Lower-Priced iPhone Stooping to Conquer:: JPMorgan

We see a high likelihood of Apple launching a lower-priced iPhone ($350-400
unlocked price) in 2H13, to capture market share among first-time smartphone
buyers. We believe Apple could re-shape the Smartphone Price Pyramid, like it
did in Tablets and iPods. This favors Apple and volume players in the supply
chain (EMS such as Hon Hai, Pegatron, Murata, LG Display, Broadcom,
Peregrine) while working against high-margin components (Largan, Catcher).
Mid-end Smartphones could move towards a Samsung-Apple duopoly, mirroring
the high-end market. Some whitebox/local brand consumers may upgrade to
Apple, but feature phone conversion should support growth in this segment.

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 Mainstream move vital; iPad mini gives a winning template: With the highend
Smartphone market saturating and growth coming at the low-end, we
believe Apple would need to move mainstream to drive further growth in device
sales and installed base. Recent success of iPad mini and iPhone 4 give strong
evidence of price elasticity for Apple products. Two comments from Apple also
lend credence to a mainstream move, in our view: 1) willingness to sacrifice
margins in the short term and 2) repeated emphasis on iOS installed base and
software/service revenue streams – which benefit from hitting new price points.
We expect a product launch in Aug-Sep 2013 and expect 50M units in
production in the first two quarters after launch.
 What would a cheaper iPhone be like? We are expecting a 4" screen device
with plastic casings, running one-generation older silicon, with two variants
running on FDD and TDD LTE networks. Our Bill-Of-Materials analysis
indicates that the device could be priced at $350 unlocked, if Apple settles at
35% GM (corporate average, but well below iPhone 4S and 5).
 Duopoly beckoning in mainstream, mirroring high-end segment: Samsung
dominates mid-end Smartphone ($200-500 price range, 200M units in 2012)
with a 35% share. Apple’s foray could convert this segment to a duopoly. Some
white box/local brand consumers may upgrade to Apple, but feature phone
conversion should support low-end growth. At the high-end, however, Apple is
likely to cede share to Samsung /HTC, at least until iPhone 6 launch in 1H14.
 Favor volume plays; Cutting supply-chain layers hurt high-margin plays:
The move to mainstream should benefit volume players like EMS vendors (Hon
Hai), commodity component vendors (Murata, Taiyo Yuden), while Apple's
efforts to cut layers in the supply chain and diversify component plays should
affect high-margin vendors (Catcher, Largan). Apple is the obvious beneficiary
among US IT Hardware stocks, while a mainstream move favors Broadcom and
Peregrine Semiconductor among US SMID cap semiconductors. Dialog,
Imagination and ARM should be key beneficiaries in European Technology.