$399 low-end iPhone predicted to grow Apple's user base without affecting margins

Estimates published on Monday by Katy Huberty of Morgan Stanley peg the cost to Apple of a 16-gigabyte low-end iPhone at $244, including bill of materials, manufacturing, warranty, and other factors. Her assumptions are based partly on checks within Apple's overseas supply chain.

Based on her estimates, a low-end iPhone priced at $349 would be neutral to Apple's total gross margin dollars. And if Apple were to reach $393, a low-cost iPhone would be neutral to its current gross margin percentage.Katy Huberty of Morgan Stanley believes a $399 low-cost iPhone could actually result in a slight increase to Apple's overall margins, and would signal the end of the iPhone 4 and iPhone 4S.

Huberty's analysis is meant to ease concerns among investors who believe that a low-cost iPhone could drastically reduce Apple's gross margins. Instead, she has argued, such a product could in fact increase Apple's margins slightly if it were priced at $399.

She expects that Apple will launch a low-end iPhone later this year, and in the process will likely discontinue the legacy iPhone 4S and iPhone 4 models. Her prediction is based on the assumption that Apple will borrow the same strategy Apple employed in releasing the iPad mini in late 2012 for $329, or $170 less than the latest-generation full-size iPad.

"We now see the most likely starting price for the low-end iPhone at $399, as supply chain components appear similar to the current iPhone lineup and the low-end iPhone would replace the iPhone 4/4S sold in the $450-$549 range before recent discounts," Huberty wrote.

"At this price point, even with a 50 percent low-end volume mix, the low-end iPhone is 5 percent accretive (to) total company revenue, 6 percent accretive to gross profit dollars, and 10 basis points accretive to ross margin versus our current (second half of calendar 2013) estimates."

Based on her models, the $399 16-gigabyte low-cost iPhone would carry a gross margin of 35.7 percent — still well below Apple's premium iPhone lineup, but in line with other products sold by the company. Margins would increase to 42.3 percent for a $499 32-gigabyte model, and 44.9 percent for a $599 64-gigabyte option.

By the end of 2013, she believes Apple's lineup will include a high-end "iPhone 5S," the low-cost iPhone, and an 8-gigabyte iPhone 5 model that would be sold for $549 unlocked and without a service contract. She believes the unlocked "5S" prices would remain as they are for the current iPhone 5 lineup: $649 for 16 gigabytes, $749 for 32 gigabytes, and $849 for 64 gigabytes.

Last month, after a visit with tech suppliers in Asia, Huberty signaled to investors that she believes Apple will build multiple new iPhones in the June-July timeframe. It's expected that Apple will unveil a successor to the iPhone 5, as well as potentially expanding the iPhone lineup with a new low-end model, this fall.