Prepaid iPhone

Earlier this week, the blogs were afire with a rumor that Apple would be producing two iPhones in 2011 — a full featured “iPhone 5” and a toned-down “iPhone 4S” available at a cut-price and on a prepay contract. While people are divided as to if this will actually happen (my money’s on no), it does raise a very interesting point: Apple needs a prepaid iPhone.

A post up on the analytical blog Asymco illustrates the key reason for this: the vast majority of the world is prepaid. If Apple’s really serious about expanding internationally, they need to look beyond the contract model and into people who pay as they go.

The reason for this disconnect from the way the vast majority of people use their cellphones is simple: America’s phone networks are aberrations when compared to the international scene. I’ve spent most of my life bopping from country to country, and whenever I used to visit America — and eventually when I migrated — I was always astonished by the manner in which cellphone plans were managed. The biggest thing that surprised me was that it cost minutes/money/messages to receive, not just send. Seriously, it costs you text messages to receive one? How is that a thing? But the other major difference is that in the USA, the contract model is king. Here, almost everyone who has a phone buys one subsidized by their carrier, and is locked into a monthly contract. Elsewhere — in the Antipodes at least — this was extremely unusual, as few people liked being tied to having to pay a set amount per month. You pay for what you use, right?

Now, this subsidized contract model and the iPhone go hand-in-hand. The iPhone was built and designed in the American ecosystem, and especially for this usage model — and as such the model has expanded with the iPhone. In places like Australia and New Zealand where previously contracts were rare, the immense popularity of the iPhone has prompted many to switch to the dark side. Even so, there are millions — and I say that without hyperbole — of potential customers turned off on the idea of signing their soul away for years at a time on a monthly plan.

Look at that graph above again. Look at Africa, Asia and Latin America. In many nations in Africa and Southeast Asia, cellphones are the defacto communication networks, as phone lines tend to get torn down and stripped for metal. People use cellphones as their lifeline: for business, for family, for everything. You don’t think they’d be willing to drop some more money on a smartphone that would last well, too? You honestly think the huge Chinese middle class wouldn’t be interested in a prepaid iPhone? There’s even some indication that Apple is planning just such a move in India.

There already exist ways to get your iPhone on prepay plans. Hell, you can even do it with AT&T, if you don’t mind being a bit sneaky and assuming your phone is unlocked. Even so, that still misses the point: this needs to be there out of the box, for more people. There needs to be a cut-price, international, prepaid iPhone that anyone can buy off contract for a reasonable price, and take anywhere in the world.

Prior to purchasing my iPhone, whenever I travelled overseas, when I landed in a new country I’d pop in to a cellphone store, drop $30 or so on a SIM card, and be able to get buy with just that for however long I was there. I’ve managed that once with my iPhone, but every other time the difficulties of unlocking have been too great — tethered boots and new versions of iOS killing any sort of practicality.

On the other hand, buying an unlocked iPhone will now set you back $650 — an excessive amount in the USA, let alone developing nations in Asia, Africa and Latin America. Apple is incredibly serious about expanding into these markets — especially China — so getting over this hurdle is a major problem.

There’s also a large number of people who need to be able to easily swap out SIMs, either because they’re travelling or maintaining multiple numbers.

So, what we have is an incredibly large market that Apple actively wants to tap. One where people rely heavily, if not exclusively on their cellphones, but would much prefer a prepay plan, and don’t want to drop $500+ on buying a cellphone outright.

Can you see where this is going? Apple would have very little trouble making absolutely huge inroads in the international market if they had a phone that was able to meet these demands.

Now, the current crop of rumors hints that Apple might be attempting to hit this market by producing a new entry-level iPhone, priced at a much lower cost. John Gruber thinks you can look at the iPod for how Apple might split the product. iPod Nano, iPod Shuffle, iPod Classic? Do you think we would see a simple, low-cost iPhone Nano/Slim/Light with the next announcement?

The other option is that Apple tweaks their existing strategy of recycling older models at low price. Currently, you can buy a generation old iPhone 3GS for $50 on contract. An iPhone 4 costs $200 on-contract and $650 unlocked, which would equate to the iPhone 3GS still costing $500 if we assume the same level of carrier subsidy.  I’m willing to bet that AT&T doesn’t subsidize a full $450 on the 3Gs — but even if we whack another $100 off of that, you’re still looking at a $400 phone.

The Asymco blog post I linked above mentions that there’s a very important psychological price point at $200, which is arguably why the contract iPhone starts at that price. $199 is mentally immensely affordable, but I’d be willing to bet that $299 would even work for an entirely prepay iPhone. But can Apple produce a fully functional smartphone at that price? The iPhone is bordering on miraculous in terms of quality and compactness. Will Apple be able to create a phone that not only continues the tradition of the iPhone, but drops the price and opens the doors to the rest of the world?

It’s pretty clear that there’s an obscenely large prepaid iPhone market just sitting there waiting to be tapped, as long as Apple can figure out a way to get in on it — but getting the iPhone down to a price point where people will buy it unsubsidized might be too big of a hurdle, even for Cupertino.