Should Apple Release a Cheaper iPhone to Boost Sales?

Some say yes. But is it worth the risk?

In an iPhone report released this morning, Rodman & Renshaw discussed a lot of key points, including the likelihood that supply constraints could limit the upside of Apple's (NASDAQ: AAPL) most successful device.

“Layering on the estimated 4 million iPhone 4S that were manufactured (but not shipped) in the September quarter, overall iPhone shipments in the December quarter could come in around 30 million units or below street estimates,” Rodman & Renshaw wrote.

That's troubling news, but it pales in comparison to Rodman & Renshaw's pricing assessment:

“iPhone share in the premium smartphone segment, 85% at price bands above $500, has likely peaked,” Rodman & Renshaw wrote. “With volume growth slowing in the high end segment, Apple's overall share could possibly decline. Most of the forecasted smartphone growth is expected in the value priced segment. The share of lower priced segment, $200-$300 price band, is forecasted to increase from 25% to 30% over the next 2 years. Repositioning the legacy 3GS at the entry level buys Apple time, but it is a dated product with limited shelf-life. A purpose build lower end SKU is key for Apple to grow share.”

This gives us some reason to pause, no question. The iPhone has been around a long time. Those who can (and want to) upgrade will do so, but Apple may have already pushed the iPhone as far as it can go. From this point forward, the company may have to rely on stealing Android users from Google (NASDAQ: GOOG) to raise its market share. Beyond that, the company will continue to introduce new features that will help future iPhones break new records.

Truth be told, that's probably enough for Apple. This company has never been one that focused entirely on growth. Rather, it has traditionally cared about – and still cares about – maximizing profit in whatever market it chooses to enter. This is why the company has always insisted on charging a premium for its PCs. If Apple builds a lower-end SKU to compete, the company will only hurt itself in the long run by diminishing its value as a manufacturer of premium products.

Ironically, this is not unlike an argument I made in favor of Nintendo's (NTDOY) business model for developing and manufacturing premium consoles and premium games. As long Nintendo can sell five million copies of a $50 game, it doesn't need to sell 200 million copies of a $0.99 download. Likewise, as long as Apple can sell millions and millions of “premium” iPhones, it doesn't need to release a cheaper iteration.

ACTION ITEMS:

Bullish:

If you agree with Apple's current (premium) business model, consider the following trades:

• Micron Technology (NASDAQ: MU) and Texas Instruments (NYSE: TXN) are among the many suppliers of the current iPhones. As long as Apple continues to manufacture this premium product, these companies will likely have the option to continue supplying Apple with components.
• Even if Apple can't ship as many iPhone 4S devices as predicted, the company will still post huge profits.

Bearish:

Those who think Apple needs a cheaper iPhone should consider the following alternatives:

• Since Android can be thrown onto just about any phone, Google will always have a cheaper alternative to the iPhone.
• If consumers can one day buy a cheaper iPhone, they will expect to be able to buy a cheaper MacBook and a cheaper iPad, diminishing the company's value as a premium manufacturer.
• This could, however, pave the way for other manufacturers – such as Dell (NASDAQ: DELL), Sony (NYSE: SNE), or Hewlett-Packard (NYSE: HPQ) – to fight harder for a piece of the premium pie.

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