Apple's "Anywhere" iPhone Has Far From Peaked

by: Carl Howe posted on: February 29, 2008 | about stocks: AAPL    

Apple's invitations to an event on March 6 to discuss the Apple Software Development Kit for the iPhone generated several Apple inquiries around here, and Apple COO Tim Cook's talk yesterday at the Goldman Sachs event added more fuel to the story. I thought I'd take a break from my usual "Anywhere all the time" writing, and just pass on some of the data and answers I've been providing to reporters:

  • Has the iPhone wave peaked? No; in fact, I would argue that the iPhone phenomenon has just gotten started. The Apple iPhone is truly an Anywhere phone, putting communication, media, and Internet content in the palm of nearly anyone's hand anywhere in the world and on (mostly) any GSM network. Despite the iPhone only being available for sale in four countries, it's being used today in more than 100. This adoption is amazing because no official native third-party apps have been released and the device is a version 1.0 device, Apple's first effort in a market most pundits said it could never succeed in. Imagine what sales will look like when there are official distribution channels in more than four countries, when third party developers can create new iPhone applications, and when Apple has version 2.0 and 3.0 devices in the market.
  • Are iPhone unlockers hurting Apple? I think this idea is way overblown. Apple receives full retail price and full retail profits for every phone it sells, locked or unlocked. The device is profitable by itself, regardless of whether it gets carrier revenue sharing or not. Further, the fact that Apple is doing carrier exclusive deals now doesn't mean it is wedded to that model, a point Tim Cook made in his presentation. So everyone who is claiming Apple is "losing" $1 billion due to unlocked phones is simply noting problems with their own models of Apple's business, not Apple's. Apple of course doesn't acknowledge or report any revenues from carriers associated with the iPhones, so any numbers or losses you hear about those are inferred speculation, not facts.
  • Does Apple need to cut prices on its iPhone? Not in the least. Apple has no intent of chasing Motorola to see who can lose more money on phones in a futile attempt to gain market share. Market share isn't the name of Apple's game; consistent and growing profits are. Apple's brand says to nearly everyone in the world that its products are fashionable, easy-to-use, and a bit exclusive. Apple competing only on price would be like BMW cutting prices on its cars so they can be distributed through Wal-Mart; it would be marketing suicide.

    In my opinion, Apple's game plan on its Anywhere phone will likely mirror that of iPods. iPods started with one model and then gradually branched out to three or four of them (depending on whether you consider the iPod touch to be an iPod or a low-end iPhone). Even today, the 16 GByte iPod touch sells for the same price as the original iPod introduced in 2001. People should expect there to be both cheaper and more expensive iPhones over time, but that the target price points for the iPhone with touch screens and Internet capabilities will remain what they are today.
  • Is Apple going to make its iPhone goal of 10 million phones by the end of 2008? Yes. Apple doesn't provide goals if it doesn't think it can both make and exceed them. While the economy and consumer spending are throwing up some roadblocks, I see Apple easily exceeding that goal by about 25% by the end of calendar 2008. And in case anyone was confused, that's the benchmark that Steve Jobs set: 10 million phones by the end of 2008, not 10 million phones in the first year of sales or the first fiscal year.

The bottom line: as the buzz at the Mobile World Congress proved, Apple changed the mobile phone market worldwide with its first and uncertain effort in a new market. Just as it did with computers, Apple isn't playing a market share game; it's building mind share. And while there only officially successful in a few countries today, imagine what will happen when they are Anywhere.

Disclosure: Long AAPL

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Carl Howe

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This article has 26 comments:

  •  
    peter02l
    Feb 29 05:27 AM
    Carl,

    Is it safe to say that those unlocked phones are considered out of warranty? So, what Apple give up in revenue sharing, it gains in not having to provide service and support for the unlocked phones?
  •  
    michiganjake
    Feb 29 06:07 AM
    Bravo! Finally an author with facts that support Apple. You might have added that the fall in stock price was totally unwarranted, and that those who penned distorted information likely were shorting.
  •  
    sschristianc
    a
    Feb 29 06:14 AM
    Exactly! People do not realize how much demand there is for these iphones. Think about it....the bulk of these iphones are going to market where there is no offical distribution. Apple is gaining incremental revenue where there was none before. Critics say "well, no they lost the recurring reveue as once they launch in an unsupported country, these iphones are out of the equation." WRONG! In fact, I will guarantee that the majority of these phones will either be used with the new carrier or if you cannot do this, be sold to buy the offical iphone. Look at me as a case scenario. I have an unlocked iphone in Thailand. The minute apple launches over here , I am selling my existing one and buying the offical one. Why? Well, I want the advanced features (visual VM, etc.), offical warranty (unlock have no warranty) and get away of the pain in the butt of unlocking everytime there is a firmware.
  •  
    JIM
    Feb 29 06:27 AM
    So refreshing to see a clear thinker relating the facts versus that befuddled, unethical, nappy-headed Eric Savitz. He has waterboarded Apple stock for far too long. Go Apple!
  •  
    User 158606
    Feb 29 06:35 AM
    good article, excellent commentary (as always). thank you.

    an interesting sampling here...

    on a flight (140 passengers) this week from paris to copenhagen, there were 3 people sitting close by with iphones. at least 2 of them were danish and denmark doesn't even sell the iphone yet. i saw a number of them in spain as well.

    this is interesting especially when you consider that in denmark sophisticated mobile phones are nearly given away free when you sign/renew with a teleco.

    the iphone sales from what i am seeing are phenomenal.






  •  
    charanischiu
    HK
    Feb 29 06:35 AM
    Asian countries should be the largest area to hold most APPLE products which is just starting to dominate the world market.

    Today, only one single model of the iPhone shocking the entire mobile world. What happen if another new model of iPhone coming this year.

    MacBook Air also represent the completely new design philosophy of the portable computer in future.
  •  
    Jon T
    Feb 29 06:39 AM
    Do you mean to say that what we read by every other pundit about iPhone failure, iPod decline and all other kinds of Apple destruction MIGHT NOT ACTUALLY BE TRUE?

    Carl, are you sure your facts are really facts, because they are sure as hell ignored by the likes of Savitz and Sacconaghi?

    ;)
  •  
    JIM
    Feb 29 06:43 AM
    Jon T, you're unbelievably perverse. The market has just shouted those two idiots down. Have you been in the game? Have you seen the tape?
  •  
    JIM
    Feb 29 06:43 AM
    Sorry, missed your winkie...
  •  
    sschristianc
    a
    Feb 29 07:22 AM
    To add more to this. If apple is so stuck on this $15 a month that T is giving them. Fine, why dont they take the total amount $360 ($15*24) and add that into the price of a current iphone. Take it down by say $100 buck and sell an unlocked iphone at $660 for everyone. The $100 is fair as they would get the money now and guaranteed vs. the monthly revenue. I would buy an iphone in a second.

    As for asia again, here is another scenario...I was in Indonesia two weeks ago and had a meeting with a business partner. The assistant came in, who was a guy not much older than 23 had an iphone. Now i know that he does not get paid more than $400 a month and that the iphone goes unlock over there between $500-$800. Can you imagain that people over here are willing to spend their one month salary for a phone? Another scenario, was in Vietnam two months ago and there were at least 4 people who I met that had an iphone.
  •  
    Arnold
    Reinhold
    Feb 29 07:25 AM
    My Website
    Another point people miss is that even at $600, the price of an iPhone is a small compared to the cost of phone/data service: $2500 or more over three years. So if Apple can make using that service a much better experience, (and the iPhone's extraordinary customer satisfaction ratings say that it has) it can easily command those prices.
  •  
    sschristianc
    a
    Feb 29 07:28 AM
    adding more color into this for asia...just talked to a family friend in vietnam. He mention everyone and their mom has one. Went into a store recently and said that at least 15 people had an iphone. His work over there has at least 4 individuals beside him that have one. When he goes out, he thinks that at least 1/4 of the people have a phone. Unreal!
  •  
    digivision
    Feb 29 08:48 AM
    My Website
    "Market share isn't the name of Apple's game; consistent and growing profits are."

    very well said... some companies will do anything to dominate market share and the most common way to do it is through price cutting
    of course price cutting comes at the expense of quality and customer support..
  •  
    JIM
    Feb 29 08:55 AM
    It's so simple to be a low-cost leader, just go out and buy business by dropping your margins to hades. But it doesn't work for long.

    Who wants to be in a race for the bottom?

    Hello DELL!
  •  
    FreeRange
    Feb 29 09:02 AM
    One of the most important aspects of Apple's exclusive deals with the carriers is that Apple then controls their own pricing. Cell phone makers have dug their own graves by selling to all the carriers and letting the carriers degrade / devaluing their products by giving them away for free with a 2 year contract. Let the carriers discount their services and quit underwriting phones turning them into commodities. The iPhone in fact is not a phone, but an incredibly sophisticated hand held wireless computer that also has phone functions and should be valued as such.
  •  
    samij
    Feb 29 09:24 AM
    i didn't think anyone was thinkin that iphone had peaked. interesting point of view. regarding apple stock price, it's widely considered that ipod has peaked. just to clarify the confusion.

    other confusion is the 10m target. apple has repeatedly confirmed that the target is for year 2008. not by end of 2008. if you want to be taken seriously, please at least follow the statements the company officials make.

    as for the target itself, apple will not reach it without new models and/or price cuts into both the device itself and the subscription plans offered by its operator partners. and for new models, adding 3g won't be sufficient.

    further i don't think anyone has been claiming unlockers hurting apple, the issue is what level of the revenues of the iphone sales are priced into the stock price. 10m subscription iphones / year vs 6m subscription + 4m unlocked iphones / year makes significant difference, especially when for company trades at the pe-level of apple.

    in summary, you're one confused dude :)
  •  
    10 million
    in CY2008
    Feb 29 09:37 AM
    Carl, I'm surprised you don't think Apple can make its oft stated goal of 10 million iPhones in calendar year 2008. You have an odd way of saying this though. First you assert wrongly that the goal is 10 million by the end of CY2008: "And in case anyone was confused, that's the benchmark that Steve Jobs set: 10 million phones by the end of 2008, ...." Then you say you believe they'll exceed that bogus goal: "I see Apple easily exceeding that goal by about 25% by the end of calendar 2008." Given that they said they sold 4 million iPhones by MacWorld SF 2008, that leaves only (10M + 25% = 12.5M; 12.5M - 4M = 8.5M) to be sold by your estimate in the rest of CY2008. Unless you think they sold over 1.5M phones before MWSF in 2008, that means you don't think they'll 10 million iPhones in CY2008.

    Apple said what they said repeatedly. No matter how many times journalists misreport what they said it doesn't change reality. Please get your facts right.

    Now, given this corrected reality, do you really believe Apple will not make its goal? Or do you want to adjust that?

    Sources for the real Apple prediction are all from Apple directly (or indirectly by transcript).
    1. Try listening to Steve's MWSF keynote again. A link to the Quicktime video is here <www.apple.com/quicktim...;. You'll find the relevant statements at 1:16:40-1:17:15 into it.
    2. Look at the transcript of Apple's FQ307 earnings conference call at <seekingalpha.com/artic...;. Search for the text "Finally, we reiterate our goal of selling 10 million iPhones in calendar 2008."
    3. Look at the transcript of Apple's FQ108 earnings conference call at <seekingalpha.com/artic...;. Search for the text "we remain confident in our goal for 10 million for calendar 2008."
    4. You can also try listening to Tim Cook's talk from yesterday again. Yes, he says it again.
  •  
    scottybe
    Feb 29 10:05 AM
    Apple doesn't base its prices on costs or the competition. It prices according to value. Fortunately, the value Apple brings to the market in hardware/software integration and ease-of-use is much greater than its costs and 2-3 generations ahead of what its competition can do.
  •  
    blah-blah
    Feb 29 10:33 AM
    Bravo! An article that makes all the people who bought AAPL stock higher feel better about their purchase!
  •  
    jahrends
    Feb 29 11:43 AM
    Even if Apple were to not sell 10 Million phones they would still meet the goal jobs stated. He said he wanted 1% market share. I think he has exceeded 1% in the markets it is sold!
  •  
    José Sousa
    Novais
    Feb 29 01:35 PM
    Your article is excellent!
    Who cares if J.C. says that apple shares should be on hold, a buy or a sell?!; only suckers follow that lead. Apple is not Jim´s; THANKS GOD!

  •  
    KPO'M
    Feb 29 03:28 PM
    They are looking for 1% market share in total. For Q4-07 they had 0.6% market share. It's a good start. I think they'll make the 10 million in 2008 (what Cook reiterated) through releases in new countries. As for unlocking vs. locked, I'm sure Apple would prefer to sell 10 million iPhones through authorized providers and get its share of the future revenue. Unlocked phones are still sales, but essentially they are sales at lower prices.
  •  
    Peter Lynch
    Feb 29 03:38 PM
    I gotta give you credit, Carl. You are probably the most consistent Apple bull other there. Your love for apple stock has really clouded your judgement and logic.

    >>>Are iPhone unlockers hurting Apple? I think this idea is way overblown. Apple receives full retail price and full retail profits for every phone it sells, locked or unlocked. The device is profitable by itself, regardless of whether it gets carrier revenue sharing or not.<<<

    Of course the unlocked iphones are hurting apple. Apple may still make a tiny profit by selling the hardware, but the revenue sharings with the carriers is where the gravy is. Instead of making $200-300 per iphone over the life of its two-year contract, apple is now making less than $50 per iphone. According to my math, $200-$300 is a lot more than $50. If that's not hurting, I don't know what hurting is.

    Bottom is this - iphone has not been as great a sucess as many apple fans and investors had hoped for....10 million iphones by the end of 2008 or not.

    don't let me stop you.....keep up the good work of leading the apple fan squad.
  •  
    JIM
    Feb 29 03:58 PM
    Lynch, you're dead wrong. Apple will be well, well, beyond 10 million phones by the end of the year.

    Hey, why don't you whine and cry over the many, many dollars that, say, Nokia, isn't getting because they haven't been getting recurrent revenue from carriers? I'll throw you a towel and join in with some crocodile tears if that will help you feel better...

    You're thick as a brick, man.

    Lastly, anyone who could seriously accuse Howe of cloudy thinking, should NOT stop taking their medication.
  •  
    tessant
    Feb 29 04:03 PM
    My Website
    i am not an apple permabull, but we all know this company and stock will be back...

    scott w
    growhtportfolio
  •  
    China Hand
    Feb 29 09:38 PM
    My Website
    I live in Hong Kong and bought an original iPhone that was unlocked. Fantastic product. The first night of use, after all data synched, I left it in the cradle, with my MacBook online, and it automatically updated the iTunes software on MacBook , and relocked the iPHone. So Apple obviously is takign the unlocking phenomona seriously.

    What I object to is that Apples MacBook doesn't synch with any other Microsoft Mobile PDA or smartphone product, so as a MacBook user, I don't have the ease of use of a portable calendar, notes, contact PDA.. I have to use my HTC Touch, synch with my MacBook's Windows Outlook data!

    I can hold off on the phone features, but want a single portable PDA that works with the MacBook!

    Further of interest, neither in Taiwan, Hong Kong or China is there an official Apple Store. Several distributors , and they try to service customers, but essentially they still just sell hardware. None has accessories for the iPhone , despite the fact that their customers are growing by leaps and bounds.

    I know of one HK mobile phone distributor that is selling 200 iPhones a day unlocked, and sales are growing 25% per week.

    Its a great product, and version 2 will I'm sure be even better. Apple - start meeting demand of the customer, instead of pissing them off!
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