A cheaper iPhone doesn't necessarily mean a 'cheap' iPhone

What Apple should really be after is a handset that, while less expensive than the top model, is an excellent product in its own right

For a product that has been around a scant six years--an eternity in the field of consumer electronics--the iPhone has had a remarkable run. It has changed the way we think about computing, conquered the mobile market, and transformed Apple from a relative underdog in the PC industry into one of the planet's most profitable and influential enterprises.

The iPhone has also enjoyed unparalleled growth, consistently reaping the lion's share of profits in the smartphone market even if it never reached the top spot in terms of units sold. Like a middle-aged person fearing his best days are behind him, however, the iPhone's growth has been slowing of late, prompting calls from all sides that Apple do something about it.

The myth of the cheaper iPhone

The latest "something" is, apparently, the need for a less expensive product in the iPhone product line--the reasoning being, as far as I can tell, that it will be more appealing to those customers with whom Apple does not perform well today because of its premium prices.

Typically, these folks are grouped in two wildly different categories: lower-income users who have less thirst for expensive electronics, and those who live in emerging markets, like India and China, where an new middle class does not yet have the buying power to afford a $650 phone.

As the story goes, these markets are being dominated by Apple's main rival, Samsung, and its rapidly expanding market share--a metric with which analysts seem to be absolutely obsessed--through a combination of cheaper phones and greater selection.

Symptoms and disease

It doesn't take a lot of poking around before this kind of shallow analysis starts to fall apart. Apple already offers less-expensive alternatives to its flagship iPhone models by making older versions of the handset available at lower cost; in most countries, a contract-free iPhone 4, for example, can be had for just half the price of an iPhone 5, and it's often subsidized in its entirety when purchased alongside a two-year contract.

To be fair, even at half the price, the contract-free iPhone 4 is much more expensive than the cheapest Android competitors, and there is no denying that it is also based on two-year-old technology.

However, if price were really all that matters, customers already have the option of picking award-winning handsets that, although a bit dated, still represent some of the best hardware made in the last decade. Not to mention software: If you want a phone that runs iOS instead of Android, there's only one company to get it from.

Red herring on the line

It would seem to me, then, that simply stating that Apple needs to sell a cheaper handset misses the mark. Instead, the real question is why, even though a less expensive iPhone is available to them, do some people (or even most people) still pick Samsung devices?

The answer is complex, and probably depends as much on consumer psychology as it does on finance. Plenty of people, I'm sure, pick Samsung simply because it's not Apple, and no discount is ever going to move them away from the conviction that the iPhone has become the status quo, and that, by picking a different manufacturer, they set themselves apart from the masses. Naturally, the fact that Samsung offers a "new" product for less than the price of one of Apple's "old" ones is also a point in its favor.

The reverse, though, is also true: Apple handsets have a cachet that is hard to ignore, and they are perceived as an "affordable luxury" that commands high prices precisely because not everybody can afford them. Sporting an iPhone--even an older one--with its excellent construction, great software, and superior street cred, is nothing to laugh at.

Innovation and iteration

For these reasons alone, a "cheap iPhone" developed by means of a straight compromise on features would be a terrible move for Apple. By cutting down on the quality of its product as a way to cater to a less-affluent public, the company would simultaneously lower its profits and become less attractive to those who pick its products as a status symbol.

Besides, even if cutting prices ultimately raised unit sales, Apple's DNA is one of innovation, and it's very hard to both be the cheapest player in the market and the one that is always expected to come up with new ideas.

Meanwhile, Samsung's rise is due in no small part to its methodical, by-the-numbers approach of tailoring the devices it makes to specific segments of the population. That process is unlikely to give birth to something as innovative as the iPhone, but it certainly works as long as the South Korean electronics giant can position itself as a full-featured, but inexpensive, alternative to Apple, and a "cheap" iPhone would play straight into Samsung's hands.

Growth by dollar signs

Still, there is a kernel of truth in all this rumormongering: Apple's growth is slowing, if not for any other reason that it has all but conquered the higher end of the market. In this space, the iPhone is gaining an increasingly iterative presence, and there are, quite simply, fewer people left to convince that they should buy one. (Interestingly, people who already own an iPhone are unlikely to switch away any time soon.)

If the company is to continue to grow, then, it must do so by aiming towards those areas of the market that today elude it. Ideally, the growth should have a twofold goal: increasing Apple's profits, while lowering the competition's share in terms of unit sales.

This is important, because Apple never goes for market share solely on the basis of bragging rights. Instead, it attacks those markets where it can leverage its brand to reap significant profits, leading to increased focus and brand value.

Conversely, Samsung banks on a large number of models sold in high volumes to make up for relatively smaller profit margins; to really ruin Samsung's day, all Apple needs to do is make its products a little more affordable--enough so to eat into its rival's shipment numbers and reduce the effectiveness of its strategy.

Different, not cheaper

Therefore, what Apple should really be after is a handset that, while less expensive than the top model, is an excellent product in its own right, with features that have been designed to cater to a specific segment of the population without compromising those offered by its higher-priced counterpart.

Luckily, Apple is very good at this kind of game. In fact, every other product category in which the company participates is nicely bracketed to cater to multiple tiers of the market: The iPod line has multiple models, each offering a different set of features at a specific price point; the full-size iPad is now accompanied by the iPad mini, which costs less but still offers an excellent array of functionality, and is, in fact, something that many have bought in addition to a larger tablet; and the Mac line has models that cater to the home user as well as the professional on the go, offering compromises that make sense in each case.

If that weren't enough, these products have, almost without fail, followed the same growth pattern: at first, Apple enters a market with an a single innovative product, usually offering a limited number of models based on simple differentiators like color, storage space, and so on. Later, it solidifies its position by expanding each product line into separate models that have fewer bells and whistle, but still retain the core features of their bigger cousins.

Take, for example, the iPod shuffle; even at $49, it's at least twice as expensive as many of its competitors. For many customers, though, an extra $20 isn't going to break the bank, and they get to own an Apple product that, in addition to being cool, fits very well into the overall iTunes ecosystem--still the best and easiest way to buy music.

The new iPhone

How can this same strategy be applied to the iPhone? It's hard to say, because the smartphone market is maturing at a rapid pace and the baseline on which products are predicated is fairly high; an iPod touch without a screen can still perform its main function--playing music--but a smartphone without a screen can't even be called a "smartphone."

Nonetheless, it's a fair bet that plenty of people in Cupertino are thinking about this problem, and, given Apple's track record, are considering more than just a cheaper price. If the end result is in line with their past performance, I can't wait to see what they have in store for us.

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Marco Tabini

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