Cheaper iPhones and the 'nano question' - a brain dump

I’ve written often about the ‘iPhone Nano’ scenario. It’s been on the cards for years and it’s one of the most private fears of many a mobile manufacturer and mobile operator.

Back in 2009, I remember discussing the horror with which the industry react to the phrase ‘iPhone Nano’. This was back when Apple had dribbled out a few iPhones to the planet but really, the product was highly restricted because it required a heck of a lot of money up front (compared to a subsidised Nokia of equal value) and the tariffs were, on average, at least £5/$5 more. But everyone wanted one. Everyone on the street wanted one.

As Apple began relaxing the exclusivity in many markets, iPhone ‘joy’ spread. Operators who previously were unable to officially offer the device(s) jumped on the bandwagon. Industry Chief Financial Officers toasted the iPhone for it’s ability to get consumers locked-in to 24-month contracts.

Whilst iPhone remained a bit-player, everybody was reasonably content. More and more now, operators have begun realising (and recognising) that every time they flog a 24-month iPhone contract, their assuming ‘bit pipe’ status for that customer. Never again will an iPhone customer click or tap ‘internet’ and land on the operator portal. Operator branded app store? You can forget that. Yes, the only revenues you’re going to see from that 24-month contract customer are the ones you’ve factored in: £35/month and a few odds-and-sods, maybe an additional text bundle, maybe a bit of roaming data.

It’s fine though, when it’s a small percentage of your total subscriber base. You can still let your marketing and propositions team play with the rest of them.

This industry loves stability. And, for the most part, we’ve had stability from Apple on the iPhone front for a long time. If you think about it, apart from the launch and the introduction of the App Store concept, iPhone has been certain and predictable at least from the point of view of the mobile operator and competitors. Yes there have been all manner of announcements and launches from Apple, new models were launched with a lot of pizazz — but the iPhone fundamentals remained stable.

The total cost of ownership of iPhone is still rather extreme. For most consumers, the iPhone is one of their most expensive (and treasured) purchases. It’s broad in appeal but highly restricted in terms of affordability.

Oh anyone can buy one now. You don’t need a credit check, you just need the readies. Five hundred smackers, typically, to buy an iPhone ‘pay-as-you-go’. Even on eBay, it’s difficult to find a cheap iPhone. They hold their value very very well.

So we’re fine.

Until, that is, Apple introduce a raft of iPhone Nano devices each priced at a highly competitive £49. For the entire device. Or £99.

Imagine the trauma that would engulf the industry. Imagine the queues. £99 one-time fee to own an iPhone? Available unlocked from all good consumer electronics retailers? They’d fly off the shelves. Faster and at greater volumes than any iPhone launch we’ve ever seen.

Why would Apple bother with this?

Oh it’s simple. Although they’ve a market cap of 326 billion dollars (14x BIGGER than Nokia and 54x bigger than Motorola), Apple is a minnow when it comes to mobile phones.

An absolute minnow.

The company sold 18.65 million iPhones last quarter. In a good quarter, the giants of the market (Nokia, Samsung) would (roughly) eclipse that in the first 10-15 days of the quarter.

And whilst I know Nokia isn’t quite at it’s prime, my point is, iPhone is small.

Something needs to be done.

Why?

Because iPhone is one of the central pivots of Apple’s on-going strategy. It’s a key gateway point for consumers into Apple. Indeed, buy an iPhone and the chances are — as we see anecdotally all the time — it won’t be long before you’re eyeing up a MacBook. Or an iPad. The ‘gateway’ point is only going to get more important as we begin to see the effects of iCloud on the world.

Something needs to be done because Apple’s share price is in the pits.

Well, not really. 😉

But run with me on this. Suspend your disbelief. If you’re a shareholder, you’ll rightly be delighted with Apple’s performance since the end of 2006.

The company has added well over $200 in value across the last 5 years.

And that is the challenge for Apple.

At last count, the company had $63 billion sitting in it’s bank accounts. Enough to buy Nokia, three times over.

Apple also has the unenviable position of having to deliver consistent returns to highly demanding shareholders who want, very much, to see the share price hit $400, $500 and beyond.

These shareholders, not necessarily wise in the way of the mobile industry, will be looking upon the growth of Android with no small amount of alarm. Apple’s market share is evaporating — not because they’re doing anything wrong per se, but because the market is growing substantially. And most folk are buying Android phones — the growth is obviously coming from the lower end too.

What is Apple doing about this? Huh? Eh? Come on! We want to see results!

That’s what the shareholders will soon be demanding. A bit-player position is simply untenable.

And goodness me, see if Nokia and Microsoft actually start getting traction, the pressure will continue to mount for Apple to do something about it.

This is why we’re getting all sorts of he-said, she-said, some-guy-overheard style rumours percolating across the marketplace. The rumours are coalescing into ‘two phones’ at the moment. Apple will apparently launch two phones. Your guess, at this point, is as good as mine. The executives I’ve spoken to are, on pain of huge, huge penalties, saying nothing. There’s not even eyebrow wiggling going on.

Expect to see Apple begin to target the lower end of the market. This is the market that has traditionally been buying £199 iPod Touches as the cheapest way to access the App Store (and gaming).

I think it might take a few product generations before we see £99 iPhones, but it’ll certainly be on the cards. Especially when the pressure to ‘do something’ begins to get untenable.

The problem with being big and having pots and pots of cash is that the market is going to start screaming for more, soon. Not even the Jobs Halo will withstand that.

There’s plenty of precedent too. It’s precisely what the company did with the iPod Nano. With one product announcement, the company democratised cool music players. Anyone with $49 could join the Apple world — and millions did.

The elephant in the room though is the ‘computer issue’. An $800 iPhone is useless to you unless you have an $800 desktop/laptop with which to activate it. And if you only bought an 8GB iPhone, then you can only buy 4 or 5 movies from Apple before you run out of space.

The existing iPhone framework dependent on desktop sync does not work when you move out to the wider audiences. A case in point: A few months ago, one of the chaps who cleans the offices in which I work got himself an iPhone. He was delighted. He paid top dollar for the iPhone 4 from 3UK. A super purchase. The only problem? He couldn’t activate it as he doesn’t have a computer. He doesn’t need a computer. He can’t be bothered with desktops. So I activated it for him.

I guarantee you he hasn’t upgraded the phone. He hasn’t backed it up. He hasn’t synched it. He’s no infrastructure beyond the actual phone.

Most of the marketplace is like this chap: No desktop.

So that’s a real barrier. However you’ll note that Apple have addressed this with iOS 5 — to the whooping delight of the gathered keynote crowds a few months ago.

And the data storage issue is a problem. How can you be expected to sell more stuff to consumers if they run out of disk space on the device they use to do the purchasing? Yeah. iCloud is taking steps to solve that.

So Apple is headed in the right direction.

If we’re truly going to see two handsets, I wonder if we’ll see a budget vs a high end device? I wonder if Apple will begin to break things out like they’ve done with their laptop range, to hit as many price points as possible?

They’re going to have to. There’s no question about it.

Why, then, is an iPhone Nano priced at a highly accessible £49 or £99, a total flipping nightmare for the rest of the marketplace, operators and OEMs combined?

Well Apple is already heavily influential way beyond it’s market reach — and that’s when the company is lucky to ship in the 50-75 million devices a year range. What would the market look like if Apple hit 200 million devices a year? How would the world look if, by 2014, there were 800 million iPhones in use across 4 billion people?

I know the figures are a little… blue sky… but consider the ramifications.

If 80% of America was running on Apple, what would the market look like? How would the market respond to Apple deciding to obsolete ‘3G’ and ‘4G’ in favour of LTE-Advanced, provided by LightSquared in the 2014 models? Apple’s got a rather successful (and rather annoying) history with forcing change upon it’s willing customers. And with such huge market share, Apple would have some serious leverage.

This is the fundamental issue. The company is already massively influential yet they’re nothing compared to Samsung and Nokia’s logistical scale. If they actually start heading toward 200,000-500,000 sales per day, that’s going to start to cause no end of headaches for the market. It’s a remote possibility at the moment — but I submit that simple economics will require Apple to expand market share downwards to the larger audiences.

Bring it on.

What do you reckon? Will we see an ‘iPhone Nano’ style product priced competitively in the next year or so?