The stream of rumors, “official” stories, and “lost” prototypes seems to never endlessly fill my Google Reader and Business Insider emails, but there is an aspect of both the iPhone 5 release and the Q3 Apple (AAPL) earnings call that I think is being overlooked. For a number of reasons there is a case, granted a speculative one, for Apple shaking things up with a completely different pricing scheme at the release of the new iPhone at the end of this month or the start of next. I’m thinking something radical: an incentive program for all, one that sweeps in new customers and lets current owners upgrade at something close to no cost.
In Apple’s Q3 earnings report, Peter Oppenheimer was conservative with the current quarter’s earnings, referring to upcoming “product transition” expenses. Such a statement does not represent anything new for an Apple earnings call; “product transition” expenses have been in earnings calls since at least 2007, but it does raise the question, what exactly will the increased expenses be from? As with any Apple related event it is more interesting, and sometimes more accurate, to speculate than to simply assume the meaning of such a statement. Yes, a lower priced iPhone 4 (as has been widely rumored) would represent such a “product transition,” but the largest expense, one that would marginally affect earnings, would be a discounted iPhone 5 for new and current owners.
Additionally, it seems as though the market has begun to appreciate the continual revenue stream supplied by iTunes and the App Store, more so than the sales margins of actual physical units. Getting more iPhone 5s into the hands of current owners would boost sales in both stores while also increasing data usage. This point makes all Apple’s carrier partners happy: an upgraded iPhone, with more users using more Apps and internet, shifts the user base even further toward the higher margin data side of their offerings.
The move to some sort of subsidized iPhone 5 devices for previous owners would also represent a fresh and impressive move for new CEO Tim Cook. The market continues to wonder when AAPL will give back to its shareholders as it sits on its cash hoard, one that more a brief moment last month might have even exceeded that of the US Treasury. By subsidizing the pricing of the new device, Cook and Apple would not only be giving back to the stock market (a far higher number of devices would be sold) but also to the consumer market (the classic “share the love” motto Apple was built on). At some point, the Everyman in all of us is going to begin to resent our ongoing marginal contributions to Apple’s hoard, and a move like the one I’m describing cuts that off at the pass.
Finally, the move to a cheaply priced iPhone, centered on revenues from new sales and post-purchase revenue, would significantly undermine the business model of Apple’s competitors in the mobile market (Googlerola (GOOG), Microkia (MSFT) (NOK), Samsung (OTC:SSNLF), HTC, and, if they even matter at all anymore, RIM (RIMM)). With rumors swirling that Foxconn is now producing 150,000 iPhone 5s a day, working to build a stock of 6 million units for the product’s debut, Apple no doubt has the inventory for a radical shift of the smartphone landscape. As with any Apple release, speculation fuels the fire leading up to the event and a subsidized, feed-the-masses pricing of the iPhone 5 has been under -discussed, though it may be a just around the corner.
Disclosure: I am long AAPL.