Analyst: A Cheaper iPhone Is A Terrible Idea

Does Apple (NASDAQ:AAPL) need cheaper devices to grow in volume or should the company stick to its status as a seller of high-end products that are coveted before they’re bought? This debate has raged ever since word got out that with falling growth rates and growing competition, the company needed a new play to remain relevant and profitable.

For Pacific Crest analyst Andy Hargreaves, there is no debate. Hargreaves believes the possibility of the existence of a new, low-cost iPhone is a bad one for Apple and will not only result in a loss of status for the company, but also cannibalization of its much higher-margin sales. Such a device violates Apple’s “core operating principles,” according to Hargreaves, because there was not “a single thing that a low-priced iPhone would do better than the current iPhones.”

The analyst was making the comments in a note sent to clients on Monday, where he addresses what he calls “the illusion of a low-cost iPhone.”

According to Hargreaves, while moving “down market” with an iPhone that sells for under $300 would expand Apple’s unit growth and revenue opportunity, it would not increase the company’s long-term profit potential meaningfully. So even though at that price point Apple could possibly increase its unit total addressable market by 74 percent, a cheaper iPhone does not fulfill a functional gap, as did the iPod Nano and the iPad mini.

“Outside of China Mobile (NYSE:CHL), which operates on a unique network technology, we do not believe geographical diversification is a compelling solution to the risk of cannibalization,” he writes.