Analyst: Here’s Why Apple Needs a Cheaper iPhone

By Roger Baettig | January 09 2013 10:22 AM

Reuters

Apple's iPhone 5 has been called one the most anticipated smartphone launch in history, and the device's pre-order numbers have proven this to be true. After completely selling out in just one hour on Sept. 14, the iPhone 5 set a new pre-order record for both AT&T and Apple.

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There have been several reports this week suggesting Apple (NASDAQ:AAPL) was on its way to introducing a new, cheaper iPhone model that compresses margins but targets consumers in cost-conscious margins. According to one analyst, such a strategy has become a necessity for the iPhone maker as its status quo puts it at risk of losing valuable market share to cheaper smartphones.

“Seeing smartphone competitors achieving similar market scale to Apple’s flagship iPhone model and platform rivals willing to subsidize device sales to build their installed base for lucrative web applications leaves me skeptical that the high margin status quo approach can be sustained for more than a few more years, and even then, I see inherent margin pressures that are not reflected in consensus estimates,” Sector & Sovereign Research analyst Paul Sagawa wrote in a note to investors, according to BGR.

Sagawa was pointing at the success of cheaper Google (NASDAQ:GOOG) Android devices in markets such as China and India, where wireless subsidies don’t exist, making buying an iPhone prohibitive for most consumers. But Sagawa added that this change in strategy, if Apple were to bring it about, would be a massive one for a company used to seeing record profits driven by unprecedented margins. It would certainly hurt profitability, he added.

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“The more aggressive strategy seems the better one from a long term perspective, but will entail substantial cultural change, a significant re-investment of capital, and a more certain and certainly more painful hit to profitability,” the analyst wrote.

Apple’s current predicament was a real one, Sagawa said, adding that he did not think investors would appreciate future negative surprises or disappointing guidance figures. “Apple may not be expensive, but it is hardly cheap with that potential overhang,” he said.