Apple's secret weapon isn't the iPhone 5 - it's the iPhone 4

Phil Goldstein

Apple's (NASDAQ:AAPL) iPhone 5 launch has dominated the mobile world since it was unveiled Wednesday, and justifiably a lot of attention is being paid to its larger screen, faster processor, inclusion of LTE and lack of NFC. However, Apple's biggest coup in this announcement was its decision to make the iPhone 4 free when paired with a two-year contract.

Apple has made older versions of the iPhone free on contract in the past, and did so most recently with the iPhone 3GS for AT&T Mobility (NYSE:T) in the United States. The difference now is that CDMA versions of the iPhone 4 at Verizon Wireless (NYSE:VZ) and Sprint Nextel (NYSE:S) will now also be free on contract, in addition to the iPhone 4 at AT&T. Further, smaller carriers that recently launched the iPhone 4S and iPhone 4 earlier this year are now also likely to drop the price of the iPhone 4. (However, a free iPhone doesn't mean that carriers' data plans are any cheaper.)

iPhone 5

Click here for complete coverage of the iPhone 5.

I think a free iPhone 4 will help the carriers sell more iPhones, but ultimately it will benefit Apple, especially as Apple competes with other handset makers at the low-to-mid range of the smartphone market. "How do you create an inexpensive phone that can compete with an iPhone 4? You probably can't," said Current Analysis analyst Avi Greengart. And since Apple did not really change the design of the phone with the iPhone 5 (it just made it taller) "the free phone feels like the premium phone of just a day ago."

A cheaper iPhone 4 will make it that much more difficult for the likes of Microsoft (NASDAQ:MSFT) and Nokia (NYSE:NOK) to generate momentum for Windows Phone 8 (they will need all the carrier help they can get). A flood of cheap iPhones to go along with a rush of sales for the iPhone 5 could give Apple a pair of monster quarters to close out the year.

The addition of free iPhones on other carriers also robs AT&T of one of the advantages it has had, especially for the past year. When the iPhone 4S launched, AT&T could plausibly say it had both the fastest iPhone, because of its 14.4 Mbps HSDPA network, and the cheapest iPhone, with the iPhone 3GS free with a contract. Now AT&T is no longer the only carrier offering a free iPhone and its network is arguably no longer the fastest.   

Apple has never detailed how many of its iPhone sales are iPhone 3GS vs. iPhone 4 or 4S. However, it's clear that the lower price points have driven sales for carriers and Apple. In discussing Apple's fiscal second quarter of 2012, when it sold 35 million iPhones, Apple CEO Tim Cook made it clear that the lower price points contributed significantly to Apple's sales haul. "On the iPhone, we continue to be very happy with the moves that we made in pricing just a few months ago on the iPhone 3GS and the iPhone 4," he said in April, according to a Seeking Alpha transcript. "And both of them contributed to our ability to achieve 35 million in sales, which is our second highest quarter of all time."

Even though the focus this week was on the iPhone 5, I'm sure Apple will be laughing all the way to the bank over all of the new iPhone 4 sales it will rake in.

P.S. For complete coverage of the iPhone 5 launch and the market's reaction, make sure to check out our special report page: Apple's iPhone 5: Complete coverage. --Phil