Will Apple Give Up Design Control For A Low-End iPhone?

Quick Take

• Apple is rumored to have chosen Qualcomm’s Snapdragon over its own A-series chips for the low-end iPhone.
• While such a move might save on costs, it is a departure from its usual strategy of tightly controlling the smartphone experience that has worked well in developed markets.
• Either way, Apple needs a cheaper iPhone for the emerging markets where low-end Androids are rapidly taking away market share.
• China Mobile, the world’s largest wireless carrier, should be Apple’s key target with the cheaper iPhone.

In a move that might see Apple (NASDAQ:AAPL) give up control over a very important component of smartphone experience, the rumored ‘iPhone mini’ may come packed with a Qualcomm (NASDAQ:QCOM) Snapdragon chipset instead of its own A-series app processor. According to several recent reports in the media, Apple is looking to incorporate one of Qualcomm’s 28nm integrated chipsets in the low-end iPhone to be able to better protect its margins.

While Apple could also choose one of its older A4/A5 app processors to cut down on costs, the tight baseband integration is touted to have tilted the scales in Qualcomm’s favor given that Apple already sources its standalone baseband chip from the semiconductor giant. Also, since most of Qualcomm’s chipsets are manufactured by TSMC, it fits well with Apple’s strategy of diversifying its supply chain away from Samsung (PINK:SSNLF). It would also help differentiate the performance of the low-end iPhone from the higher-priced models already available in the market.

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However, since we think that the low-cost iPhone needs to be launched only in the emerging markets where the high-end iPhones have a very low market share, going with Qualcomm’s widely-deployed solutions will make it tough for Apple to stand out from the rest of the crowd. Also, using Qualcomm’s app processor means that Apple may have to rework the iOS to work as smoothly as it does with its own in-house solution. Given how tightly Apple likes to control the user experience of its products, using a Snapdragon app processor would be a remarkable departure from its traditional mobile strategy that has worked so well for the company in developed markets.

Emerging market strategy required

Whether Apple chooses one of its older A-series chips or Qualcomm’s Snapdragon, this much is certain: Apple needs a strategy for the emerging markets where the iPhone is way too overpriced to make any meaningful dent. (see Apple Needs A Better Emerging Markets Strategy) If this meant having to give up control over a component to reduce costs, Apple may well have decided so.

Android smartphones are already breaking the price barriers at the low-end, infiltrating emerging markets such as China where Apple doesn’t yet have a deal with the largest carrier, China Mobile. Considering that 3G penetration in China is about 20% currently despite which it has already overtaken the U.S. as the biggest smartphone market in the world, Apple will miss out on a huge growth opportunity if it doesn’t find a way to mitigate China Mobile’s subsidy concerns soon. (see Apple’s China Potential Could Be Limited By A Subsidy Compromise With China Mobile)

A cheaper iPhone for the emerging markets that does not compromise much on the build quality and margins, in a move similar to the iPad mini, will go a long way in addressing these issues. It will help lower the per phone subsidy costs and potentially help bring China Mobile on board. Such a move would also undoubtedly translate well to other developing markets that may want Apple’s iPhone but may find the subsidy costs and the retail price tag too high. If a cheaper iPhone results in a deal with China Mobile, it could be the next big catalyst for Apple’s stock. (see Apple Could Have A $750 Fair Value If China Mobile Deal Works Out)

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