Apple May Speed Up iPhone Launch And Release A Cheaper Version This Year

In a bid to counter the growing threat from Samsung (PINK:SSNLF) and other smartphone makers, Apple (NASDAQ:AAPL) may be looking to release an iPhone upgrade sooner than expected. The iPhone maker seems to have made plans to start production for the next-generation of its flagship device in the second quarter of the year, according to the Wall Street Journal. ^[1] Beginning production in Q2 itself could imply a possible launch during the summer if the report is true. The company is also rumored to be working on a cheaper version of the iPhone, which could be launched in the second half of the year. The Journal speculates that the cheaper iPhone will feature a display similar in size to the iPhone 5 but use a casing made of a different material.

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A response to the Galaxy S4

Going for an early launch of the next-generation iPhone could mean that Apple is going after Samsung’s recently launched Galaxy S4. Last year, the S3 was a runaway success for Samsung, helping it rack up almost 20 million unit sales in the first three months of launch at a pace that was thrice the previous generation S2’s. At about 33.5 million units, the high-end Galaxy S3 sold nearly as much as the iPhone 5 or the 4S did in the last two quarters combined. ^[2]

The incredible success that Samsung had with the flagship Galaxy S in a segment that has long been Apple’s hegemony is a matter of concern for the iPhone maker. Moreover, Samsung sent a clear message across by holding the launch event of the S4 for the first time in the U.S., a traditional Apple stronghold. Apple might therefore be looking to decrease the upgrade cycle of the iPhone to give Samsung less of a window to gain high-end market share with the S4.

However, speeding up the development process of the iPhone will be tough, and Apple needs to make sure that it doesn’t compromise on user experience in order to launch it sooner. To speed up the iPhone’s development, Apple will need to release the iOS 7 for developers sooner, else it risks launching the iPhone without apps customized for the latest OS.

Cheaper iPhone needed for untapped markets

As for the cheaper iPhone, launching one this year will go a long way in tapping the enormous growth potential of the emerging markets where 3G penetration is low and the iPhone way too expensive without carrier subsidies. It will also help it better compete against the likes of Samsung that has exploited the lack of choices in Apple’s smartphone portfolio to employ its market-flooding strategy well and gain a lot of smartphone market share over the past year.

The first quarter of last year saw Samsung take a decisive lead in the smartphone market – a lead that it has maintained ever since. For the full year 2012, Samsung accounted for more than 30% of the smartphone sales worldwide, increasing its lead over Apple whose market share has remained stagnant at almost 19%. We believe that the big market share gains that Samsung has achieved is, for the most part, a result of the number of low-end Android smartphones it has flooded the markets with, both in emerging and developed markets.

One of the biggest opportunities that lies in front of Apple right now is China, which recently surpassed the U.S. as the world’s biggest smartphone market in the world despite having a 3G penetration in the low-20s. However, without a deal with China Mobile, the country’s largest carrier which controls almost two-thirds of the wireless market there, a vast chunk of the Chinese populace is out of Apple’s reach. Since the iPhone 5 sports a chip that can theoretically support China Mobile’s 3G network, we believe that subsidy concerns have held up discussions.

Coming up with 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, could help lower the per phone subsidy costs and potentially help bring carriers such as China Mobile on board. Such a move would also translate well to other emerging economies that may want Apple’s iPhone but, due to the lack of carrier subsidies, find the retail price tag too high. (see Apple Needs A Better Emerging Markets Strategy)

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1. Apple to Begin iPhone Production This Quarter, WSJ, April 2nd, 2013 [↩]
2. Apple iPhone 5 Overtakes Samsung Galaxy S3 to Become World’s Best-Selling Smartphone Model in Q4 2012,  Strategy Analytics [↩]