TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

The most interesting moment in Apple’s earnings call today was when an analyst asked Steve Jobs what Apple will do if the market shifts to lower price points for smartphones. Andy Parkinson has a transcript:

Analyst: So if the market starts to move toward lower-functionality smartphones and dramatically lower price points, and you feel you can’t make an appropriate product on those price points, you’ll throw in the towel?

Steve: You’re looking at it wrong. You’re looking at it as a hardware person who doesn’t know much about software who doesn’t think about an integrated product and thinks the software will just take care of itself. You assume the software will just somehow come alive on this product you’re dreaming up, but it won’t… Because these app developers are taking advantage of products that came before it, with larger screens and more capabilities it throws you back to the beginning of the chicken and egg problem again. Most developers won’t follow you.

I think that’s Google’s strategy—to push smartphone prices lower, where they don’t require a carrier subsidy to be affordable (less than $150, say), so the phone itself becomes a basic commodity. At that point, the phones would be commodities with high unit sales and low profit margins, and the important factor wouldn’t be the phone hardware, but the software. That’s a good situation for Google because the hardware would be largely irrelevant, and the only area you could make money on phones is in the services they use. And, coincidentally, Google controls that part for Android phones. Search, email, advertising, their web applications, et cetera.

That would also eliminate Apple’s business model, which is large profit margins on their hardware. Apple could, of course, refuse to participate at these lower price points and pursue their Mac strategy, which was to compete at the mid to high-end of the market, enjoying large profit margins but smaller unit sales. This, unfortunately, means the iOS platform would be a small player in the overall market.

In other words, for Apple, Google’s strategy to commoditize the hardware and software is the biggest threat they face. It would require Apple to completely change their business.

Jobs’s answer is that for these more basic smartphones to exist, the software’s capabilities would have to be pared down, too, and that users and developers won’t accept that. This makes sense, because to sell a device at those lower price points, the device will probably need to be a generation or two behind in capabilities from where the leading devices are. iPhone 3G instead of iPhone 4, say.

That’s probably true, but there’s an important implication here, too: Apple is trying to make mobile devices as feature-rich and powerful, both for users and developers, as possible. By doing so, users will expect their devices and applications to have certain capabilities, and won’t accept a device that doesn’t provide them. Lower-functionality smartphones, then, can’t become mass-market devices.