How Apple could have built a cheaper iPhone 5C

Compromises -- ones Apple decided not to make -- were necessary to drive down component costs for a $400 smartphone

Apple could have built a much less expensive iPhone, a move most analysts expected before Sept. 10, but that would have risked destroying intangible advantages the company has accumulated over decades, an expert in component costs said Wednesday.

iphone 5c saving chart
IHS iSuppli calculated the total savings in the iPhone 5C's bill of materials as $25.25 compared to the flagship iPhone 5S. (Data: IHS iSuppli.)

"You can make a smartphone for under $150 or even under $100," said Andrew Rassweiler, a senior director of IHS iSuppli's cost benchmarking team, in an interview Wednesday. "Apple could have done that if it de-speced [the iPhone 5C] enough. But it would have tarnished the brand."

Two weeks ago, Apple unveiled the iPhone 5C, an old smartphone -- essentially 2012's iPhone 5 -- in a new plastic coat. More importantly to the Wall Street and industry analysts who had pondered the long-rumored handset, Apple priced the entry-level 16GB iPhone 5C at $549 sans a mobile carrier subsidy, just $100 less than the company's flagship iPhone 5S.

Before the Sept. 10 unveiling, experts of all stripes bet on an unsubsidized price of between $300 and $450 for the iPhone 5C. That price range, their thinking went, would allow Apple to compete with global smartphone brands powered by Android, like Samsung, and the plethora of in-country, Android-using handset makers in massive markets such as China, like the hard-charging Xiaomi.

They argued that without a truly low-priced model, Apple would continue to shed share -- especially in China, India and other parts of Asia -- and perhaps lose its prominent place in developers' minds as a result. In turn, that could negate one of its biggest advantages, a thriving app ecosystem.

Instead, as only a few analysts predicted, including Ben Thompson of Stratechery, Apple reiterated the strategy that has made it billions: The iPhone is a premium smartphone even when it costs less.

The build quality and components within the iPhone 5C support that, said Rassweiler. IHS regularly disassembles smartphones and tablets to see which component suppliers are in with a vendor, which have been dumped. The research firm also uses its teardowns to calculate a "bill of materials," or BOM, an estimate of the device's manufacturing cost.

According to IHS' calculations, the iPhone 5C's BOM was $173.45 for the 16GB model.

But Apple could have built an iPhone that would sell unsubsidized for $400 and retained its customary high hardware margin of around 68%, Rassweiler contended. Such an iPhone would have had to cut enough corners to bring the BOM in at approximately $130.

In fact, IHS created a "straw man" BOM as an exercise, hoping to find out what such an iPhone would have -- and have to give up -- to meet the $130 limit.

"We were able to make it to $134," said Rassweiler of IHS' speculative BOM for a $400 iPhone. "It would have had the same A6 [system-on-a-chip] as the iPhone 5C, the same display. But they would have had to downgrade the system memory from 1GB to 512MB, reduce the NAND flash to 8GB, [shrink] the battery to 1250 mAh [milliampere-hour], and it would have been 3G only."

By comparison, the iPhone 5C that Apple released sported a minimum of 16GB of NAND flash memory, included a battery rated at 1510 mAh, and supported both 3G and LTE -- also called 4G -- cellular networks.

Apple could not have stopped there. It also would have had to install a lower-quality rear-facing camera -- a 5-megapixel camera -- and supported only 2.4GHz Wi-Fi. The actual iPhone 5C boasted an 8-megapixel camera and supported both 2.4GHz and 5GHz Wi-Fi.

"Those were all a far cry from the specs they used in the 5C," noted Rassweiler.

IHS' imaginary lower-priced iPhone would also have been more "plasticky," as Rassweiler put it, and do without the expensive steel frame that firmed up the real device and doubled as its antenna. "We had made the naive assumption that the plastic iPhone would be more plasticky," said Rassweiler. "But under the plastic case is a not-inexpensive metal frame."

Numerous reviewers -- including analysts who had hands-on time Sept. 10 -- have remarked how solid the iPhone 5C felt, a trait credited to the interior steel framework, which would have had to go to drive the BOM close to $130.

The bottom line, said Rassweiler, is that a $400 iPhone would have felt, looked, and operated a lot cheaper than Apple's usual smartphones. And Apple knew it.

"You definitely don't want to go low end in China," Rassweiler said, citing China- and Asia-based colleagues who were adamant about the danger to the brand and reputation of Apple if it had gone low rent. "Even so, there was a media backlash about how high-priced the iPhone 5C was for China."

Still, Apple could have gone lower, if not to $400, then to a mark midway between that and $549, without damaging its brand. "They could have gone lower, split the difference," said Rassweiler.

"We've seen plenty of phones much lower-priced than the iPhone 5C, but I don't think Apple wants to go there yet," he added. "But it could have been possible."

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, or subscribe to Gregg's RSS feed . His email address is gkeizer@ix.netcom.com.

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