Is the iPhone Mini in Apple’s Pipeline?

Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Cupertino tech giant Apple (NASDAQ: AAPL) is rumored to have plans for offering a low-priced iPhone that would focus on the price sensitive developing markets. As per Bloomberg and Wall Street Journal, the company wishes to penetrate emerging markets by offering a reasonable version of the iPhone, as Apple’s premium products remain unaffordable there. However, the release date isn’t known yet, though the Wall Street Journal speculates that this piece of innovation would hit the stores sometime this summer.

When asked about the speculation in an interview with the Shanghai Evening News, Phil Schiller, Apple's Marketing Chief, made it crystal clear that the iPhone maker has no intentions to invest in making a low end product and compromise on quality for the sake of gaining market share. The company is extremely particular about the kind of technology it uses, to make sure that the best is offered. Though reasonable smartphones are becoming popular in Apple’s second largest market, China, the company would not manufacture a low end iPhone. He pointed out that the tech giant may hold just 20% of the smartphone market, but it gobbles up as much as 75% of the profit.

However, some analysts of investment bank Piper Jaffray consider entry into the less expensive phone arena would be a smart move that would help Apple grab up to 65% of the smartphone market.

China could become the top market
The company’ CEO, Tim Cook, is very optimistic about the Chinese market and wants to undertake aggressive tactics there. He believes that the budding nation will surpass the US market as far as sales are concerned. He recently made a trip to China, the second visit in the past 10 months, and met up with China Mobile’s Chairman and China’s Industry and IT Chief. The company witnessed tremendous growth in this nation during 2010 and 2011 when its sales doubled in this market. Though the sales growth slowed down in 2012, China still remains an extremely lucrative market for Apple’s future growth.

Now that the nation’s interest is diverting from non-smartphones to cheap smartphones, there are speculations that the Cupertino giant would create an inexpensive offering to take advantage of the same. If an iPhone Mini is in the making, it would help the company amass huge revenue from the emerging markets and compete with Samsung and other brands that provide cheaper mobile models. Apple may choose to use the latest chipset developed by Qualcomm.

Taking care of competition
A reasonably priced version of the iPhone would help Apple directly compete with cheaper models powered by Google’s (NASDAQ: GOOG) Android software. These smartphones are able to capture the emerging markets much easier because of its low priced innovation. As per the IDC industry tracker, 3 out of 4 smartphones globally shipped in the recent quarter were powered by Android. In addition, as per a research company Strategy Analytics, sales of the Samsung S3 surpassed those of the iPhone 4S in the third quarter.

Another favorable impact of a cheaper iPhone would be that it would help Apple combat Nokia's (NYSE: NOK) latest range of Lumia smartphones. While the iPhone 5 can battle with the Lumia 920, the iPhone Mini can take care of the rest of the Lumia devices. Lately, Lumia devices have been gaining some traction and Nokia was able to sell as many as 4.4 million units. At present, though the number seems to be pretty small compared to iPhone sales, there is a potential future threat. Precaution is better than cure, and Apple's precaution can be the iPhone Mini. Again, Nokia is doing well with its Asha series of smartphones, which the Finnish phone maker sold more than 9 million units of. I feel a more reasonable iPhone can also be targeted at the Asha buyers. By paying a little more, the Asha users will get to use a genuine smartphone and not a smartphone-like smartphone.

So would Apple begin making a less pricey phone? Certainly it would increase the company’s market share, but what about the profitability margins?

The cons
The primary concern in all this is how the launch of a cheaper iPhone would impact the brand image and the business model of Apple. The tech giant is known for offering top class features at premium prices. Not only is the gross margin of the company at stake, but the brand perception is a critical concern as well. The company has built such an image over the years by offering products that resonate with its business model, and an offering like this could hamper the brand identity. Even if we consider the iPad Mini, we would see that it is priced higher that its closest competing tablets, showing that Apple has an audience of its own and that it’s not meant for the masses. In addition, making an inexpensive model would involve compromising on quality and using cheaper inputs, which would go against Apple’s customer satisfaction philosophy.

My takeaway
Tim Cook has said that the company is innovating and some exciting products are in the pipeline. However, an iPhone Mini is unlikely to be one of them. The company will make sure to maintain its profit margin and brand image rather than offer something that would risk all it has built. The iPhone maker has clarified that they wouldn’t get into offering low end phones just to expand market share. It would rather invest to innovate more impressive and premium devices and create a masterpiece, than compromise on technology and quality to make an inexpensive offering.

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