If smartphones were only about gadget sales, market share wouldn't be so important: Apple could just relax and enjoy its humongous profits and keep making high-end phones for its richer customers.
But smartphones are a platform market, meaning that third-party companies built products and services that run on top of them. (In smartphones' case, apps.) Platform markets tend to standardize around the platform with the most market share--at the expense of smaller platforms, which are often forced to become niche players.
This is what happened to Apple in the PC market in the 1990s: Despite its extraordinarily innovative Mac, it tried to maintain its "premium" positioning, lost the market-share war to Microsoft and nearly went bankrupt.
This iPhone, he thinks, will have a much lower profit margin than Apple's current iPhone, a margin that is more similar to the profit margin Apple makes on its iPads and Macs.
If Apple were to sell a lot of these phones, the average price point of its iPhone unit sales would drop, and its overall profit margin would fall. If it were to sell enough of the phones, however, it's overall profit might increase. And, importantly for its competitive positioning, its global market share would stop dropping and start growing.
So, Apple fans should hope Gene Munster is right about Apple releasing a $200 iPhone.
* In the US market, and other markets in which wireless carriers subsidize handsets, Apple already offers a phone that is free for consumers. But this is only because of the carrier subsidy (the carrier buys the phone from Apple for full price, which, on average, across all iPhones, is about $600). In emerging markets like China and India, there are few carrier subsidies. So phone buyers have to pay the full price.
Watch Gene Munster's presentation at IGNITION below: