T. Michael Walkley, an analyst at Canaccord Genuity Inc., last month lowered his estimate for iPhone sales for fiscal 2014 to 173 million from 181 million. Natalie Kerris, a spokesman for Apple, declined to comment on iPhone sales.
Falling prices and the popularity of products with lower margins such as the iPad mini are beginning to hit Apple's profitability. While the company makes a gross margin of more than 50 percent on the iPhone 5, sold for more than $600 to carriers, it has sold millions of older models in recent years at lower prices at a gross margin of 35 percent or less, according to Brian Marshall, an analyst at ISI Group. Apple's gross margin fell to 37.5 percent in the period that ended in March, from 47.4 percent a year earlier.
Apple shares have dropped 39 percent from a record in September amid concerns of slowing iPhone growth and declining margins. They declined 1.6 percent to $424.95 on July 19.
While any innovations may slow the drop in prices—for example, Apple, Samsung and others are working on wearable, wristwatch-like device, which could stoke sales—most people are content with the size, shape and features of basic smartphones, ABI's Morgan said.
Morgan predicts Apple will introduce an iPhone 5S this September that could come in different colors and feature a fingerprint reader so owners wouldn't have to remember a security code. That won't be enough to revive iPhone sales growth for long, he said.
More of those profits will be won in emerging markets, where many consumers have yet to buy their first smartphone. IDC's Restivo predicts that 66 percent of the 384 million smartphones sold in China next year will cost less than $200, compared with 14 percent of the 153 million phones projected to be sold in the US.
China-based suppliers of less-expensive phones, such as Huawei, have been gaining market share, mostly by undercutting HTC, BlackBerry and Nokia on price. Even as its phones priced as low as $100 sell briskly, Huawei's two-year-old devices unit is profitable, Shao Yang, the company's vice president of marketing, wrote in an e-mail.
Lenovo has used the same low-price strategy that has made it the world's largest PC maker to become the fastest-growing smartphone maker in China, said J.D. Howard, vice president of operations and business development for Lenovo's smartphone, tablet and TV unit.
"It really works in the smartphone business, because some of our rivals have been charging a ridiculous premium," he said.
If the history of PCs is any guide, price wars can quickly lead to industry-wide carnage. In the years after cheap models such as EMachines's $600 desktop became popular in 1998, average PC margins narrowed to less than 10 percent from more than 15 percent, not enough to cover the research and other costs at bigger companies, Dukker said.
As margins shrank and losses mounted, PC makers merged and divested the commodity business. Onetime leader Compaq Computer Corp. was acquired by Hewlett-Packard Co. in 2002, and International Business Machines Corp. sold its PC business to Lenovo in 2005. Gateway Inc. purchased EMachines in 2004, only to be bought by Acer Inc. in 2007.
The two smartphone powerhouses, Apple and Samsung, are better-positioned than Compaq and IBM were in PCs. While most of its marketing in the US focuses on high-end devices like the Galaxy 4S, Samsung sells hundreds of models at all price points. As one of the largest manufacturers of chips, displays and other smartphone parts, Samsung can reach lower price points more easily than rivals who must buy those components—often from Samsung itself.
Apple's strong brand and ecosystem of music, services and more than 800,000 applications should help it maintain its large customer base, according to David Yoffie, a professor at Harvard Business School.
The company has also shown it can profitably appeal to thriftier shoppers with older iPhone models. About half of the iPhones sold by Verizon Wireless in recent quarters were iPhone 4 or iPhone 4S models, which Verizon and other carriers sell for $99, or give to customers who agree to a two-year contract. More recently, Apple has helped carriers run trade-in programs that give shoppers as much as $200 in credit toward an iPhone 5 if they hand in their existing iPhone.
Without these efforts, Apple would have lost even more market share to Samsung and other makers of smartphones running Google Inc.'s Android software, Yoffie said.
"As growth increasingly comes from emerging markets, Apple is not going to hold share," Yoffie said. "An evolution in strategy is definitely necessary. They can't stay where they are."