The concept of Apple Inc. (NASDAQ:AAPL) downsizing its iPhone device into a miniature version has been heating up in recent months, especially since CEO Tim Cook visited China last fall and repeatedly touted the value of the China market to the company's future in the weeks since then. The reason that an iPhone Mini is being mentioned is because it is intended to be a "China" smartphone with a lower price point that will make Apple more affordable and more reachable in emerging markets like China, India and Brazil.
An analyst at Morgan Stanley stated this week that she thinks an iPhone Mini would make a major impact in China should such a device go to market. Katy Huberty of Morgan Stanley estimated that an iPhone Mini would produce about $2.5 billion in revenue for the company and could potentially triple Apple Inc. (NASDAQ:AAPL) reach in the China market for its $330 price point. She is predicting that the device would boost current Apple market share in China from 10 percent to nearly 30 percent, which would make it very competitive in the overall market, which has been dominated by cheaper smartphones.
But with Apple Inc. (NASDAQ:AAPL) and its legendary profit margins, how would a low-cost iPhone affect those margins and thus Apple's overall numbers? “Even in a scenario of low 40-percent gross margin and one-third iPhone cannibalization rate (flattening legacy iPhone shipment growth), which we view as conservative, the iPhone Mini adds incremental revenue and gross profit dollars,” Huberty said.
While a cheaper iPhone would be one key to getting into China, perhaps the bigger obstacle is the lack of a contract with China Mobile to carry the iPhone. China Mobile, though it has lost some subscribers due partly to its lack of iPhones, still is the largest carrier in the country with 700 million subscribers. Even if there is a small percentage of those subscribers which could afford a current iPhone model, reaching a deal with China Mobile would likely add market share to Apple Inc. (NASDAQ:AAPL). Cupertino and China Mobile have been in discussions for more than three years.
What do you think about Huberty's analysis? Can Apple Inc. (NASDAQ:AAPL) make inroads just with a cheaper iPhone device in China, or is a deal with China Mobile important to establish this bigger stake? We'd like your thoughts about this in the comments section below.
DISCLOSURE: I own no positions in any stock mentioned.
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