Will the 'Cheap iPhone' Help or Hurt?

 | Jan 09, 2013 | 10:26 AM EST  | Comments
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Big news last night that Apple (AAPL) is reportedly working on a cheaper version of its iPhone for possible release this year.

The story was reported in the Wall Street Journal and includes lots of "according to sources," which makes it look like a senior executive picked up the phone to deliberately plant the story.

The news sent the tech blogosphere into a tizzy, but the stock didn't move much after hours.

This morning, it's down less than 1%.

The bears say that Apple is moving down market with this phone and it will surely lead to lower margin over time, which will directly hurt the stock price.  They say it signals copy-catting, shows a lack of innovation and it raises questions about the long-term strategic direction.

I say that's all hogwash. This is all about Apple seeing a market opportunity  it can make money off of.  Why would it turn its nose up at that and walk away?

Moreover, I think what's really behind Apple targeting a lower-priced phone is to go after the emerging markets opportunity, including China.

Three years ago, smartphones only accounted for 5% of handset sales in the pre-paid market. In 2011, they were up to 29%. There's still a lot of headroom for future growth for smartphone makers in that market, especially in the emerging markets.

And it's in these emerging markets where Android has proliferated so quickly.  It's also no coincidence that Android Web browsing and app downloads are so much lower compared to iPhone. Basically, a lot of people in the emerging markets on prepaid plans are using their phones for talk and text. Androids have simply replaced their old Symbian phones from Nokia.

Right now, Apple isn't playing in this market at all. It can't play in this market with its premium phone.

You can call it a cheap iPhone or you can call it an appropriately priced version of the iPhone targeted to win in this particular market niche over the next five years. It's all about Apple realizing a huge market opportunity that's starting to take off in the next five years and wanting to ensure that a large percentage of people in that market get hooked on iOS software instead of Android.

For it to not go after this market would be like Apple saying it no longer wanted anyone under 25 to buy its products. That's the future lifeblood of Apple. It needs to have share in that future growth area.

Any Apple investor would be shooting themselves in the foot to encourage Apple not to take part in that space.

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