There may not be a market for a mid-range iPhone

06 May

iPhonesWith Apple signalling that it won’t be releasing any new products till the fall, the cottage industry that is speculation about the company’s imminent moves has taken a hit. The normal rash of stories trying to guess everything from what kind of watch Apple is working on to how much integration the iPhone will have with cars has slowed lately, even though the company has its annual Worldwide Developers Conference coming up in a month’s time.

The slowdown hasn’t affected some analysts and media, though, with All Things D picking up a report from J.P. Morgan analysts who believe Apple isn’t planning to release a cheap iPhone. Rather than a $200 iPhone, the company is likely thinking of a mid-range device that would sell for around $350, they say.

Their logic is based on two facts. For one, the company has historically avoided catering to the low-end by releasing mid-range iPods and iPads (the Mini) after initially commandeering the high end. And secondly, there’s a big chunk of the mid-range market that is there for the taking.

That thought is best illustrated with this chart:


As is clear, smartphone vendors are already selling a lot at the low end and the high end, but not much in the middle. That’s low-hanging fruit that Apple could go for, the analysts suggest (no pun intended).

There are a couple of problems with the theory. Firstly, the iPod and the iPad are probably not good devices to compare with because they were (and are) sold under completely different market conditions. With the iPod, Apple was so far out ahead of competitors that it was able to establish a de facto monopoly. By the time any competitors caught up, it was too late – no consumer would dream of owning an MP3 player that wasn’t an iPod because it would just be thoroughly uncool to do so. Apple thus owned the market and could price low-, mid- and high-end devices how it saw fit.

The iPad was the complete opposite. Rivals caught up to it relatively quickly and took Apple’s pricing power away, forcing the company to react by releasing a smaller, cheaper iPad (the Mini). The J.P. Morgan analysts consider the full-sized, $500-plus iPad to be the tablet category’s high-end, but they’re wrong – the $325 iPad Mini now represents the top of the line. Anyone who’s ever used one will probably agree that there’s no reason to go back to the much bulkier and heavier regular iPad, even though it does have a sharper screen. The numbers bear it out, with the Mini cannibalizing the bigger tablet faster than anyone predicted. More expensive tablets are quickly becoming a niche.

The other fallacy in the mid-range iPhone prediction lies in the chart above. Perhaps the reason why so few mid-range smartphones are being bought is because no one actually wants one. With the market distortions introduced by wireless carriers and phone subsidies, there really is no reason for consumers to get a lower-powered device unless it’s a budget purchase. Consumers will either pay somewhere between $100 and $200 to get the top-end phone on a contract, or between zero and $50 to get a low-end device. There really isn’t much room in between.

There are two other factors that add to that. Firstly, Apple currently sells older iPhones as its mid-range – the iPhone 4 is $450, for example – while the rest of the segment is made up of either failed high-end phones that have been marked down, or other devices that have already been out for a while.

Besides, what would a mid-range iPhone look like, or even a low-end one? Would it just be a crippled version of the current model, perhaps without LTE, a Retina display and a good camera? Isn’t that just basically an iPod with a phone antenna?

For all these reasons, I’m not convinced there will ever be more than one current version of the iPhone. If Apple really does want to grab more market share and cater to budget-conscious buyers, it really has only one option – to make its one, single iPhone cheaper overall.


Posted by on May 6, 2013 in apple, iphone


2 responses to “There may not be a market for a mid-range iPhone

  1. Marc Venot

    May 6, 2013 at 12:20 am

    Since an iPhone comes with a monthly subscription the key factor is the ratio between it and the price of the gizmo. Another factor is that the iPhone 5 is much easier to repair than its generation 4. The new one will certainly follow that way and that’s important for Apple to have a minimum cost to build one since the company does rather easily do an exchange for iPhone4 at $150.
    According to rumours the new iOS 7, under the leadership of Jonathan Ive, will be a significant change from the actual version.

  2. Michael Elling (@Infostack)

    May 6, 2013 at 10:22 am

    Both you and Marc have established that the y-scale is wrong. It should illustrate either/both the subsidized cost of the device or the 2-year total cost of usage. Those are the better ways to understand and reveal demand elasticity given the inefficiencies introduced by the walled carrier model.

    What Apple really needs to do to expand the market opportunity is either open up it’s silos (disrupt itself) or look really hard at disrupting the carriers. It can probably only afford to do the latter in conjunction with other OS providers and leading application ecosystem players, as the vertically integrated monopoly carrier response will be frightful.

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