Apple May Actually Boost Margins With This Device

A low-cost iPhone may have seemed like a dangerous move for Apple (NASDAQ:AAPL) to consider, but that could be far from the truth. A new, cheaper device could be a new cash cow for Apple.

Many had seen the prospect of a cheap iPhone as a good way for Apple to widen its consumer base in developing countries like China, where Android has been dominating because of its ability to hit many different price points. The move could also help draw in consumers who are new to the smartphone market.

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One of the big concerns about such a device is that it would be crushing to one of Apple’s greatest assets: its high profit margin. The device would not only cannibalize sales of the higher-end, higher-profit-margin iPhone model, but potentially reduce the company’s profit margin.

However, that may not exactly be the case. Morgan Stanley analyst Katy Huberty, through some mathematical wizardry, was able to determine that a low-cost iPhone could actually drive up the company’s gross margin. If that is case, it may not be such a bad move for Apple to launch a cheaper iPhone after all.

The math behind it assumes that the low-cost iPhone ends up selling a lot of devices, which isn’t too far-fetched, given the popularity of iPhones. Because of a number of product launches last year that drove the margins down slightly, a major increase in the sale of iPhones with higher margins than other devices would help bring overall margins back up. That kind of sale increase would likely be impossible with only high-end iPhone models.

There may be a case study available in the sales of legacy iPhone models like the iPhone 4. As the iPhone 4 is outdated, it has to be sold at a lower price, and that has made it particularly desirable for people who see the iPhone 5 as out of their price range.

With some regional discounts on the iPhone 4, it was found that sales in the June quarter should actually have an increased gross margin because of the iPhone 4. If the old iPhone 4 can drive off the gross margin, then it’s quite likely that a new, low-cost iPhone could very well do the same.

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Huberty suggested that if the device sells at a price above $349, then Apple will be able to increase its gross profits, and if it sells for over $393, then the company will be able to increase its gross margins as well. So, rather than being a sour point for investors, a low-cost iPhone could be a something to anticipate eagerly.

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