IPhone 5C: Cheaper for Apple, not for you

August 28, 2013: 10:44 AM ET
iphone 5c
NEW YORK (CNNMoney)

Apple has a China problem and it has a profit problem. The eagerly anticipated "iPhone 5C" will address the latter issue.

Many analysts and investors have called for Apple (AAPL) to enter into the low-end smartphone market to lure in customers in China and other emerging markets. But the rumored iPhone 5C likely won't be any cheaper for consumers than the discounted iPhones Apple offers today; it will, however, be cheaper to manufacture.

According to the latest images leaked to tech blog Sonny Dickson, the iPhone 5C is a plastic-shelled, colorful version of today's iPhone 5. Why plastic? The casing of the iPhone 5C could reduce manufacturing costs by $17 dollars per phone, according to Morgan Stanley analyst Jasmine Lu -- no small amount when Apple is selling tens of millions of iPhones each quarter.

When Apple releases a new iPhone, the company's current strategy is to knock $100 off the price of its year-old iPhone and continue selling it as a "mid-tier" option. The two-year old iPhone remains on store shelves too with a $200 price cut.

Related story: Selling your old iPhone? Do it now

That strategy has become a problem for Apple: Older iPhones are an incredibly popular option among consumers, but the bill of materials on those devices is still exceedingly high. The two-year old iPhone 4S and three-year old iPhone 4 comprised just less than half of iPhone sales in the United States in 2013, according to Consumer Intelligence Research Partners. Gross margins have tumbled over the past year as a result.

The iPhone has never been a particularly cheap device to manufacture, but last year's iPhone 5 was the most expensive, resource-intensive device to produce yet. That's why it makes sense for Apple to take the iPhone 5 completely off store shelves when it unveils the new flagship iPhone 5S (or whatever it will be called). The iPhone 5C can slip in as the No. 2 phone in Apple's product hierarchy.

It's the best way to maximize profit margins without cutting into Apple's core, high-end market -- it would be foolish for Apple to cut corners on its best-selling, premium iPhone.

Apple declined to comment for this story.

But plastic doesn't have to mean "low-end." Plastic can actually add functionality and even fun. Plastic backs can endure more drops and hide more scratches than their glass and metal-clad peers. Colors can represent a form of personal expression for smartphone users who view their phones as extensions of themselves. It's why people loved the early iMacs, and colorful iPods.

The iPhone 5C can have an appeal that goes beyond value. If the iPhone 5C is a way to get consumers excited about a cheaper-to-manufacture device at the same price point, that sounds like a goldmine for Apple.

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