Why Apple will have to start making cheaper iPhones

There's no doubt that Apple will be forced into making a lower cost iPhone – but that doesn't mean it will be rubbish.

I've been arguing back and forth with a number of noted voices in the technology community about whether Apple is really going to bring out a cheap iPhone – and it's fair to say opinion is divided.

For those that haven't seen, this eternal brouhaha has been brought to the surface once more by the Wall Street Journal's claim that people 'briefed in the matter' told it that plans to bring out a lower-cost handset are progressing.

This would allow Apple to compete with the budget handsets that are powering through developing nations, into the hands of those seeking to jump on the smartphone bandwagon now they can afford to do so.

However Phil Schiller chatted to the Chinese paper Shanghai Evening News, and surprisingly spoke candidly on the subject of budget smartphones. He said that cheap smartphones would never be Apple's product development direction. "Although Apple's market share of smartphones is just about 20 per cent, we own 75 per cent of the profit," he added.

Cheap = bad?

Some people have speculated that a cheap iPhone would use lower-cost materials, something that Schiller took exception to. He noted that with things like the Retina display or aluminium chassis show that Apple will always look to the higher-end of the materials to bring the Apple 'ethos' to its products.

The issue Apple is going to have to face is that the smartphone market is set to change rapidly in the next few years, evolving into an almost unrecognisable user base.

Nathan Eagle, founder of Jana, which uses text messaging and mobile web surveys in remote parts of the planet to gain market data, told TechRadar he believes that Android's dominance is almost unstoppable, pointing to the low-cost handsets available using the OS and the 5 billion feature phones in the market that are likely to be upgraded to smartphones over the next half-decade.

There's no doubt that the emerging market is going to be a crucial battleground for manufacturers. IDC predicts that while the market share for Android will stagnate over the next few years, this isn't a bad thing given the user base will be an order of magnitude higher by 2016.

Apple, on the other hand, will see its hold on the market shifted somewhat as the likes of Windows Phone make inroads to the developing nations; already Nokia has seen modest success with its low-cost Lumia range in China, and the trend is continuing around the world.

"We believe that the high-end smartphone market (above $400 USD off contract) for [calendar year 2013] will be about 320 million units, of which we believe Apple will capture 50% market share," Gene Munster, analyst at Piper Jaffray, said.

"We believe this means Apple is missing the other 65% of the market, or 580 million units, given its current product lineup without the lower priced phone."

Add in elements like Firefox OS and the efforts of brands like ZTE and Huawei, all of which are capable of providing higher-end specs and experiences at low prices, and you can see why Apple could be forced to react.

China bright

China is a smartphone market that many are talking about as a key battleground in the near future, and that makes sense given its economy is growing at a rapid rate.

Samsung is currently leading the way in this region, although Lenovo - a relatively unheard of brand in the handset space outside of its native China - is intent on taking that slot away. Apple has around 80% less market share than Samsung, albeit with only three of its six-strong iPhone range actually launching in the country and it still hasn't offered a model that can run on 3G networks, which would clearly hold back sales.

The reason for smartphone dominance in such parts of the world for the likes of Samsung and Lenovo rests partly on their ability to bring sub-$250 devices to the market - there are many featurephone upgraders in rural parts of the country and the lower prices combined with ever improving hardware now make a smartphone a sensible choice given 3G networks are finally becoming more widespread.

So it would seem to the outsider that Apple would be mad to ignore such an opportunity, right? After all, it's got more cash than Scrooge McDuck many times over, so bringing a phone that costs $100, has the Apple logo on it and runs a watered down version of iOS is an easy win in the eyes of many.

And to those people Schiller's comments might reek of arrogance, of a firm that loves money and hates consumers and won't bring anything to market that it doesn't think will add to its massive money pile.

But look again at what he's really said and you'll realise there's a lot of wiggle room left with his words: a phone that uses 'the best materials we can' as well as cheap smartphones never being the future of Apple.

Of course they won't be the future. As long as Apple keeps making attractive smartphones to Western consumers (although there are some that think the mixed reception the iPhone 5 garnered is evidence that may not happen) it will maintain a healthy presence at the sharp end of the smartphone market and keep those high profit margin devices flying off the shelves for years to come.

But below the top end, there is absolutely room for an iPhone mini. One that uses older screen technology and lower cost materials but has a new design.

Which is precisely what happened with the iPad mini. In fact, it's hard to think of a top-end product range where Apple HASN'T made a mini version: the iPod, Mac and iPad all became miniaturised when Apple succumbed to pressure for a cut down version and decided such a model could flourish.

It didn't just make a low-capacity and rubbish quality version of any of these products though. It went back to the drawing board, looked at what was available at the price point it needed to hit, and found the perfect blend between profit and presence.

So if it does ditch aluminium for polycarbonate, an 8MP camera for a 5MP variant and brings the screen size back down to 3.5-inch, you can bet it will do so in a new shape and with a fanfare large enough to extol the intelligence of all these decisions.

As Matt Bolton, Deputy Editor of Future's Apple Group in the UK, pointed out, Apple can always find a new way through when it looks like there's only one option: "I wonder if this is a netbook-like situation; by the time it looks like Apple has missed the boat, a new way of solving the problem comes along."

In that case it was the iPad, so Apple could just wait until some emerging markets become a little more mature and then bust out a strong mid-range device that costs perhaps $280 - keeping the aspiration levels high but maintaining its presence.

In short, Apple cannot continue with its strategy as it stands in the same way it couldn't let Google and Amazon hoover up the tablet market with the Nexus 7 and Kindle Fire HD. But that doesn't mean we're going to suddenly see an iPhone 3G with nothing more than a new name either.