Apple should offer a cheap iPhone (but it isn’t doomed if it doesn’t)

Apple will take the wraps off the latest iPhone during a media event on Sept. 10, according to All Things D, and speculation that it will offer a mid-tier version of its iconic handset has never been louder. And there’s no shortage of opinion regarding whether Apple should make such a move: John Gruber argues that while Apple’s strategy of selling older iPhones at discounted prices has been a success, the company “needs to push the low end of the iPhone market even lower” with a new, mid-tier iPhone that can compete better in non-subsidized markets. Tony Bradley of Forbes, on the other hand, writes that “A cheap iPhone makes absolutely no sense” because Apple remains a profit-making machine without having “to pander to a bargain basement market.”
The shrinking revenue gap between iOS and Android apps
Most arguments in favor of a cheap iPhone are as simple as they are compelling: Android’s dominance continues to grow thanks in part to low- and mid-range devices both in advanced and, increasingly, in emerging markets. But the most persuasive and insightful piece I’ve read this week is from analyst Benedict Evans, who writes that Apple’s ever-shrinking market share puts iOS at risk of losing its status as the premier mobile ecosystem to Android.
Evans points out that while Apple’s App Store has long been the more lucrative distribution platform for developers, recent data from Distimo suggests that may be changing: Revenue from apps downloaded from Google Play increased 67 percent over the last six months, according to Distimo estimates, while App Store revenues increased only 15 percent. That revenue gap – which is now shrinking – is a big reason why the best smartphone apps are generally available for the iPhone before the come to Android, Evans rightly notes. That’s an important selling point for Apple, and a cheap iPhone could help keep iOS as the top priority in the minds of developers.
The need to tread carefully
Of course, a cheap iPhone would only hasten the narrowing of that revenue gap because it would appeal to the same budget-conscious users who buy low- to mid-range Android products – and who are far more reluctant to spend money on apps than their iPhone-toting counterparts. And there are other obvious downsides: A discounted Apple handset made of second-rate materials risks tarnishing image as a provider of only top-of-the-line products and services, and it wouldn’t generate the luxurious margins the rest of Apple’s lineup enjoys. Apple could help protect its brand, though, by offering a cheap iPhone only in the emerging markets where growth will be explosive over the next several years, and it could even roll out an entirely new brand for a more affordable handset.
But Apple will continue to do just fine for the foreseeable future even if it opts not to expand its lineup with a lower-end phone. The iPhone remains the most popular phone on the planet, Apple’s ecosystem of tablet apps is far superior to Android’s, and developers are likely to swoon later this year when the company trots out iOS 7, which CEO Tim Cook has said “is the biggest change to iOS since the introduction of the iPhone.” A cheaper iPhone would allow Apple to reach far more users worldwide than it can now, and I believe that would be a good move overall. But even if Apple doesn’t introduce a less expensive handset next month, there’s no reason to believe that Android is in position to run the table.