Why Apple Needs a Really Expensive iPhone

Some pundits are predicting, and others are advocating, that Apple launch an iPhone that’s much cheaper than the current iPhone in order to keep up with Android phone sales.

This is crazy talk.

Apple doesn’t need a cheaper iPhone. They need a more expensive one — much more expensive. Here’s why.

Android Gets Big Market Share with Small Profits

Android phones are selling in vastly higher numbers than iPhones. So high, in fact, that Google Chairman Eric Schmidt says the market share numbers are comparable to Microsoft vs Apple in desktop operating systems in the past 20 years.

The difference Schmidt didn’t mention is that Microsoft always made money from Windows.

The main reason Android is selling so well is that most Android phones are very cheap.

Sure, a tiny number of handset models like the Samsung Galaxy S3 are both very good and profitable. But the high-end, best-of-breed Android phones aren’t the ones driving massive market share numbers for the Android platform.

Those big Android market share and unit shipment numbers are being generated by China. In the world’s most populous country, with a population of more than 1.3 billion people, roughly 2/3 of the phones sold are Android phones. In fact one-third of all Android phones sold in the entire world are sold in China. And a huge chunk of the phones sold in the third world these days are Chinese-made Android phones. For example, one of the most popular phones sold in Kenya right now is a Chinese Android phone called the Huawei IDEOS that costs $80 unlocked.

These phones for the masses are not profitable Samsung Galaxy S3s, but instead no-name, no-margin Chinese-made pieces of junk, for the most part. They use Android in part because it’s free.

You’ll also note that, although there are hundreds of companies making Android phones, Apple makes far more money in mobile phone profits than all of them combined.

To say that Apple should make a cheap phone in order to keep up with Android market share is madness.

It’s like saying Ferrari should make a low-cost family car to keep up with Toyota. It’s like saying Starbucks should make cheap, low-quality coffee in a can to keep up with Folgers. It’s like saying Nordstrom should open a floor of cheap, discount clothing to keep up with J.C. Penny.

Apple is a premium, aspirational brand. It successfully targets the most profitable sweet spot in the market.

To slug it out in the muck with cheap Chinese phones for small margins would not only tarnish Apple’s image, it simply wouldn’t be worth the tech support, supply chain and manufacturing trouble.

Instead of a cheap, low-margin phone Apple should come out with an expensive, high-margin phone. A satellite phone.

Why Apple Should Sell a Satellite iPhone

A satellite phone lets you make calls from anywhere — while hiking, traveling, sailing, or when your carrier just sucks and becomes unavailable. They’re great to have, but they can be expensive.

If you think satellite phones are ugly, boxy, heavy gadgets from the 90s with horrible, fat, swing-out antennas, then you may be unfamiliar with the TerreStar Genus phone.

The Genus is a Windows Mobile smart phone, so nobody wants to buy it. It looks to me like a BlackBerry phone with extra heft in the back, presumably for the satellite antenna and electronics.

The TerreStar Genus costs $800 unlocked on Amazon.com. It works like a normal GSM phone, but you can switch to satellite mode for both voice and data.

It’s on the AT&T network, and the charge for the satellite feature is an extra $24.99 per month above the regular amount you would pay, plus 65 cents per minute for each satellite call.

The phone enables users to switch into satellite mode, which supports voice, texting and data.

The TerreStar Genus is not a great phone, and the satellite service isn’t great, either, nor is it global (it’s North America only).

The point is that a relatively compact, satellite-capable smart phone is possible, and the rates for usage are more reasonable than you might expect.

Apple isn’t in the business of cheap products that do the same things other phones do. Apple is in the business of re-inventing industries.

Apple needs to re-invent the satellite phone industry. (Yes, I’m suggesting that Apple needs a space program.)

Just to give you a sense of scale and proportion, Apple could probably buy any one of the existing satellite phone providers for less than $3 billion. (Apple has more than $125 billion in cash.)

Better yet, Apple should develop it’s own high-speed, high-capacity global satellite network, which it could do for less than $5 billion, I would imagine.

Note that running its own satellite system would be expensive. But it would make Apple a wireless carrier, and a global one — for decades.

So the company would not only be able to get large profits from each handset, it would be able to earn hundreds or thousands of dollars from each user in carrier fees.

I would guess off the top of my head that Apple could sell a satellite iPhone for, say, $1,500 unlocked, or $600 to $800 with a contract.

The price should be whatever it costs Apple to make the phone, plus a fat margin of $500 or more.

While Android phones scramble to match the iPhone feature for feature, rendering it somewhat ordinary by comparison, a satellite iPhone would be almost impossible for competitors to beat.

Plus, a super high-end iPhone would be an aspirational item that elevates the image of the entire iPhone brand.

And who would buy such a phone and pay such prices for handsets and service?

• Business travelers with expense accounts
• People who live outside cell coverage areas
• People who work or live on boats
• World travelers
• Government workers
• Military people
• NGO workers
• Emergency workers
• Contractors
• Digital nomads
• Journalists and bloggers
• Posh rich people
• People who enjoy outdoor recreation
• Apple fans who want the very best of everything

The reality is that Apple’s iPhone — once the industry’s new hotness — is quickly becoming old and busted as the rest of the industry copies, catches up or exceeds the iPhone in specs and features.

The solution to this problem is not for Apple to come out with a cheap piece of crap.

The solution is for Apple to do what it does best: re-invent an industry, seize control of its ecosystem, think big and come out with the very best product in the world.

Apple needs an expensive satellite iPhone. And the high-margin, big-spending, jet-setting world needs one, too.

Would you buy a satellite iPhone?