Apple to Release iPhone 5 and Cheaper Prepaid iPhone This Fall, Says Report

An analyst from Deutsche Bank today released a report saying to expect two new models of iPhone this fall, one the iPhone 5, the second a lower-cost iPhone built specifically for the prepaid market. One of the biggest barriers to owning an iPhone today is not necessarily the cost of the hardware itself, which can be had for as cheap as $199 with a two-year contract, but the monthly fees from carriers, which can run around $900 a year or more, depending on plans.

Analyst Chris Whitmore says a move into the lower cost prepaid market makes sense as a strategic move for Apple:

With Nokia and RIMM struggling, the time is right for Apple to aggressively penetrate the mid range smart-phone market (i.e. $300-500 category) to dramatically expand its [total addressable market] and market share.

A strategy to sell a cheaper version of a device alongside a “premium” model has historical precedence for Apple. It wasn’t until the release of the iPod Mini, later the iPod Nano, did Apple truly dominate the digital music player market on a global scale.

Earlier this year, Apple COO Tim Cook hinted that a cheaper iPhone was on its way. Cook in February 2011 told analysts that Apple didn’t want only the affluent to have access to an iPhone. According to a report by Toni Sacconaghi of Bernstein Research, Apple was taking a close look at the prepaid market, where most cheap phones are sold:

While Tim stopped short of explicitly stating that Apple would pursue a lower price iPhone, he did state that Apple was working hard to “figure out” the prepaid market and that Apple didn’t want its products to be “just for the rich,” but “for everyone”; he also stated that Apple “understood price is big factor in the prepaid market” and that the company was “not ceding any market.” Cook noted that Apple executives – including himself – had spent “huge energy” in China, noting that it is “a classic prepaid market.” He further noted that the handset distribution model was poorly constructed and that Apple would look to “innovate” and do “clever” things in addressing that market.

Apple’s acknowledgement of China’s prepaid market as a potential revenue source may help explain a recent siting of Tim Cook in China, who was reportedly there to hold discussions with China Mobile executives, the largest mobile carrier in that country. Subsequent reports claimed Cook was there to strike a deal for the iPhone 5 to work on China Mobile’s proprietary next-gen 4G TD-LTE network, but China Mobile is still building out its 3G network based on TD-SCDMA.

Both China Mobile’s 3G and 4G technologies are owned by the Chinese government, which forces China Mobile to use them to prevent the company from paying licensing fees to western companies. It’s been rumored recently that China Mobile will skip completing its slow buildout of a 3G network altogether and move straight to 4G, as in the past few years it has lost market share to its competitors China Unicom and China Telecom, who license the more-mature western technologies and who have had an easier time building out their networks.

The rumors of a low-cost iPhone go back to February 10 of this year when Bloomberg first reported that Apple was working on a “cheaper and smaller” version of the iPhone that would sell for as little $200. In his report today, analyst Chris Whitmore says he thinks the prepaid iPhone would sell for $349. A few days after Bloomberg’s report, the Wall Street Journal also said Apple was working on a cheaper version of the iPhone, code-named N97.

Prepaid markets not only dominate China, but also much of the third-world as well. Website Asymco estimates that Europe alone contains 100 million potential customers that Apple’s iPhone isn’t currently serving because it doesn’t have deals set up with local carriers. Add similar markets in Asia and Africa, and the untapped potential for an unlocked, prepaid iPhone is large.