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Apple Inc. (AAPL)’s Low-Cost iPhone Market Opportunity

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When it comes to the high-end smartphone market, Apple Inc. (NASDAQ:AAPL) is the king. Developed economies where wireless carriers subsidize smartphone purchases in exchange for service contracts vote overwhelmingly in favor of the iPhone. Just this month, investors have seen reports that Apple has become the No. 1 smartphone vendor in important countries like the U.S. and Japan, but there remain plenty of untapped opportunities within the global smartphone market.

Apple Inc. (NASDAQ:AAPL)Specifically, unsubsidized and emerging markets are practically blank slates where Apple Inc. (NASDAQ:AAPL) can tap low- and mid-range market segments for future growth. How big of a market opportunity are we talking about?

Very big
According to recent estimates from Piper Jaffray analyst Gene Munster, we’re talking about a total low-end addressable market opportunity of $135 billion this year. That’s a huge segment of the smartphone market that Apple Inc. (NASDAQ:AAPL) has mostly neglected thus far. Sure, the company progressively reduces the price of older-generation models each year as new ones are released, but even the iPhone 4 that was launched in 2010 is still priced at a premium relative to current low-end devices.

In the U.S., the iPhone 4 still carries an unsubsidized retail price point of $450 for an 8 GB model. Munster went through pricing data from six international markets (Germany, the U.K., France, China, Brazil, and India) and found that the iPhone 4 is still over twice the average price of a low-end smartphone. In fact, that model is even pricier than even the average mid-range smartphone.

Within important regions like China and India, which are the two most populous nations in the world, low-end smartphone average selling prices, or ASPs, are between $138 and $140, making the iPhone premium much higher in that market segment.

Munster estimates that the low-end segment will comprise 60% of the smartphone market this year, with 540 million units selling at an ASP of $250. This is why the analyst believes that Apple Inc. (NASDAQ:AAPL) will launch a $199 iPhone later this year, which will promptly see sales skyrocket to 170 million units by 2015.

A second opinion
Just yesterday, Morgan Stanley analyst Katy Huberty similarly weighed in on affordable iPhone prospects. Specifically in China, Huberty believes that a 2,000 yuan (about $330) iPhone could pose a major competitive threat to flagship devices from local rivals like Lenovo, Huawei, ZTE, and Coolpad, many which are seeing success on the low end. Huawei and ZTE in particular have ridden that sector to rank within the top 5 smartphone vendors in the world. In the fourth quarter, Huawei and ZTE ranked No. 3 and No. 5, respectively.

Even if a third flagship iPhone sales are cannibalized by a lower-end device, the net result will still be overwhelmingly positive as Apple Inc. (NASDAQ:AAPL) could potentially triple its addressable market in China.

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