Behind the Money

Apple May Soon Sell Cheaper iPhone with Pre-Paid Plan

Apple may introduce the new iPhone5 in September, along with a lower-end iPhone with less technological capability, a pre-paid voice plan option, and a price tag of about $349, according to a Deutsche Bank analyst note.

Apple Store
Flickr: ping ping

“With Nokia and RIM struggling, the time is right for Apple to aggressively penetrate the mid range smart-phone market (i.e. $300 to $500 category),” said analyst Chris Whitmore, in a note. “Apple could further segment the market by offering an unlocked iPhone 4S with a pre-paid voice offering. We’d expect this product to look a lot like the low-end iPod touch with wireless connectivity built in.”

Shares of Apple are off their highs this year as some investors were disappointed the iPhone5 wasn’t introduced in June. However, the stock is up almost 6 percent from its 2011 low, in part because of the speculation brought to light by the Deutsche Bank note. Also, Morgan Stanley reiterated its "overweight" rating on the stock Monday.

Shares of Research In Motion and Nokia are both off more than 40 percent so far this year, because of customers switching to the iPhone and devices running Google’s Android system. If prepaid iPhones catch on in emerging markets, it could be the knockout punch for Nokia. 

Apple now has 205 carriers in 98 countries, according to Deutsche Bank, giving it access to a total of 1.5 billion subscribers, including 1 billion pre-paid customers. While still No. 1, Nokia’s international smartphone market share has plummeted to just 25 percent from as much as 45 percent three years ago. Apple is now second at 17 percent, according to Whitmore.

“It is a good move and has been the subject of speculation,” said Stephen Weiss of Short Hills Capital. “They have multiple products at multiple price points in iPods, laptops and PCs hitting various levels of the consumer, so it is reasonable to expect them to do the same here, particularly if they want to go after the business customer where cost is more of an issue.”

BlackBerry models account for 13 percent of the smartphone market and a lot of that has been propped up by information technology departments unwilling to spend the money to switchover to Apple’s technology. That attitude may be starting to change, however, as the economy enters its third year of recovery. Total U.S. enterprise and public sector IT spending is expected to climb 5.6 percent in 2011, much faster than he economy, International Data Corp. reported in a release Monday.

To be sure, the introduction of the lower-end handset could backfire on Apple, some traders said, as it hits margins and reduces the cachet of Apple’s stylish and innovative products.

“Offering old hardware without the technological capability to run the software at the same quality as the most recent products only opens them up for criticism, which they don't take well,” said Dan Nathan, options trader and creator of

Apple’s gross margins are the envy of the tech hardware space at 41 percent, compared to 29 percent for Nokia, as the Finland-based company allowed its generic phones to become commodity over the last few years.

“We see this often in retailing that the brand with such great ‘cachet’ has to be careful that they do not get an image as cheap,” said Joe Kinahan, chief derivatives strategist at TD Ameritrade’s thinkorswim brokerage. “As long as Apple keeps its high-end technology as impressive as it is, they can retain their cool factor better than anyone. In doing so, they can also use the different phones as a product ladder so that you can ‘graduate’ up to the best phone.”

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