Apple Could Crush Competitors With a $99 iPhone

by: Sam Diaz October 27, 2008 | about stocks: AAPL    

Sam Diaz

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Apple (AAPL) could slash the price of an iPhone to $99, continue to supply a nice margin of more than 40 percent and potentially dominate the smartphone market. At least that’s the opinion of a research analyst who issued a report Monday, according to a post on Electronista. The analyst said that a $100 price cut to the 8GB iPhone 3G could “double or triple” sales and quickly overtake other smartphones that are popping up these days, leaving only established successful smartphones - like the Blackberry - as competitors.

In addition, blog post noted that Apple’s growth in non-GAAP revenue - which it said it now would be reporting separately in quarterly earnings calls - could also give the company some serious wiggle room to adjust the iPhone’s price.

The company said earlier this month:

Management uses Adjusted Sales to evaluate the Company’s growth rate, revenue mix and performance relative to competitors. Given the significant increase in iPhone unit sales during the quarter ended September 27, 2008, Adjusted Sales provides a meaningful measurement of the Company’s growth by reflecting amounts generally due to Apple at the time of sale related to products sold within the period. Further, eliminating the effects of deferred revenue (current sales deferred to future periods and prior sales being recognized currently) provides more transparency into the Company’s underlying sales trends.

In accordance with the subscription accounting treatment required by GAAP, the Company recognizes revenue and cost of goods sold for iPhone and Apple TV over their economic lives. Adjusting GAAP sales and product costs to eliminate the impact of subscription accounting, the corresponding non-GAAP measures for the quarter are $11.68 billion of “Adjusted Sales” and $2.44 billion of “Adjusted Net Income.”

Earlier this month, Apple, which has already surpassed its goal of selling 10 million devices this year, said the iPhone now accounts for 39 percent of the business. The company also said the iPhone outsold the Blackberrry during the last quarter.

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This article has 22 comments:

  •  
    Oct 27 05:32 PM
    Why in the world should Apple race to the bottom on price? This is a ridiculous proposition. This is an aspirational brand, not a price brand. The other phone makers have screwed themselves by moving to lower price points thus reducing their perceived value to consumers. How much is a cell phone? "Free with a two year contract" is a perfect example. Let the carriers start discounting their services when you buy a great phone instead of the other way around. Cell phone makers have lost much control over their brands and are struggling because of it.
    Reply | Link to Comment
  •  
    Oct 27 06:00 PM
    Right Freerange

    Better for Apple to make more phone models, instead this dramatic cut of price.

    1 - Why the old iphone edge diseapear? The old iphone has still a value on the used market.
    2 -I'm still waiting for a model for a mix wifiphone and ipodtouch.
    3 - N a high cost iphonemodel with 2 camera high rez n more memory and high rez screen, TV and FM tuner
    Reply | Link to Comment
  •  
    Oct 27 07:17 PM
    not necessary. apple will crush the competition @199
    Reply | Link to Comment
  •  
    Oct 27 07:48 PM
    This moron doesn't even know that Apple sells the iPhone for OVER $550!

    Yes, the carriers pay Apple that price, then THEY mark it down to $200 and hope to recover the difference via the subscription fees over the life of the contract, and customer retention, and customer aquistion from rivals.

    So, IF THE CARRIERS WANTED TO, they could "make the iPhone $99" tomorrow morning.

    Why do these morons write financial articles when they don't have a CLUE about the underlying assumptions they seem to think are so brilliant?

    Sam, get a real job where you MIGHT have some expertise, I hear McDonalds is looking for burger flippers right now.....
    Reply | Link to Comment
  •  
    Oct 27 08:12 PM
    Well said TanToday!
    McDonalds is the place for Sam.
    Reply | Link to Comment
  •  
    Oct 27 08:48 PM
    Well that is very well possible with help of ATT!! Rather ATT can sell Iphone FREE with 2 yrs of contract eventually like it does for other phones! By reducing margins on both Apple and ATT side this is possible.

    Let there be more competition and free iphone (with contract) is possible! :-)

    --
    www.slickdeals4u.com
    Reply | Link to Comment
  •  
    Oct 27 10:09 PM
    Apple is looking good this year. This guys has it all dealing with apple. Ive made a lot of money from this site:

    crashmarketstocks.com
    Reply | Link to Comment
  •  
    Oct 27 11:27 PM
    I agree, Another ANyALst ...who knows nothing! These twits were cheerleaders of this mess!
    How well has Dell done mate?
    Reply | Link to Comment
  •  
    Oct 28 01:34 AM
    I think you guys are being a little tough on this guy. His suggestion that Apple or its carrier sell the iPhone for $99 is not preposterous. Look at how many iPhones Apple sol when it lowered its price to $199. Almost 7 million in three months. I think we will in fact see an iPhone for $99 within one year, but I think $199 is the right price for the next 6 months.
    Reply | Link to Comment
  •  
    Oct 28 02:23 AM
    I get the idea of increasing total revenues by decreasing price and increasing volume but like one of the other posters said, the iPhone is an aspirational product. The $99 price point is dominated by phones like the Moto Q and BlackJack. AAPL's traditional marketing plan has always been higher quality at premium and the consumers have gobbled it up.

    Didn't they just sell 6.7M iPhones last quarter? Why cut the price now when the market doesn't seem to have been fully saturated with $199 iPhones? Wait for sales to slow, then consider cutting cost to $175 or maybe $149. No real need to even think about going lower than that yet.
    Reply | Link to Comment
  •  
    Oct 28 08:28 AM
    While I am certain that cheaper iPhones are in the future (just review the history of iPod pricing), it is not in Apple's game book to pump out lowball products. There wasn't an $800 Macbook, and the Mac mini, the cheapest Mac available, is cheap only when you consider the package you are getting for the money. In terms of absolute dollars, the mini is a lot more than the $300 and $400 junque PCs you see at places like Wal-Mart, that are matched in price only by their ability to do work.

    When you figure out how Apple can make 30% margins on a $99 iPhone, then you will see it happen -- but chances are, Apple will figure out how to do that before you do.

    I know that they will NOT get there by stripping out functionality.
    Reply | Link to Comment
  •  
    Oct 28 08:40 AM
    they are already dominating the smartphone market ...
    Reply | Link to Comment
  •  
    Oct 28 09:09 AM
    If apple can make as many as they can sell, lowering the price might be an option. Being that there are about 20 countries that are not yet selling iphones and are chomping at the bit to do so, manufacturing then fast enough is apples real problem and it's a nice one to have!
    Reply | Link to Comment
  •  
    Oct 28 11:26 AM
    Agreed, $200 is cheap enough, and we have the touch for when you don't really need another contract (but it brilliantly feeds the iPhone app market and also generates profit from sales of apps.)
    Reply | Link to Comment
  •  
    Oct 28 12:22 PM
    Apple will follow the same strategy it did with the iPod, and eventually have a phone at each price point. I predict in one year they'll have accomplished this.
    Reply | Link to Comment
  •  
    Oct 28 01:02 PM
    Why would Apple ever cut there phone this low? It's not like people have stopped buying the iPhone yet, so there is no reason too. I guess this could be a strategical holiday move, but 100 just seems to low. Apple is doing just fine right now, sentiment is strong, revenue is steady (www.predictwallstreet....) -they really don't need to mess with prices at all.
    Reply | Link to Comment
  •  
    Oct 28 02:50 PM
    One significant question here is the whole basis of the argument presented:

    Will substantially more people purchase iPhones if the price drops to $99?

    Obviously many will. That goes without saying. But will this be a truly significant number? I am not so sure. Remember, people are buying into a plan that will eventually cost them a minimum of $1500, and it is difficult to go out on a Saturday night and spend less than $50 (unless someone else is buying). So I do not think that many serious buyers are put off by the $199.

    IMHO
    Reply | Link to Comment
  •  
    Oct 28 07:50 PM
    I change my mind it s a good idea
    Reply | Link to Comment
  •  
    Oct 29 02:22 PM
    I believe this is the ticking time bomb in iPhone sales - the total cost of ownership. In these tough times, spending $1000 or more per year for a phone is going to be viewed as a place for budget-cutting, at least in the US where lower-cost phone options are available.

    If you REALLY want iPhone sales to explode, get multiple carriers in a market to offer it and have them drop the cost of their service.

    When IP-based wireless networks prevail (WiMAX is the tip of the iceberg), all proprietary cell networks will lose their value and service pricing will drop. Meanwhile, the carriers will milk customers for all they can - look at SMS pricing for a great example...

    This will take at least ten years, but it is inevitable. Apple wins in this scenario, and the carriers lose.
    Reply | Link to Comment
  •  
    Oct 29 02:48 PM
    xwallster has it pegged.

    "total cost of ownership" is what is keeping the next tier of consumers (i.e. me) away from an iphone purchase.

    "If you REALLY want iPhone sales to explode, get multiple carriers in a market to offer it and have them drop the cost of their service. "
    Probably won't happen, but YES.
    Reply | Link to Comment
  •  
    Oct 29 03:57 PM
    If Apple dropped the iPhone's price down to $99 it could actually dilute the iPhone's valuable brand equity. Motorola started going down the tubes around the time the RAZR hit $99. In addition, AT&T's network wouldn't be able to handle that quick of an increase in the iPhone installed base because iPhone owners use huge amounts of data.
    Reply | Link to Comment
  •  
    Oct 30 06:04 PM
    Sorry, but disagree. Two points.

    (i) Growth in domestic sales of iPhone units (presume your opinion focuses upon US market) will not be materially driven by price, but rather proven quality of AT&T's network. I don't think that AT&T's growth in subscribers due to price, but rather exclusivity of offering of iPhone as an revolutionary & appealing mobile platform.

    (ii) It is not AAPL's strategy to compete on price, but rather quality.

    Reply | Link to Comment
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