Morgan Stanley: Cheap Apple iPhone Makes Sense

In a note released early Friday, analysts at Morgan Stanley write that they believe a lower priced

iPhone “makes sense,” though they don't predict the device is forthcoming. Rather, the analysts argue that the success of the iPhone Mini in emerging markets -- specifically China and Brazil -- portends the success of a cheaper, iPhone “mini.” Although they admit that such a device would cut down on gross margin and may even cannibalize some sales of the higher end iPhones, they believe that it would be beneficial from the perspective of expanding Apple's “ecosystem.” The possibility of a cheap iPhone has been floating around for years. Although American consumers can get a new iPhone for about $200 when signing a contract with a major carrier, buyers in emerging markets don't have that luxury. Consequently, smartphones running

Android OS have absolutely dominated the emerging markets. Apple has over 50% of the smartphone market in the U.S., but only about 20% on a global basis. Launching a cheap iPhone might allow the company to reverse this trend. At the Goldman Sachs tech conference earlier in the month, CEO Tim Cook addressed the possibility of a cheap iPhone. He seemed to downplay it, but did not explicitly dismiss it. Rather, Cook pointed out that, when it came to Apple's other products like the Mac and the iPod, the company decided to introduce different products rather than cheaper ones. For example, rather than offer a cheap iPod, Apple launched the iPod Shuffle. Still an mp3 player, but fundamentally different from the iPod itself. Rather than offer a cheap Macbook, Apple introduced the $500 iPad. Could Apple do something similar with the smartphone market? Apple has also continued to produce the older models of its iPhone -- the iPhone 4, first launched in 2010, is still in production, and prices of the older devices have steadily come down. But as Morgan Stanley points out in its note, consumers prefer intuitively prefer a new device over a cheaper old one. Shares of Apple traded near $447 on Friday.