The phone will reportedly be targeted at emerging markets where carrier subsidies are negligible or don't exist yet. The reports come from Bloomberg and WSJ.
Munster has been predicting a cheaper iPhone for a long time now, and gives the device a 60-70% chance of launching in 2013 based on the recent reports.
Here's what Munster had to say in a note to Apple investors:
According to the Bloomberg report, Apple could price the phone at $99 to $149. We believe it is more likely that Apple prices the phone at $149 or $199, more likely closer to $199, off contract given Apple's history of commanding a premium to the market and believe the core competition at that price level would be $99-199 Android devices. We note that the cheapest iPhone, the iPhone 4, currently costs $450 off contract and more in many countries were additional taxes are levied. We note that an off contract iPhone 4 is ~$490 in China and $750 in Brazil, thus the sub $199 price would be a significant discount.
While we expect the lower priced iPhone to carry reduced features like a lower quality screen, casing, and potentially processor, we believe the phone will carry a lower margin than the standard iPhone. We note that reports suggest that the standard iPhone has a 55-60% gross margin. We expect the lower priced iPhone could carry a ~30% gross margin. Given the lower margin, we think the lower priced phone could be slightly dilutive to our 41.5% margin in 2014.