Apple's Rumored Low-End iPhone Could Undo Q2's Hero

NEWS ANALYSIS: Apple's Q2 results owed major thanks to older iPhones. How would its rumored low-end iPhone change that?

Apple sold 31 million iPhones during its fiscal third-quarter, it announced July 24. This was down from 37.4 million iPhones the quarter before, but still a June-quarter record, said Apple.

How do you sell iPhones when the newest model is nearly 10 months old and the next model is thought to be weeks away? Apple's answer was to first-time smartphone buyers, who are happy to have old models at low prices.

While the iPhone 5 was "by far the most popular" during the quarter, Apple Chief Financial Officer Peter Oppenheimer said during Apple's earnings call, the iPhone 4 and 4S played very large roles in helping Apple keep revenues flat year-on-year (though profits took a 22 percent nosedive).

The average selling price per iPhone was down 4 percent, or roughly $27, year-on-year, which Apple attributed to the mix of products it sold.

"As we anticipated, iPhone 4 sales accelerated as we offered more affordable pricing in emerging and other markets," said Oppenheimer. Sequentially, he added, "it was down about $32, and again, that was driven by a mix."

CEO Tim Cook added, "The number of first-time smartphone buyers that the iPhone 4 is attracting is very, very impressive, and we want to attract as many of these buyers as we can."

This is because of how "sticky" the iOS platform is. Earlier in the call, Oppenheimer quoted research firm Kantar, which found the loyalty rate among iPhone owners to be 93 percent, "significantly higher" than Apple's competitors.

If during a time of supposed high-end device saturation, with Apple relying heavily on sales of older devices to emerging markets, where would the lower-cost iPhone that Apple is rumored to be preparing for such markets fit in?

"If they went low-end, I do not think they could go much lower than 300 USD, which likely is where the iPhone 4S is selling now," Gartner Research Vice President Carolina Milanesi told eWEEK.

The risk of a lower-end iPhone, she added, is that Apple would need to introduce it with another hero product, "as the cannibalization on the higher-end device would be bigger than what we see today with the cheaper iPhone 4."

Technology Business Research analyst Beau Skonieczny says he expects the impact of a lower-cost iPhone would be similar to what Apple has demonstrated with other product lines.

"In the Mac space, we've seen Apple transition from the MacBook to the MacBook Air, where the price of the MacBook Air continued to come down to more feasible price points for consumers, enhancing the value proposition and subsequently increasing the cannibalization rate of the entry-level MacBook," Skonieczny told eWEEK. "In the iPad arena, I expect there is similar cannibalization happening with the iPad Mini and the 10-inch iPads."

Still, Skonieczny adds that, should Apple in fact introduce a low-end iPhone—which, before subsidies, he expects would be priced between $350 and $450—
he doesn't expect older iPhone models to pile up, as "Apple and its partners would leverage discounts to help clear inventories ahead of a refresh."

"Apple would be designing from the start with lower pricing in mind, packing in more capable, albeit less premium than top-tier smartphones, technologies into the device to take advantage of iOS 7 while saving costs in other areas," he continued.

As such, Skonieczny added, a low-end iPhone would essentially be the iPad Mini of the iPhone line.

Many believe Apple will introduce a lower-cost iPhone this fall, along with its next flagship iPhone and possibly an iTV—an actual television set, versus the Apple TV box and service it currently offers.

"We believe strong demand for the more affordable iPhone 4 demonstrates the sizable [market] potential for a new lower-priced iPhone SKU, likely to launch later this year," Canaccord Genuity analyst T. Michael Walkley wrote in a July 23 research note.

Oppenheimer said Apple is "on track to have a very busy fall."

He added later in the call, "We are very hard at work on some amazing new products that we will introduce in the fall and across 2014."