Cheaper iPhone to outsell iPhone 5S, hurt margins: Analyst

A UBS analyst has said that the cheaper iPhone will account for 53% of total smartphone sales for Apple by 2014 end.

Apple is widely anticipated to launch a cheaper version of its iPhone in the current quarter and according to UBS it will be a bigger hit than its pricier counterparts.

UBS analyst Steve Milunovich in a research note has written that the rumoured plastic model will account for 53% of total smartphone sales for Apple by the end of next year. However, he says the handset (naming it iPhone M) will be responsible for just 3% of total iPhone sales in 2013, suggesting that it may hit the market towards the end of this year.

According to Milunovich note, Apple will sell 92 million units of the cheaper iPhone by the end of 2014. However, due to its low price it will hurt the company's profit margins. He wrote, "In our model, the iPhone M is dilutive not only to gross margin but to gross profit dollars. The impact of the M depends on assumptions. We estimate the 4/4S, which the M would replace, currently have a gross margin of 55% because of the low cost of older components. We also assume the gross margin of the M will be near 32%."

"Because the M has such a lower gross margin than the 4/4S, the M reduces earnings in our model. iPhone gross profit declines by 4% or $1.6 billion with the iPhone 5/5S profit up $4.9 billion and the 4/4S/M profit down $6.5 billion. The net iPhone impact is a reduction to F14E EPS of $1.16. In this case, Apple would be looking to add new users to its ecosystem at the expense of short-term profit, which CFO Peter Oppenheimer said the company occasionally does," he continued.

The cheaper Apple smartphone is being called iPhone Mini, iPhone Lite and, most recently,iPhone 5C. The allegedly upcoming handset is said to have a plastic body, 4-inch screen, run on iOS 7 operating system and come in multiple colour options. Other rumoured specifications of the device include an 8MP camera, A6 processor and 16 as well as 32GB storage options.

This model is said to be aimed at emerging markets like India and China. In both markets, Apple does not figure in the top five smartphone manufacturers in terms of unit sales.

Piper Jaffray analyst Gene Munster has predicted that the cheaper iPhone will be launched during the US holiday season and sell approximately 12 million units by year-end
.