Apple Could Sell A $99 iPhone, But...

Burlingame, Calif. -

Speculating about Apple Chief Executive Steve Jobs' next move is a loser's game.

Jobs shocked IBM (nyse: IBM - news - people ) in 2005 when he switched to processors from Intel (nasdaq: INTC - news - people ). Then he shocked Intel earlier this year by buying a chip designer to crank out processors for the iPhone.

The press has been predicting an Apple (nasdaq: AAPL - news - people ) tablet computer for years, but it still hasn't appeared. The problem: The secretive Jobs has the creativity--and with $24.5 billion in the bank, the money--to do almost anything.

So what about the latest rumor: that Apple introduces a $99 iPhone at the annual Macworld conference in San Francisco this January? Forget it, this is Apple. We don't know. But we can list some of the constraints Jobs would have to struggle with to put together a budget iPhone. And we know that if Apple built a phone that sold for $99 or less at retail by January, it probably won't look much like the iPhone on sale today.

You Tell Us: Should Apple sell a $99 iPhone? Would you buy it? Or would it be a sign that the iPhone is going the way of Motorola's RAZR? Share your thoughts in the Reader Comments section below.

So why bother? The iPhone has been an enormous hit for Apple, catapulting the Cupertino, Calif.-based computer maker to the second spot in the fast-growing market for smart phones. The phone's touchscreen, the smarts to download and install a vast array of applications on the fly, and the ability to switch between networks run by carriers and the local coffee shop have been widely admired and imitated. If Apple wants to sell a phone for $99, a lot of those qualities might have to go.

Just add up the bill of materials for the 3G iPhone that went on sale in July. The parts alone cost $166, according to tech tracker iSuppli. The costliest item is the $60 application processor from Samsung that runs the phone's OS X software, according to iSuppli. The next-costliest part is the phone's signature item, a $20 multitouch display. Add manufacturing and the iPhone's cost rises to $172, according to iSuppli. And that doesn't even count the cost of shipping the phones from Apple's contract manufacturers in Guangdong to the far corners of the world.

The tricky part is that Apple has to sell these gizmos without diluting the fat 34% gross profit margins it enjoys on its computers and iPod music players. To do that, Apple sells the iPhone to carriers for between $500 and $600, according to iSuppli. And in the U.S., AT&T (nyse: T - news - people ) passes that cost on to consumers by getting them to agree to pay $30 a month for an unlimited data plan, allowing AT&T to knock the retail price of the phone down to $199.

So if Apple wants to sell a phone for $99 at retail and avoid wrecking its profit margins, it will have to start knocking out features. The quickest way is to get rid of that costly processor and fancy display. That knocks Apple's cost per unit down to about $92. The problem: Without that Samsung processor and multitouch screen, the phone would look a lot like, say, the Motorola RAZR.

You Tell Us: Should Apple sell a $99 iPhone? Would you buy it? Or would it be a sign that the iPhone is going the way of Motorola's RAZR? Share your thoughts in the Reader Comments section below.

So should Apple go that route? Dan Frommer, of Silcon Alley Insider, thinks not. Instead, he thinks Apple will drop the price of the phone it sells now and introduce a new phone with more features at a premium price.

"If their intention is to sell more music on iTunes, than yeah, why not?" says Tina Teng, a senior analyst at iSuppli. But, she notes, "if you are making a phone that couldn't stand out in a crowd, then why would anyone want to buy Apple's phone rather than a Samsung, or a Lucky Goldstar or a Motorola?"

Then again, we are talking about Apple here. "Maybe they have another trick in their pocket," Teng says. Apple has done it before, selling a stripped down iPod Shuffle that gets by on style, rather than features, to users on a budget who pour in content from Apple's iTunes store.

In other words, we know Apple could offer a $99 phone at retail. We know that if they do, it won't look much like the iPhone the world knows and loves. And that's all we know.