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Apple iPhone: The Gateway Smartphone

Apple Inc. (Nasdaq: AAPL)'s third-quarter earnings were buoyed by strong iPhone sales as the company found success in emerging markets and positioned the high-end device as the gateway smartphone for even the most price-sensitive of consumers.

Apple reported its highest quarterly revenues and earnings in its history in the third quarter, as well as all-time highs for sales of both iPhones and iPads. All together, Apple has sold 222 million iOS devices, including the iPhone, iPad and iPod Touch. (See Apple Posts Strong Q3 on iSales and Apple Reports Q3.)

As it looks to keep the momentum going, Apple has been rumored to be launching a lower-cost, pre-paid iPhone to appeal to even more consumers. And, while COO Tim Cook didn't directly address the speculation on its earnings call today, he did talk up the importance of going lower -- when it has to.

He also noted that tariffs are set by carriers and virtually every one of them desires to have more customers use smartphones and data on their network as a way to expand average revenue per user (ARPU).

"I firmly believe there is no better device than the iPhone for someone to use to move from any phone to a smartphone," Cook said. "The ease of use is unparalleled and the ecosystem is unparalleled."

Even in markets that are pre-paid, however, Cook said Apple does well in convincing consumers to go post-paid instead or pay more for a "materially better" product. Apple isn't avoiding the pre-paid market, he added. It needs to be there to get the volumes it wants, but Cook said it still has more work to do.

This is especially true because emerging, predominantly pre-paid markets like China where Apple hasn't historically been strong were key this quarter. China showed six-fold revenue growth over last year, and Cook said the company is just scratching the surface here as it is reportedly in talks with China Mobile Ltd. (NYSE: CHL) to offer the device.

It is Android and it's emerging lower cost smartphones that are pressuring Apple to reduce costs in China and the rest of the world, but the company says it's still not worried about competition from Google (Nasdaq: GOOG)'s partners. Cook said that, as compared to Android, Apple's activation numbers are transparent, historic and reported quarterly -- and they're higher too.

"Our philosophy is we will only make products we're proud of that are the best in the world," Cook said. "If we can do that and the price is lower, we're great with that."

— Sarah Reedy, Senior Reporter, Light Reading Mobile

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