What the Leaked iPhone Means for the Competition

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

While the Street has speculated Apple (NASDAQ: AAPL) may be manufacturing a lower cost, more affordable iPhone for years, the time may have finally come. Taiwanese custom phone maker Techdy has released photos and a video of what it claims to be Apple's cheaper version of its popular iPhone.

The phone is suggested to have a 4" display, plastic chassis, and thinner bezel than the current iPhone 5. From the initial look, it seems Apple is mainly sacrificing the traditional cosmetics of the product. It has not been announced if the lower priced phone will be similar in functionality to the iPhone 5. 

While some analysts have actively voiced their concerns regarding margins and brand identity should Apple release a cheaper phone, I believe the launch would be beneficial for the company over the longer term. While Apple does maintain good market share here in the U.S., the global story paints a different picture.

In the majority of developing countries, including China, Apple has failed to establish a strong presence even with rising smartphone demand. Predominantly, the company's high price point has turned would be Apple customers away from the brand and into the more generic offerings from Samsung (NASDAQOTH: SSNLF) , Blackberry (NASDAQ: BBRY), and HTC.

By offering these consumers an entry level product, the company would be setting itself up well for long term success in the region. As incomes rise in these markets, consumers would be more inclined to trade up with a brand they are familiar with. The lower priced phone would become the starter product before the full functionality iPhone.  

One analyst, Gene Munster of Piper, doesn't believe the lower priced phone would significantly hurt gross margins as some have feared. Munster reported the odds of Apple's gross margins falling from 37.5% to below 30% are close to zero. He thinks if anything gross margins would still be 32%, even if a cheaper iPhone cannibalized 50% of regular iPhone sales and had only a 15% gross margins.

I would think the only sales which are vulnerable are those of Blackberry and Samsung. Up to this point, Blackberry and Samsung have dominated the Asia Pacific smartphone category.

While BlackBerry looks inexpensive on paper, considering the company's stash of cash, demand for its products may be in jeopardy. Going into the recently reported quarter many analysts and investors held high sales and earnings estimates. The company disappointed with poor performance resulting in yet another quarterly loss. The cash position, the only thing supporting this stock, has continued to shrink as a result of extensive R&D and cash burn.

Using search engine data provided by Google, we can conclude Blackberry's relevance in the U.S. has dwindled to near multi-year lows. Should the only positive business segment, emerging markets, get hurt as a result of increasing competition from a cheaper iPhone, I would expect losses to accelerate.

While Samsung is diversified across almost every consumer category, smartphones sales have powered earnings growth and estimates in recent years. Samsung's gross margins are already significantly lower than those of Apple, 14%. Should a lower priced iPhone start to compete with the similarly priced Samsung phones, expect increasing competition and incentives from both sides.

The manufacture which leaked the new designs actually did compare the product to outstanding Samsung designs. They concluded the feel and stability of the iPhone outperformed that of Samsung's line of devises. 

Wrap up

A lower priced iPhone could open up a huge consumer base, both domestically and internationally, for Apple. The fears of drastic gross margin contraction may be over blown as it is highly unlikely current iPhone users will trade down during the next refresh cycle. By offering the lower price option, Apple can pull in consumers in the emerging markets which have typically stayed away from the high price point associated with iPhones. I feel both Blackberry and Samsung could feel gross margin pain of their own as competition increases. 

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Nathaniel Matherson has a long position in Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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