Analyst Predicts Apple Will Offer Free iPhone 3GS w/Subscription

With the iPhone 5 rumored to launch this September, analysts and users alike have turned to wondering what adjustments Apple will make to its pricing structure. Mike Abramsky, an analyst with RBC Capital Markets, has stated he expects Apple to break with its established pattern where updates are concerned. To date, each successive product launch has heralded the retiring of the company's oldest iPhone model still for sale. If the company keeps to this, it'll stop offering the iPhone 3GS when it launches the iPhone 5. The iPhone 4 (16GB) would then become the entry-level iPhone at a subsidized price of $99.

Abramsky thinks Apple will eschew this option in favor of offering a 'free' iPhone 3GS.
As its entry-level iPhone strategy, Apple is expected to cut iPhone 3GS to $0 (on contract, $399 unsubsidized) in conjunction with iPhone 5 launch. This approach is intended to target mid-market smartphone buyers and counter Android’s mid-market expansion... While a $49 iPhone is already available, psychologically a $0 iPhone provides a compelling offer... Proprietary survey data... suggests 14% are very/somewhat likely to buy the iPhone 3GS for free with 2-year contract, exceeding buying interest for the iPad (13%) and original iPhone (9%).
Customers may love the idea of a $0 iPhone, but that doesn't mean Apple is interested in offering one. The potential flaw in Abramsky's opinion is that he's assuming Apple is out to maximize market share. He's right about demand for Apple products;  at least one analyst firm claimed earlier this year that older i-devices like the original iPad and iPhone 3GS continued to outsell current-generation Android products. This implies that customer demand for Apple hardware--even older hardware--is quite robust.

The 3GS is still capable enough, but by the time the iPhone 5 launches, it'll be well behind the curve.

The reason we question Abramsky's argument is because Apple has a very long history of not competing on price, even when doing so could increase its market share. The first iPod with a screen (iPod Nano) starts at $149 for 8GB, $179 for 16GB. That's more than twice the cost of any number of MP3 players on Amazon, including those made by well-known companies. Creative's 16GB Zen Touch 2 (running Android 2.1, with support for microSD cards, Bluetooth, and WiFi) is $159.99 at Amazon. The 8GB iPod Touch starts at $229.

This trend applies to all of Apple's products. Could Apple gain market share by offering a $599 Macbook or a $799 iMac? Absolutely. The company (starting with Jobs), is patently disinterested in slugging it out with Dell, HP, Toshiba, and Asus to see who can offer the cheapest back-to-school system. Instead, Apple deliberately cultivates a sense of exclusivity and quality. Maintaining that perceived superiority requires that the company must strike a balance between refreshing products quickly and offering unique features its competitors can't match.

We suspect AT&T loves the idea of a 'free' iPhone 3GS much more than Apple does. Certainly the company could go this route, but Apple typically prefers to introduce new products with their own features as opposed to simply continuing to cut the cost of high-end products. A limited time $0 3GS that's eventually succeeded by a $99 16GB iPhone 4 makes more sense.