iPod Touch 3g = iPhone Nano?

An intriguing piece by website  The Next Web suggests that the next gen iPod Touch to be released this fall should have a 3g radio antenna and a SIM card slot just like the iPad lineup.  A cellular data iPod Touch is an interesting idea by itself, but TNW goes a step further and predicts that the cellular data or 3g/Wifi iPod Touch will be the foundation for the cheap iPhone Nano/pre paid iPhone.

TNW premise is that that a 3G iPod Touch just like the 3g iPad could be purchased without a contract and then customers could add data as needed. This data package would eventually be able to provide voice options through any of the current VOIP services with work over 3G networks.  The premise is pretty convincing for US based users especially parents purchasing devices for teenagers. Teenagers don’t use voice minutes, and a fixed data plan on a lower cost device without a contract would provide the boundaries needed by a parent. iMessage’s free usage capability would be a huge boost for this type of scenario. In addition, traveling overseas it would be easy to purchase a data SIM card just like you do for the iPad, with the advantage of the iPod Touch being pocket portable. With over the air updates and over the air syncing of purchases through iCloud, adding 3G data to the iPod Touch makes a lot of sense.

The biggest potential downside to this plan is cost. Apple is currently charging a $100+ premium on the 3G iPad. Adding $100 dollars to the iPod Touch’s price point does not really seem practical, the 32 GB iPod Touch would end up retailing for over $400. Apple could drop the cost differential to a more reasonable $40, but then would be open to price questions on the iPad’s markup. Some iPod Touch customers will not want the 3G option so Apple would need to continue to offer the wifi only version highlighting the price difference.

The second biggest issue is that the pre paid cheaper iPhone is needed for markets with poor cellular data networks. Relying upon a cheaper device using VOIP applications for voice is just not going to work. An LTE iPod Touch in 2012 in the US might be a total game changer, but the markets for cheap iPhone need a different device.

This whole discussion gets us back to the cheaper iPhone product. The pre paid/unlocked iPhone that customers can purchase for under $300 and a iPhone that users can get for free with a contract. Microsoft’s  Window Phone VP Andy Lees is already predicting the price of Windows Phone units will drop 50%, and this lower price strategy is Microsoft’s key to regaining smartphone market share. Android premium phones that previously cost $199 with a contract are being priced at $49 or less. The eventual migration from feature phones to cheaper smartphones is being tracked by every phone vendor. In the US cellphone market as of March 2011, the feature phone installed base is over 150 million phones.  There is certainly enough compelling evidence that the time for the cheaper iPhone has arrived and waiting 12 months could be costly to Apple. As Horace Diedu has suggested, even these cheaper iPhone users could create additional revenue for Apple through their apps and content purchases perhaps justifying the hit in overall margin.  Plus, Apple/iPhone users are less likely to switch brands after making that first purchase.

Apple could release a new cheaper iPhone based on the iPhone 4. Same screen resolution, limited on board memory 4 – 8 GB, GPS, weak camera options, older A4 processor, plastic case, cheaper updated chips sets. Probably release separate GSM and CDMA versions since Apple will need a China CDMA version regardless. Make the 8 GB version $350 dollars or free with a contract signup, and make the 4 GB version the pre paid go phone option at $299. This phone would have margins close to 50% and certainly would be able to generate tremendous revenue through sales numbers. The margin number is closer to that of the iPad which is a price leader for tablets. Apple could also sell the $16 GB version for $99 with a contract or for $399 (price of the original 4GB iPhone).

But you cannot make this change at the low end without an equal response at the higher end price point. To avoid cannibalization of their premium iPhone product, the iPhone 5 would need to be a brand new device loaded with new features. Thinner, lighter, bigger screen, better cameras inward/outward, better video recording capability, faster processors, faster graphics, NFC technology,  4g LTE, 4G HSPA+, GSM/CDMA compliant world phone capability. This device would easily demand the traditional $199 contract price, and the previous $600 unlocked price and $400 carrier subsidy. I really think the iPhone “delay” was due to component suppliers needing additional time to provide Apple with a new bigger LCD in massive quantities for the redesigned iPhone 5.

Instead of 3g data the next generation iPod Touch gets the same big screen and processor upgrades as the iPhone 5. Apple may even continue to sell the older iPod Touch at reduced price points to further the reach of iOS. The new iPod Touch will then wait to be upgraded the following year with an LTE/3g capable cellular data option.

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