Is a Low-cost iPhone a Bad Idea?

Though rumors and speculation point to Apple (NASDAQ:AAPL) launching a low-cost iPhone sometime in the near future, it may never happen. But investors shouldn’t worry; that might just be the best outcome for the company.

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Apple has long been known for having high premiums on its devices, a characteristic that has lead to high profit margins, which, in turn, has surely enticed a large number of investors. However, those premiums only work if people were willing to pay them. As competition to Apple’s iPhone and the dominance of its operating system strengthened from Google’s (NASDAQ:GOOG) Android and the plethora of Android-powered devices last year, Apple ran into trouble.

Not all Android devices are priced low — some have comparable prices to Apple’s iPhones — but a good number of them have prices well below that of an iPhone, and they often feature similar tech specs. This reality makes a lot of Android devices appealing to people cautiously testing the water of smartphones without diving in head first. The low-cost devices powered by Android may have pulled a number of potential customers away from Apple.

Many have suggested that Apple will be working on an iPhone that can compete with Android by offering a lower-priced alternative that will be more accessible to people who aren’t ready for the monetary commitment the latest and greatest iPhone requires. But, it may never come to fruition…

Dell (NASDAQ:DELL) ran into trouble several years ago; its stock began falling much like Apple’s did late last year, which prompted the company to drop the prices on its devices. But the stock only fell further. If Apple has learned from Dell’s mistake, it seems unlikely that the company will release a low-cost iPhone.

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In February, CEO Tim Cook even said that the company was not working on a budget iPhone. Such a device would surely fail to command the premiums that many of Apple’s current devices do, and it could have an even worse effect. A cheap iPhone could attract Apple-loyal consumers that would have otherwise bought the higher-priced iPhones, which would negatively impact the company’s margins on device sales. In the end, it may be better for Apple to accept its fringe position in the market, with high premiums and loyal customers, and continue to make products and generate revenue the way its always done.

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