Apple News, Analysis and Podcasts

If you think the worldwide population buys cell phones via two-year subsidized contracts the way U.S. and European consumers do, think again. In fact, the majority of the cell phone's sold across the globe each year are non-subsidized purchases which use prepaid minutes and data plans.

Prepaid programs are also catching on in the U.S., largely led by Sprint, desperate to attract new customers — and it's working. In 2010 the US prepaid market grew to $16 billion. Smaller companies like Cricket Wireless operate as purely prepaid carriers, attracting people with poor credit ratings or for those who can't afford the larger carrier's monthly fees. Apple has yet to truly attack the non-subsidized market, especially those in low-income regions, but the company appears to be on the precipice of entering the prepaid market, leaving Android, WebOS, Blackberry and Windows Phone 7 to tear each other apart for market share table scraps.

China is Apple's clear path to victory. During this week's financial conference call, Apple COO Timothy Cook pointed to the fact that Apple's growth in China ballooned to $3.8 billion, nearly 6x growth over the year-ago quarter. Mr. Cook noted that he believes Apple is just scratching the surface in China. But Apple's mobile reach in China could be limited, as China is the world's largest pre-paid market. Apple's solution for prepaid is only for the high-income earners which could be fully tapped within a few quarters.

Apple isn't going to let the prepaid market be taken over by Android. It has been rumored Tim Cook visited China Mobile in June to close business for the iPhone 5. China Mobile boasts 600 million customers, but to truly tap into that customer base Apple will need to deliver a low-cost iPhone.

Unfortunately, Apple cannot slot the iPhone 4 into a low-cost, unlocked, prepaid solution. Unlike the 3GS, the iPhone 4 was built with the intention of being a subsidized product, where its manufacturing costs actually rose over that of the 3GS. For Apple to hit the rumored $350 retail price point, the iPhone 5 must revert back to the manufacturing techniques of the 3GS. A stamped back plate instead of glass will need to be used, and moving to a less precise magnesium injected chassis vs the iPhone 4's machined technique will need to be reintroduced. Delivering one phone across the world will further drive Apple's unparalleled economies of scale, allowing margins to be maintained while pushing their supplier costs to the floor.

By no means will this make iPhone 5 an inferior product to that of the iPhone 4. iPhone 5 will likely be the thinnest, most powerful smartphone in the world, with the added bonus of being a subsidized or prepaid solution where the market demands.

September is the likely launch point for iPhone 5, iCloud and iOS 5, which will make this the largest iPhone launch combo ever. Will Apple go nuclear and deliver a $350 unlocked iPhone in the U.S.? It's likely. Sprint is coming onboard this fall with the iPhone, and their forward momentum is largely hinged on prepaid solutions. Releasing a world-wide $350 iPhone also eliminates a massive gray market of U.S. consumers buying hordes of unlocked iPhones from China, so why not just make the solution world-wide and avoid such a mess? Releasing an low-cost iPhone in the U.S. and Europe will also give carriers subsidized plans a run for their money — literally. 

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