Will Apple jeopardize smartphone lead with $99 iPhone‾

Caroline Gabriel, Rethink Research
11 Dec 2008

Speculation that Apple would offer a $99 iPhone through the US and UK retail chain WalMart appears to be true, a move that should boost the vendor's overall market share and push it into the midrange webphone category.

But just as it grabs the leadership position in the US smartphone market, analysts fear radical price cutting will devalue its brand and risk condemning the 2008 "Ëœphone of the year' to the same fate as the once iconic Motorola RAZR, which also lost its kudos once it was put into mass market channels.

According to many leaks, including reports in the usually reliable Boy Genius Report, Apple will create a special edition for WalMart, though this will still be tied to a two-year AT&T contract, since the operator's exclusive in the US will last at least for another year. In the UK, where WalMart trades as ASDA, the model may also be offered along with O2 deals, though this would be more complex to achieve as it could conflict with Apple's existing retail agreement with Carphone Warehouse. It would also be less impactful on uptake, since the iPhone can be obtained for free with certain O2 contracts that involve heavy data spending.

To justify the low cost, the special iPhone will sport less memory - 4Gb instead of 8Gb or 16Gb. It is likely to be identical to the 4Gb model that was introduced with the first iPhones in June 2007, but was phased out shortly afterwards, but this time should support 3G.

Apple's generous iPhone margins and significant buying power on components such as flash memory give it room to move on pricing, but of more concern is the effect on the iPhone brand. On one hand, Apple will be playing to the highest growth markets for its device. It is extending its reach into emerging markets, but needs a lower cost model for many of these territories, such as India, and could be using WalMart to launch a product that is primarily geared to these new markets. Also, in the US, there has been significant uptake of the iPhone among low income users, who use its strong internet capabilities to avoid buying additional devices such as netbooks.

So Apple may be seeing its flagship product moving naturally downmarket, and be seeking to accelerate the process to gain share. But unless it launches a well differentiated high end - the memory difference may not be enough to keep the gloss on the iPhone brand for smartphone users - it risks losing its appeal to the consumers who are expected to keep spending the most on mobile services through the downturn. This is high risk for a company that relies on high margins relative to the cellphone sector average. Of course, the company may be pushing the current model down the food chain to prepare the ground for a new high end device, though there has been no indication of that, even though a logical launchpad would be the annual Apple World conference early next year.

On the software side, mass uptake is clearly a plus. iPhone owners have now downloaded more than 300m applications in the five months since the App Store was launched on July 11, and over 10,000 apps are available. This is almost double the number that were available on October 22, when the store passed the 200m downloads mark.

According to research firm Gartner, Apple now ranks third in worldwide smartphone market share, behind Nokia and RIM, and overtook Windows Mobile devices for the first time in the third quarter. In north America, Apple and RIM together accounted for 70% of smartphone sales in Q3.

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