According to Whitmore, Apple has shipped 87 million units of the iPhone over the last two years which is only a 6% penetration of the market. The analyst sees Apple aiming to increase that percentage and feels that a $349 low-end variant of Apple's touchscreen phone would allow the company to keep a high level of profitability. He figures that an unlocked Apple iPhone 4 at $649 gives Apple a 70% profit margin. A low-end iPhone, he figures, is similar to the $229 iPod Touch which has a 38% profit margin. By adding an RF module to the iPod so it can make and receive phone calls, and pricing the device at around $350, Apple could score a respectable 53% profit margin.
With pre-paid users dominating in some countries, a pre-paid Apple iPhone could be a good way for Apple to increase it's share of the cellular market. In China, a market that Apple would like to increase its presence, a whopping 85% of cellular customers use a pre-paid account.