There is a possibility that Apple (NASDAQ:AAPL) could unveil a cheaper version of iPhone targeted for emerging markets along with iPhone 5 in tomorrow’s event. We have talked about what we expect from iPhone 5 in terms of features in our earlier note titled iPhone 5 Features & Design Need to Wow Users for Large Impact. However, we believe that if Apple doesn’t come out with a separate version of cheaper iPhone, it should offer modified versions of older iPhone designs like the iPhone 4 and iPhone 3GS so that they can serve as a cheaper phone for other markets. Whatever the case, Apple will need to do this in order to increase its presence in the emerging markets.

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According to a Bloomberg report citing IDC estimates, Apple is having trouble selling iPhones in India, which is the world’s second largest telecom market after China.^[1] India has more than 840 million subscribers and Apple accounted for 2.6% of India’s smartphone shipments in the quarter ended June 30, trailing Research in Motion’s (NASDAQ:RIMM) 15%, Samsung’s 21% and Nokia’s (NYSE:NOK) 46%.^[2]

Although the Bloomberg report mentions about other factors such as lack of 3G network availability and ‘pathetic’ advertising for marketing iPhone in India, we believe that iPhone’s steep pricing remains the main issue for Indian consumers. Comparing the pricing, the cheapest iPhone 4 in India sells at $705, while in the U.S. it starts at $199 for a two year contract with telecom providers AT&T (NYSE:T) and Verizon (NYSE:VZ).

Due to these issues, Apple has not been able to penetrate the emerging markets in a meaningful way, which explains its rather low global mobile phone market share of less than 5%.

The iPhone is the most valuable business for Apple and accounts for more than 50% of our $510 price estimate for Apple stock. We are bullish about iPhone’s prospects, and our price estimate for Apple stock is about 30% above market price.

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