Apple gearing up for US$99 iPhone?

(Credit: Apple)

Come mid-year, Apple is expected to dip its toe in the entry-level market for its popular iPhone, according to a report by RBC Capital Markets analyst Mike Abramsky.

Apple is expected to debut a US$99 iPhone, as well as an iPhone 3G with updated performance, sometime in June or July, according to Abramsky's research note on Tuesday.

Abramsky, in his report, states:

"Checks reveal further entry-level iPhone details, including launches on existing carriers June/July with a data plan, entry-level pricing and a lower subsidy. Also expected is a 3G iPhone performance upgrade (performance, features, form factor)."

An entry-level iPhone could increase Apple's overall iPhone unit sales by 25 per cent to 69 per cent and bump up its slice of the smartphone market from an estimated 12 per cent to 14 per cent to 19 per cent, the report notes.

But it could come at a price.

Apple could find itself cannibalising its iPhones/iPod business. For example, Apple would need to sell three US$99 iPhones to replace the gross profits of one 3G iPhone, according to Abramsky in his report. And it could also create a situation where Apple would need to lower its iPod pricing to sustain the momentum with its media player since the iPhone also offers such capability.

To compensate for a potential cannibalisation of its gross profits, the computer maker would do well by expanding its distribution beyond its current list of iPhone carriers, the analyst notes.

From Abramsky's point of view, Apple investors should remain wary.

Apple's shares have risen 16 per cent since its reported record first-quarter results. While the shares could possibly go higher ahead of the iPhone update, Abramsky remains concerned that Apple is still largely a premium-priced hardware maker standing in a global recession that's acting like quicksand.

Talk of an entry-level iPhone has surfaced in the past, from rumours of an iPhone Nano to a US$99 iPhone at Wal-Mart.

Apple was down less than 1 per cent at US$97.20 a share in early morning trading, coming off a 4.6 per cent decline on Tuesday when it closed at US$97.83 a share.