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Summary:

The big news this week (ahead of Apple’s iPad 2 announcement on Wednesday) is that Apple COO Tim Cook admitted the company was working on developing “lower-priced” iPhone options. Here’s how Apple could go about providing a low-cost option without sacrificing quality.

smaller-iphone

The big news this week (ahead of Apple’s iPad 2 announcement on Wednesday) is that Apple COO Tim Cook admitted the company was working on developing “lower-priced offerings” for the iPhone, since the company doesn’t want its products to be “just for the rich.” Cook didn’t go into detail, but at this point, we can at least come up with an educated guess about what a cheaper iPhone might look like.

Where the Cost Comes From

Apple is known for having some of the larger profit margins on a per-device basis of any electronics manufacturer. While the company might be willing to accept a slightly lower margin on a cheaper iPhone with much broader mass market appeal in exchange for higher sales volume (it has to now compete with China Unicom’s own cheaper Wophone platform, after all), it won’t be willing to go as far as its competitors. How then will Apple keep quality up, costs down, and prices low at the register?

The bulk of the manufacturing cost of the iPhone 4 (and any iPhone) comes from two things: the device’s memory (flash storage and RAM) and the device’s display/touch screen. iSuppli’s estimates of the Verizon iPhone 4′s bill-of-materials puts the memory cost at a total of $40.40, and the screen at $37.80. These are the areas where cutting costs would have the biggest payoffs in terms of maintaining a healthy margin for Apple.

Memory

With regard to memory, Apple can save a number of ways. First, it can continue to expand its NAND flash module component hedging program, buying in bulk to keep prices low. If it could add a device to its lineup that would be available to consumers at a no-cost subsidized price point (or an affordable pre-paid price), it could plan for far more additional device sales and be still more effective with its hedging efforts.

Apple can also save costs simply by not advancing performance and hardware specs at the aggressive pace that it does with the iPhone currently. Device RAM can be modest, especially if Apple’s software engineers can figure out better ways to coax smooth performance out of fewer available system resources, something which they’ve proven they can do with technologies like Apple’s selective iOS multi-tasking and Mac OS X Snow Leopard, which in many ways did more with less than its predecessor.

As for onboard storage, Apple is already making great strides with all-streaming devices thanks to the latest generation Apple TV. Kevin also speculated that a cloud-based iPhone makes sense, partly because of cost. I don’t think we’ll see Apple go cloud-only with a cheap iPhone, however, if only because it would end up alienating the very customers it appeals to: people who don’t want too pay much for their device also don’t want to pay tons each month for data plans.

Instead, I think we’ll see Apple offer a device with limited onboard storage (between 4 and 8 GB). It’ll have space for a few apps and photos, and a modest iTunes library. Apple could alleviate space concerns by reworking iTunes and iOS to make it easier to get apps, media and photos on and off of iOS devices, perhaps by making an easily accessible cloud “locker” for this content available to all iPhone owners through a revamped MobileMe. The company’s already taken a few steps in that direction, by allowing home screen management in iTunes, and by introducing “Install” buttons to previously purchased items in the iPad App Store. Users may still end up feeling like they want more space (as I do with my 16 GB iPad), but if Apple does this right, that’ll act as an upgrade incentive, not as an annoyance.

Screen

The iPhone 4′s fancy Retina Display is costly, and could get even more so if it goes to 4-inches in size, as Kevin believes it could. But Apple has even more room to play here than it does in the memory area. Screens on its older iPhone 3GS and 3G devices by no means look bad, so just something as simple as sacrificing true Retina Display resolution could result in significant cost savings.

If Apple wants to stick with the high-res screen, it could shave the size and make up costs that way. The new iPod nano’s screen costs only $11.40 to make, so it’s clear that sizing down definitely saves money. And if Apple really is hedging Samsung display components as has recently been reported, display part prices could fall farther still over the next few years.

Other Components

There are a slew of areas where Apple could make up small amounts of parts costs. Chief among these is probably in the array of sensors that can be found in the current iPhone. Apple could easily drop the compass and gyroscope from the device without even prompting so much as an inquisitive eyebrow raise from the majority of consumers. It could possibly even drop the rear-facing camera altogether, playing up the fact that the cheaper device remains camera-equipped and FaceTime compatible.

Other Devices Point the Way

Remember, too, that Apple isn’t starting from scratch in designing a cheaper device. The iPod touch, despite sharing many components (especially the expensive ones) with the iPhone 4, sells for a lot less and offers most of the same functionality. And the iPhone 3GS is available at a subsidized price of $49 as it nears its end-of-life. It’s true that it’s difficult to compare the costs of the iPod touch and iPhone because after manufacturing, they chart very different paths, and the price drops on previous generation hardware often have to do with accepting a lower margin on products for which there is existing supply to be liquidated. But still, it’s worth considering that Apple isn’t looking to jump directly from high-priced, boutique offerings directly into the bargain basement.

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  1. The cheaper iPhone has already been announced, and here it is http://bit.ly/hQ6dQj

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  2. If Apple wants to profit from the sales of iPhones to almost everyone, it needs a cheaper-to-make iPhone model. But if it really wants its products to not be “just for the rich,” it should also unlock iPhones when their contract expires. Then those who’re less-than-rich can buy used iPhones just like they buy used Macs. I believe that’s called trickle down.

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  3. I doubt Apple would drop the gyroscope–it’s the motion sensor and thus used heavily in games. They could reduce the number of axis back down to what was in the original iPhone, but I’d guess this would be saving pennies, not dimes. The compass is nice to have but not necessary for basic GPS–on the other hand, removing the compass would impact some saugmented-reality applications and also probably would not save much.

    Saving on the screen by using old iPhone resolutions would make for a very simple bifurcation–Retina displays for their high model and standard display for the low model. Another way to save on the display would be to use a less expensive LCD technology than IPS.

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  4. Apple really has so many ways they can produce a cheaper Iphone. What they need to do is decide wht features make the phone and what can go in this cheaper model. If they can figure the correct balance they are sure to have another great product for the masses

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