Yes, Apple should sell a $99 iPhone

It's just a rumor at this point, but a $99 iPhone could help Apple dominate the market for consumer smartphones before the competition has a chance to catch up.

It's just a rumor at this point, but the usual anonymous tipsters have told the Boy Genius Report that Apple is planning to sell a $99 iPhone at Wal-Mart. There's been some debate about whether this would be a good idea for Apple. One financial analyst ran the numbers and believes that Apple would double or triple sales while still maintaining very healthy margins of more than 40 percent. Other onlookers have noted that Apple does not typically play the low-cost high-volume game; it certainly made fools of any suckers who believed the $800 laptop rumor.

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I'll throw my hat into the ring and say that a $99 iPhone would be a great idea. Why?

1. The smartphone market is new(er). Laptop computers have been around for more than a decade and have practically become a commodity, as evidenced by the recent rise of sub-$500 Netbooks. The typical way to compete in a commodity market is by ruthlessly slashing expenses and competing on price. But the better way--if you can swing it--is to break out of the commodity ghetto and position your product as a luxury exception. That's exactly what Apple has done, largely by way of design. (You can argue the merits of OS X versus Windows all you want, but there's no arguing that OS X has a simpler--not necessarily "easier"--and therefore more elegant appearance.)

But smartphones are still a relatively green market. Yes, we've seen "feature phones" capable of running simple applications like games for some time, but true smartphones--with large displays, sophisticated user interfaces, and the ability to run multiple types of computer-like applications--are still rare outside the business world. If Apple can compete aggressively on price now, it could dominate the consumer smartphone market, just as it dominates the MP3 player market today. Once that happens, all sorts of interesting long-term revenue possibilities open up--App Store revenue could become significant with 50 million iPhones out there, not to mention upgrade cycles, attached devices and services, and the "halo effect" on Apple's other products.

2. The competition is behind. As today's Gartner report on smartphones makes clear, the competition is in disarray. Nokia/Symbian's market share showed an annual decline for the first time ever in the third quarter because of a lack of competitive touch-screen devices. Windows Mobile fell behind the iPhone in North America. And while Research In Motion is also growing, its entrant in the touch-screen race, the new Storm, has been met with a decided "meh" or worse.

None of these competitors is standing still. Nokia's got its Ovi Internet services online and is unveiling touch-screen devices left and right ; Microsoft's busy at work on Windows Mobile 7, which will almost certainly incorporate music functionality from the Zune and design and other features from Danger. And the Storm won't be RIM's last effort at a touch-screen phone.

3. The economy. Times are hard. Apple's got a backlog of 2 million iPhones in the channel, according to that Gartner report. RIM just downgraded expectations for its third quarter. What better way to dominate than by being the low-price leader and creating the product with the most mainstream appeal? It sure seems to be working well for Nintendo .

By striking now, the iPhone could become "everybody's" first smartphone. Five years from now, it could be as synonymous with smartphone as iPod is with MP3 player.

 

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