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Will Apple Inc. (AAPL)’s iPhone Trade-In Program Work?

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For months, speculation has been growing that Apple Inc. (NASDAQ:AAPL) will introduce a lower-cost iPhone for emerging markets. Apple’s growth has tailed off recently, as the U.S. market is starting to become saturated and relatively few people in emerging markets can afford even an iPhone 4 without a carrier subsidy.

Apple Inc. (NASDAQ:AAPL)

However, as I wrote back in April, a cheaper iPhone will still be very expensive compared with the legions of Android phones available for $199 or even $99 without a subsidy. If Apple Inc. (NASDAQ:AAPL) introduces a lower-cost iPhone, $329-$349 seems like a reasonable price range to expect, while analysts at Morgan Stanley think that the unsubsidized price could be as high as $399.

Apple Inc. (NASDAQ:AAPL) may be about to unveil a program that could boost sales in the U.S. and other developed markets while also increasing adoption of the iPhone in developing countries. According to Bloomberg, iPhone owners will be able to trade in iPhone 4 and iPhone 4S devices at their local Apple Inc. (NASDAQ:AAPL) Store for a credit toward a new phone purchase. The trade-in could potentially cover the full subsidized cost of an iPhone 5, which is $199 at most carriers.

Apple Inc. (NASDAQ:AAPL)

The iPhone 5. Source: Apple.

Apple would then refurbish (if necessary) and resell the old iPhones in emerging markets. Doing so could potentially help Apple supply sub-$300 iPhones to developing countries on a large scale, which could increase iPhone adoption there and create a loyal user base over time. At the same time, by making it easy to trade in an old iPhone, Apple Inc. (NASDAQ:AAPL) would speed up the upgrade cycle in the U.S. If executed well, this program could provide a significant boost to Apple’s growth.

A promising program
The U.S. telecom industry already encourages frequent upgrades for smartphone users, because of the nature of the subsidy system. T MOBILE US INC (NYSE:TMUS) hopes to change that situation with its new plans that unbundle the cost of your phone from the cost of your data plan, but it’s still a relatively small carrier compared with behemoths Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T).

Still, as smartphones have rapidly become “good enough,” some consumers have chosen to keep their old phones running longer rather than paying $199 for the new top-of-the-line model. Thus, while the new iPhone 5 offered LTE capability and a larger screen than previous models, sales have been underwhelming. In fact, roughly half of Verizon’s iPhone sales since the iPhone 5 release have been older (i.e., cheaper) models. While any iPhone sale is good for Apple Inc. (NASDAQ:AAPL), the company earns a lower profit per device on these older models.

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