March 05, 2013

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Since the iPhone 3G, Apple has recycled old iPhone models to be the low end model. As Apple produces more of each model, it’s profit margin increases to the point where the price can be reduced. This has worked very well, with the iPhone 4 supply constrained in the entirety of Q4 2012 despite being two-years old, some people want an iPhone while paying as little as possible.

But while it may be profitable, no-one gets excited about buying a two year old phone, you don’t get the media attention that a new phone would create and it’s much harder to market a new price point rather than a new product.

Apple has taken this approach with iPads as well, the iPad 2 being demoted to a low end model when the iPad 3 was released. The iPad 2 remained a strong seller even though it lacked the spectacular Retina display, but with the release of the iPad 4 Apple introduced the iPad mini, a new, cheaper iPad which is now rumoured to be the best selling model.

While it’s clear that the mini has several technical advantages over the existing models: weight, size, appearance have all been improved, it got significant mindshare well before it was announced. The endless rumours, mockups, fake photographs, supply chain leaks, all culminating in an Apple product announcement covered by the media worldwide. Even if Apple had a comparable existing product to the mini, discounting that model by $100 wouldn’t have generated anywhere near as much attention as releasing a new product.

This is why I think the next budget iPhone will be a brand new model. Even if the hardware is based on an existing iPhone, Apple has learned with the iPad mini, that it’s worthwhile to take a short term hit in profit margin to gain more market and mind share with a new model. Apple used this strategy with the iPod as well, releasing an iPod mini which itself cannibalised their own iPod sales and then became the dominant model. I can only speculate why Apple changed their strategy with the iPhone, perhaps they went too far in chasing higher profit margins. Whatever the reason, Apple are showing signs that it’s learned from that mistake, and they are developing a new iPhone model that has the opportunity to take the iPhone’s success to the next level.

If you’ve read this far, you should probably follow me on Twitter: @weiran.

Weiran Zhang

Written by Weiran Zhang who lives and works in Nottingham. You should follow him on Twitter.