When it comes to the high-end smartphone market, Apple Inc. (NASDAQ:AAPL) is the king. Developed economies where wireless carriers subsidize smartphone purchases in exchange for service contracts vote overwhelmingly in favor of the iPhone. Just this month, investors have seen reports that Apple has become the No. 1 smartphone vendor in important countries like the U.S. and Japan, but there remain plenty of untapped opportunities within the global smartphone market.
Very big
According to recent estimates from Piper Jaffray analyst Gene Munster, we’re talking about a total low-end addressable market opportunity of $135 billion this year. That’s a huge segment of the smartphone market that Apple Inc. (NASDAQ:AAPL) has mostly neglected thus far. Sure, the company progressively reduces the price of older-generation models each year as new ones are released, but even the iPhone 4 that was launched in 2010 is still priced at a premium relative to current low-end devices.
In the U.S., the iPhone 4 still carries an unsubsidized retail price point of $450 for an 8 GB model. Munster went through pricing data from six international markets (Germany, the U.K., France, China, Brazil, and India) and found that the iPhone 4 is still over twice the average price of a low-end smartphone. In fact, that model is even pricier than even the average mid-range smartphone.
Within important regions like China and India, which are the two most populous nations in the world, low-end smartphone average selling prices, or ASPs, are between $138 and $140, making the iPhone premium much higher in that market segment.
Munster estimates that the low-end segment will comprise 60% of the smartphone market this year, with 540 million units selling at an ASP of $250. This is why the analyst believes that Apple Inc. (NASDAQ:AAPL) will launch a $199 iPhone later this year, which will promptly see sales skyrocket to 170 million units by 2015.
A second opinion
Just yesterday, Morgan Stanley analyst Katy Huberty similarly weighed in on affordable iPhone prospects. Specifically in China, Huberty believes that a 2,000 yuan (about $330) iPhone could pose a major competitive threat to flagship devices from local rivals like Lenovo, Huawei, ZTE, and Coolpad, many which are seeing success on the low end. Huawei and ZTE in particular have ridden that sector to rank within the top 5 smartphone vendors in the world. In the fourth quarter, Huawei and ZTE ranked No. 3 and No. 5, respectively.
Even if a third flagship iPhone sales are cannibalized by a lower-end device, the net result will still be overwhelmingly positive as Apple Inc. (NASDAQ:AAPL) could potentially triple its addressable market in China.
A Foolish opinion
Munster’s expectation that Apple will launch the device at a $199 price point seems too aggressive, considering Apple’s historical pricing strategies. Apple has always maintained premium price points, even when it moves downmarket, and I think a price point closer to $250 to $300 makes more sense in order to preserve margins and the premium branding.
An affordable iPhone would still carry lower gross margins relative to the flagship model, but considering the sheer size of the market opportunity we’re talking about, Apple will make up for margin contraction with unit sales growth that should significantly boost gross profits in dollar terms.
At the recent Goldman Sachs Group, Inc. (NYSE:GS) conference, Tim Cook reiterated his belief that eventually all phones will be smartphones, and that represents incredible opportunities for Apple. The implication there is that in order for Apple to truly tap its full potential in the booming smartphone market, it will need to eventually broaden the segments it addresses — and Tim Cook knows that.
The article Apple’s Low-Cost iPhone Market Opportunity originally appeared on Fool.com and is written by Evan Niu, CFA.
Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple and Goldman Sachs. The Motley Fool owns shares of Apple.
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