You know, when the rumor mill starts to churn there is almost always some grain of truth underlying the rumor. Over the last 10 days or so we've heard plenty of chatter - started by Chinese media outlet DigiTimes, and picked up in numerous other places - including the good folks over at the Wall Street Journal (which ran two articles on the issue - neither of which actually said anything beyond stating the obvious reasons Apple might want a less expensive iPhone). The problem though is that we are not seeing that grain of truth and we don't believe there is even a single grain of it to be had.

Meanwhile, Piper Jaffray's Apple analyst - and chief Apple noisemaker - Gene Munster jumped in this week and suggested that an inexpensive iPhone might find an audience of half a billion Chinese and much of Brazil eagerly awaiting the opportunity to buy such a beast. He tagged it a 580 million unit, $6.5 billion opportunity. Apple of course is keenly aware of both markets.

In the wake of all this noise Phil Schiller, Apple’s SVP of marketing and one of Apple CEO Tim Cook's key lieutenants, gave an interview to Chinese-language newspaper Shanghai Evening News (try a Google translation of the article, it is pretty funny), where he proceeded to make it clear that Apple is not interested in making "cheap, low-profit" products.

The interview with Schiller, which was confirmed by Apple to The Next Web (which provided the interview news and a translation of the interview), was conducted this week when Schiller visited China along with Cook. Cook reportedly had a meeting with China Mobile - which has the largest base of mobile subscribers on planet Earth and sits in a very strategic position relative to Apple and its longer term China strategy. And BTW, China Mobile itself does not yet have the iPhone in its smartphone arsenal. Apple wants to see its "best" products in that arsenal.

What Paul Schiller Said

Apple knows that China will ultimately become its single greatest market - and in large part the interview was more a case of China catching up with Apple (which as far as we know had never done an interview with a Chinese newspaper) while Cook and Schiller were there. The questions during the interview concerning a low-end iPhone came up because of the recent reports we noted earlier. Here are the key things Schiller noted during the interview:

• Schiller acknowledged that, “At first, non-smartphones (feature phones) were popular in the Chinese market, now cheap smartphones are more popular and non-smartphones are out…”
• "Despite the popularity of cheap smartphones, this will never be the future of Apple's products" Schiller continued.
• Next Schiller pointed out a big fact: "…although Apple's market share of smartphones is just about 20 percent, we own 75 percent of the profit."
• Finally, Schiller went on to say that, “In every product that Apple creates, we consider using only the best technology available…”

The one thing Schiller didn't mention is that the foundation for Apple's success - the thing that gives it that 75 percent of the profit - is the ongoing original thinking and true innovation that Apple has brought to the mobile device game since 2007. It isn't the hardware - it is the "innovation + high end hardware" that has earned Apple its star-studded stripes. We can add in as well the iOS platform and the ability it has given developers to create amazing applications from both a functional and visual perspective (it's a key piece of the innovation).

What Paul Schiller Means

At its core Apple is not a hardware or software vendor - it is an innovation vendor, and it takes this role extraordinarily seriously. This is what gives Apple its special cachet that people are willing to part with their dollars for. Some mistake it for hubris - but it isn't (you need to look at Microsoft for that). Scott Forstall exhibited hubris - and Apple got rid of him. It is a genuine desire engrained throughout Apple to build products that advance the state of the art, and the state of the art isn't advanced by building cheap or low cost or inexpensive iPhones or iPads that will hurt its cachet. It will never happen.

That said, Apple isn't caught up in the clouds of starry-eyed innovation idealism, however. The company also always targets being the "premium" player within whatever class of software/hardware it finds itself playing in, and sometimes that requires a bit of compromise - though we would call it "effective compromise" that works extremely well within the reality of sales and marketing, and not merely market-driven compromise.

Take the iPad mini for example. There isn't anything state of the art about the iPad mini. Yet it is the best designed small tablet out there. Apple did not cut corners on manufacturing quality, there is no "cheap" plastic to be found anywhere, and the fit and finish justify its $329 price tag. It is now the "premium" product in the small tablet market - and this is what sells Apple products and maintains the Apple cachet. When Apple reports its earnings in a few weeks we are going to see some numbers that will have financial analysts once again singing halleluiahs.

This is what Schiller's comments mean.

Nothing Schiller said suggests that Apple won't build a "class of iPhone" that is not its absolute state of the art product. Apple will most certainly bring a version of the iPhone down to the lower end of the smartphone scale. But it will do so only on Apple's terms - and it won't be cheap or inexpensive.

When Apple does deliver it, rest assured that it will be the "premium" device in that class - it will cut no corners, it will have no cheap plastic, it will cost more than the cheap smartphones it will go head to head with - especially in China and Brazil. But it will be priced in absolute terms much lower than the next true state of the art device Apple will deliver - the iPhone 6 or whatever it ends up being called. And it will sell hundreds of millions of them to eager buyers on a global basis.

China Mobile doesn't want cheap iPhones to replace cheap Android devices. There is a place for those cheap, plastic devices. What China Mobile wants are two things - it wants the state of the art ultra-iPhone to sell to the quickly growing higher end of the Chinese market and it wants the premium device on the lower end of the scale that it will sell to China's emerging middle class (we use "middle class" here relative to China's population, not the United States). These near-future buyers lust after the Apple cachet!

So fear not - there will indeed be siblings to the iPhone 5 coming our way in 2013 - but they will all be premium versions of whatever end of the smartphone market Apple will place them in - whether on the lower end of the spectrum, in the 5 to 5.5 inch huge screen end of the spectrum, or as direct iPhone 5 upgrades. In all of these cases, Apple will be filling gaps in its product line - this is what any business needs to do.

But none of these represent Apple's next true level of innovation. Stay tuned for more on this.