At this stage it looks as though everything about Apple's (NASDAQ:AAPL) "cheaper phone" has been leaked - plastic casing, choice of colours, "5C" name, same screen as the current iPhone 5, and a transparent box to help retail sales. Everything, of course, except the price - which is all that really matters.
What price would Apple choose for a genuinely cheaper phone? There are four brackets worth looking at:
- $100-$150 – this is where budget Chinese manufacturers are starting to deliver usable dual-core 3G Android phones
- $150-$200 – the upper end of what is possible to sell to the unsubsidised prepay market - which is half the planet
- $200-$400 – almost certainly out of reach without subsidies but a solid mid-range smartphone price range
- Over $400 – similar price to the existing discounted two-year-old model, but with more up-to-date technology, possibly higher margins and probably an easier marketing sell than the "old" phone
The first of these price points requires too many product experience compromises from Apple, while the leaks we've seen so far seem to show a device that would not be priced $200 or under, ruling out most prepay.
So, the decision is where to sit in the mid-range. The interesting dynamic in this is the tension between the USA and China.
The U.S. contract phone pricing structure today effectively puts a lower limit on the viable price for a contract smartphone. The ($450) iPhone 4 and similar high-mid range Android phones are sold as "free on contract"; phones whose list price is actually much lower are sold at the same price. A $200 phone is sold to consumers at the same price as a $400 phone - and hence is very uncompetitive.
One effect of this is that the iPhone 4 and 4S made up a quarter of Verizon Wireless (NYSE:VZ) contract smartphone sales in Q4 2012 and Q1 2013, a much higher share than they appear to have elsewhere. In the USA they're as cheap as any contract phone on the market - everywhere else they're cheaper than the iPhone 5 but still relatively expensive. The Android ASP, after all, is $250-300. Everywhere else $200 and $300 Android massively outsells $400-$600 iPhone: in the USA much of that price advantage is removed.
So, a $300 or $250 iPhone is a tough sell in the USA. But a $450 iPhone is a tough sell in China. Xiaomi, after all, just announced a very compelling new phone, the M3, at $330, and that may not be staying in China.
Hence the tension: which is more important to Apple? It already has 40-45% share of smart sales in the USA, which was just 12% of the global smartphone market in Q2. But it can't launch a phone that doesn't work at all in the USA (nor is it likely to persuade the U.S. operators to drop their pricing to remove this distortion) - which points to a higher price, higher spec model. The further you go below $400 the more you get a phone that's tough to sell in the USA.
But too high, and the current dynamic may not change - Apple remains camped out in the top 10% of the global handset market while all the rest converts to Android - and this is a problem.
The true unknown in this, of course, is that while we know that any $300 iPhone would sell very well, we don't know how much better a new $400 or $450 iPhone would sell than the current "two year old" $450 iPhone. How much difference would the screen, coloured plastic casing and 'newness' make?