We also see several signs that a lower priced iPhone makes sense: 1) iPad Mini is expanding Apple’s customer base with 50% of purchases in China/Brazil representing new customers to the ecosystem. 2) Chinese consumers show a desire to purchase the latest version of iPhone (instead of discounted older generations). 3) iPhone 4 demand surprised to the upside in the December quarter. Even at a low 40% gross margin and 1/3 cannibalization rate, we see an “iPhone Mini” as incremental to revenue and gross profit dollars.
This is a fairly consistent theme from analysts meeting with Apple's management.
Since then, Apple has dropped the price of older models of the iPhone. This has helped it sell in developing markets, but it hasn't done enough to hold off the rise of Android and Samsung.
There is a lot of chatter that Apple is finally, really, going to release a less-expensive iPhone that can compete in developing markets that are all pre-paid this year. Who knows. Maybe it will really happen!