Apple’s $300 million gray market dilemma

The iPhone is only selling in just a few markets right now, and yet it has already sold 4 million units. With Canada, Spain, Italy, and the rest of Europe, and some Asian countries coming on board as early as this spring, it shouldn’t be difficult for Apple to reach that 10 million sales goal by the end of 2008.

iPhone should continue to reach their goal even if it means lowering the price but the cost of people buy them and not activating them righ away is the problem. Open up options maybe look to verizon or another company to sell your phones to.

Steve …
I am an Apple shareholder and user.

The iPhone is by far an impressive phone. Free it from AT&T and you will exceed your 10 million sales forecast for 2008.

the phones are not missing…they are sold….people in canada paying a premium for unlocked phones…seen them there missing phones….find another topic ….

Pay off AT&T to sever the deal..it will hurt in the short term.

Stop doing exclusive deals. Make it open, so who ever the user partners with, revenue can come in from what ever mobile provider the user goes with.

And then it’s up to the mobile phone companies to market there own deals.

I have no idea why a company that built it self on being user friendly, is actually not being user friendly.

Steve may have better luck stopping the tide then controling hacked phones.

“ex ped: Not sure where you are getting your numbers or your assumptions,…”

He’s getting them from the Bernstein Research numbers on your blog. 1455 “Unlocked Units” out of 3750 “Total Sold” is about 39 percent.

Sacconaghi guesses that the 1455 is actually 1000. That guess is better than his earlier one of closer to zero, but not a lot better.

ex ped: You misread the chart. The 1,455 refers to “Unlocked Units + Channel.” In other words, both iPhones that were unlocked and iPhones still on the shelves.

you guys are completely missing the point. either you guys are blind or dumb. these apple heads are mad that they cant keep bilking the providers and the users after the phones are sold. they are loosing $.99 per song,$3 per movie and $70 a month per subscriber. and O.B.R. you must not be paying attention. just how many firmware updates has apple released?

I think Apple has to reconsider its business models - basicly where it gets its revenue from…
Charging monthly fees to users of the iPhone is partly good business partly highway robbery; the iPhone is also an iPod and paying monthly charges on top of what they make of your iTunes Store purchases is just too much!

For the iphone to be of any use to anyone it needs to be activated. Other wise it’s just an ipod. Even for email you have to have an internet provider and thus activation. But what Apple can and should do to stem the tide of lost revenue, and to bring many lost phones back into the stream. Is to offer a wide variety of cost effective incentives to “legitimate” users. Contests with prize, sweepstakes type events and offering credits or a rewards programs. Like many retailers do to get and maintain customer loyalty. The alternative would be to continue restricting software upgrades that might limit or restrict device interactive ability. But the legality of such action might be challengable. Personally I prefer the carot approach.

What is the scale in the chart?? Am I supposed to think that Apple only sold 3,750 units?? Please tell the chart maker to add some sort of footnote with the scale of the numbers.

Were Apple to add VOICE DIALING . . . that would help . .or, better yet, DICTATION SOFTWARE (the device does have a microphone and a system, no?) to its iPhone usefulness, it would change the entire equation and make obsolete every other cell phone in the world, no?
Al Feldzamen

“10 million is just a goal” - Yeah, a goal that was publicly communicated to analysts, then plugged into models and used to project a fair value for the stock. It’s also called a “forward looking statement”. No problem - if AAPL doesn’t meet the goal, the stock gets hit. Fair enough?

I think O, B, R may have something there.

That sounds just like the kind of thinking Jobs would have in mind.

Besides, sure Apple wants all the revenue sharing they can get, but it’s like immigration: talking about stopping it is very hard to do. Best to put on a good show but let it happen anyway: it’s good for big business in th e long run.

And the same goes for unlocked Iphones. Jobs can make a good show of saying they won’t be hacked, but the more that are out there, the more publicity and sales just the same.

Much ado about little in my opinion. I suspect that many iPhones aren’t being activated at all because they are used simply as a portable email access device by many customers. That number may be as high as 7.5% of unit sales based on my information surveys.

How the latest update to the iPod Touch will impact this will be interesting to watch.

Anybody been to India lately. Every single executive and well-to-do teenager is carrying an iPhone. I see the same phenomenon in other countries, especially those where the iPhone conveys prestige. The unlocked phones are not just been used in the US but I would guess the vast majority are floating around elsewhere, having been shipped through gray channels. Apple is not losing potential revenue since quite simply they have no carrier deals yet in these places.

It seems to be exceedingly hard for analysts to think outside of the USA. So here are some points of note to help:

- The only way to get an iPhone in the “rest of the world” is unlocked
- Shops over here in Asia offer unlocked iPhones for $700. There is plenty of supply so the grey market machine that ships them over for $300 profit a piece is very well oiled.
- Revenue that you never had cannot be “lost”. In other words, if people here in Asia could not buy unlocked iPhones, they would buy Nokias instead. Apple is not selling locked phones here.

People are not factoring the way christmas gift giving of iphones may play out in activations. I gave my mom an iphone for christmas and she wanted to wait until the new year to activate it. I think about 10% of all iphones sold in Q1 were christmas gifts (which I think is a conservative number) and you will see a spike in new year’s activations with AT&T on January 1. I think there isn’t as many unlocked phones in the US as in Europe. Consider the alternative - T-Mobile not very attractive.

WOW! Looks like what’s been stirred up is the nest of rabid Apple fanboys.

The fanboys are right: Apple wishes its iPhone to be unlocked. The more phones unlocked, the better. They don’t want the carrier’s money. That’s why Apple is doing nothing to deter the unlocking of its phone. What Apple wants is market share at all cost, not profit. –end sarcasm–

You know what apple if you were not to just allow only certain country to have iphone but let your iphone to be able to be used with any provider i think you would not have this problem in the first place.

sacconaghi overstates by $200,000,000 the amount apple looses by unlocking.$136 yearly per phone in fees times 1,000,000,phones is $yet he says earnings per share will drop 37cents,or one third of projected earnings 136,000,000 LESS than 1% of 2008 sales,

RE: “This is a big problem for Apple … ”

Actually this can be VERY helpful to Apple. Many of these unlocked phones are used in countries that do NOT have an iPhone network provider at all. These iPhones are purchased by the elite, the first-adopters, and the entrepreneurs. These people are the trendsetters in their countries and it is common knowledge that they paid a PREMIUM to obtain their iPhone. These unlock iPhones provide a marketing buzz and cool factor before Apple has an official launch in these countries.

When the iPhone does officially arrive in these countries, it will have already have been established as “cool” and trendy and a status item. Apple will be “golden.”

I can vouch for this on a micro-level for asia. Everyone I know here has an iphone. It is unreal.

I personnaly like the apple’s closed system. I buy an Iphone for $400 unlock it and sell sell it to some stupid apple fanboy in europe india or china for about three times as much.PT Barnum said theres a sucker born every minute and lucky for me most of them are apple fanboy….hahahahahahah

First, the 10M mark does not really matter its just a goal. The phone is clearly a success and will be mores so when the 3G ships. I am sure they will make it though - but this doom and gloom is kinda silly.

Second, Apple is missing an opportunity with their distribution model. I would much rather see them offer a completely unlocked phone through the same global channels they use for the iPod. that would be a much better program - even if it meant the phone cost more.

Palm seemed to have a good model - they had subsidized phones with carriers for one price, completely unlocked phones for with a $300 premium on them. That was a much better approach.

the iphone must be a cashcow. they make money:

a) on every handset sale
b) monthly data usage plans (excluding black market iphones of course)
c) and soon to be introduced, a percentage of most third party apps and games you will be able to buy via iTunes.

i think for the iPhone to be a true global hit apple will need to knock one of the above revenue streams on the head. my money would be on option b. let anyone anywhere be able to use the phone on any network and concentrate on developing the phone to be the defunct platform for mobile communications.

The most effective way to control de gray market is to “premium” non-service contract phones. If in the near future production costs can be controlled (which is probable by now, or at least by launch of the next-gen iPhone), then keep charging the $400 for the phones, but sell to the telcos at less than that by maintaining the margin. The premium contributes to the lost revenue share and mitigates the problem.

I could be wrong, but then not as wrong as Sacconaghi. Gray markets in international business “opens up” the markets. When one telco gets an exclusive rights deal, the competing telcos fish for the gray markets to beat it to the punch. Happenned a lot with the Motorola RAZR just about everywhere, in which case the sole winner was Motorola, dramatically increasing market share.

Did Toni have a short position? Someone at his firm? Spread enough garbage from the Bernstein platform in a market like this and you can for sure pressure down the stock. Tell me he couldn’t suss this info out before dropping a “short” position bomb on a falling stock. And you printed it.

I am from Europe, an I have several friends around me that have an iphone. They get well paid (<8000 pm) and they what the newest thing in town. So they get an iphone. So blame them to be it not available in the Netherlands. It’s just that Apple has this strategy that provokes this behaviour

I think it is odd that people see unlocking as disastrous for Apple. It hurts the ability for a provider like AT&T to control their future, but Apple will sell a hell of a lot more phones, and with the SDK being released, there will be even more reasons to buy the phone.
In the long run this is about controlling a major portion of the handset market. Apple’s hardware, Apple’s software, Apples media sales.
As many have pointed out, the AT&T deal is what has hurt Apple. But even here in the states the future is with open hardware. Apple can win that contest. We aren’t even at V2 yet…imagine…
-M
http://cartoonshmartoon.blogspot.com/

I hope with this stupid report sacchonaghi just commited a career suicide. I mean to believe him you must be really bad at math and have no common sense. I can’t believe he’s rated as a top analyst by Institutional Investor magazine. Get real!

Apple is booking $450 for every iPhone sale, with 7/8ths of that deferred over 2 yrs. You can figure that out from the deferred revenue numbers and total iPhone sales using the last 2 quarters figures.

According to Sacconaghi, 50% of that revenue is carrier and 50% is wholesale? Does he really think that Apple books only $225 when it sells a $400 iPhone? Is he nuts?

And, analysts complain if Apple is only selling thru one carrier per country. According to Sacconaghi, 39% of iPhones sold are unlocked. If this were true, then selling thru one carrier is NOT a problem, as almost 40% are unlocked for use. So, Apple loses carrier revenue, but gains market share. Is that so bad?

Sacconaghi asks, why would any carrier want to be exclusive if there’s so much unlocking? Because, it’s cheaper, in the four countries that have official iPhone carriers to get a phone and unlimited data plan with the official carrier than it is to get a phone and unlimited data plan with an unofficial carrier. People will flock to an official carrier, because it’s always cheaper. Eventually, those people who’ve unlocked phones in China will activate when China gets an official carrier so they can get the cheaper plan. Apple then gets all of its carrier revenue, just as originally intended. Sure, there’ll be a few who’ll keep their unofficial carriers, but they’ll pay for it.

ex ped: Not sure where you are getting your numbers or your assumptions, but some of them are pretty far off. For what it’s worth, Sacconaghi in his report to clients today estimated that 27% of the iPhones sold in 2007 were unlocked, not 39% as you have it. –Philip Elmer-DeWitt

How do we stop this non sense?

Hit them where it counts, MONEY!

I’ve already canceled my subscription to Fortune. Stopped supporting any ads on this web site. I suggest you all do the same.

You’ll see just how fast all this crap stops.

Having stirred up a hornet’s nest with his first take Toni Sacconaghi has taken a second look. “Hey I stirred up a hornets nest, how can I keep that going since that’s my job.” “Truth doesn’t matter on my end it’s all about internet traffic to my story.”

His conclusion: most of the devices are“missing in action” in warehouses. No change that, now he thinks most were siphoned off into the gray market for unlocked iPhones. Wait, maybe aliens stole them to use in distant galaxies.

His best guess is that in 2007 as many as 1 million iPhones may have been hacked by resellers and activated by carriers that are not paying Apple a kickback on every monthly charge.

Sacconaghi continues to believe — almost alone among major analysts — that Apple will have a hard time reaching its goal of selling 10 million iPhones in 2008.

Hi, my name isToni Sacconaghi. I don’t actually know anything about Apple. I was supposed to write a story that stirs up controversy, attacks Apple and generates hits to the site, so I went on the internet do dig up some dirt and this was the best I could come up with. I filled in the blanks with whatever I could make up in my head. You guys don’t mind do you? I have a deadline to meet and need the hits to the site so my boss doesn’t fire me.

:)

The guy is an idiot. He’s got no clue about this and must be profiting from a short sale.

This is by the same idiot “special-ass” that said the iPhone would not be announced last year at Macworld. This guy talks out of his “special-ass” and should be ignored but of course you guys are giving him more coverage than he deserves, which is no coverage. He is doing his clients a huge disservice and organizations (Fortune) that pickup his dribble without checking their facts should be ignored as well.

If there really is such a great demand for the Iphone, how could that be a bad thing? If people want it that badly, that they are willing to go to the trouble of flying all the way to the US and buying them three at a time, and flying all the way to India or where ever, that tells you something about it’s long term prospects. People want it, and Apple is making a large ( or larger if locked) profit on every one that it sells. What other phone maker has these kinds of “problems”? The stock is going to be $300 by December!

Hey nice graph. do you think they did that on a PC? I’m so getting a Dell dude! That graph is awesome.

Elmer-DeWitt writes, “This is a big problem for Apple, says Sacconaghi.”

Full article here.

MacDailyNews Take: You’d think the one with the biggest problem would be a so-called “analyst” and “Apple specialist” who first told his clients and everyone else that the iPhones were “missing in action” or gathering dust in the channel and then figured out the real answer days late.

But, that would be a world in which people were held accountable for their actions. Instead, we seem to be in a world where just about anyone can get hired as an “analyst” and get their malformed, knee-jerk “analysis” widely quoted and published just about anywhere. If their idiocy and ineptitude affects the stock price one way or the other, so be it. Then, when they get around to “taking a second look” and find something closer to the reality of the situation, we’re still supposed to give a shit what they think? Sorry, not here.

Yes, iPhones that are sold and unlocked fail to generate additional carrier-derived revenue for Apple. This explains the iPhone’s across-the-board unsubsidized price. Apple still derives a profit from each unit sold. In Apple’s conference call last Tuesday, CFO Peter Oppenheimer addressed this issue and stated that Apple sees iPhone unlocking as a “good problem to have” and is a sign of iPhone’s popularity.

“Apple specialist” Sacconaghi will no doubt come up with new theories as to how Apple will not achieve their goal of selling 10 million iPhones in 2008. And when Apple blows that goal away and Sacconaghi proven is wrong yet again, will he finally be held accountable by his firm and/or clients?

Are you a Bernstein Research client currently holding AAPL? If so, why? Hopefully, you’re operating independently and ignoring “analysis” from “Apple specialist” Toni Sacconaghi.

I actually think an investigation should be opened about the relationship between Sacconaghi / Bernstein and big Short sellers. Something is fishy here. Without any research , he claims that AAPL iphones are gathering dust in Wearhouses and stock plummets? Then he somehow retracts it and still justifies it as a negative to AAPL and drives the stock down from 132 to 129 when Markettalk hit the wires today at 2:35 PM. What is wrong here is there is no accountability. Sad.

The fact is half a year ago Apple had NO cell phones for sale or cellphone revenue. Now in the U.S it’s chasing up to Black Berry in the smart phone market ahead of many others.

Analysts blew up the expectations for iphone last year, now they are down on it — just in less than half a year. As Apple management has said, their plan is multi-year and in the past they have shown incredible flexibility in adjusting strategies: macOsX, intel chips, etc. They matched Amazon’s drm free music pricing very quickly, and they will adjust to the new iphone conditions. The future of the true smartphone is integration with computers and other hardware and (with ace in the hole OsX) nobody does it better than Apple. Wait for more Apple products to be wired in.

And don’t forget the halo effect - the iphone is advertising for other Apple products.

I’ve just bought more Apple stock.

I have bought an unlocked a phone in Norway. The second Apple has an agreement with a local PTT i will sign up locally and according to Apples intentions. Until then me and approximately 1 million other iPhone user around the world will stay unlocked

There is no such thing as “This is a big problem for Apple” and “the company forgoes, by his calculation, $300 to $500 million in future revenues and profits”. You are talking about a revenue stream Apple would like to create by strong-arming wireless carriers into a revenue sharing deal which they successfully did with AT&T. But Apple is wrong in thinking they can’t get this much control in the rest of the world’s free market place where every other phone company is functioning with a different business model.

The iPhone would already have been past the 10 million mark worldwide if it was not locked with AT&T.

Biggest problem: Apple’s restrictive policies will slow the iPhone’s market penetration, giving Nokia and Motorola much needed time to develop a touch screen phone that will be very similar to the iPhone but will give customers the freedom they demand in choosing a carrier of their choice.

I love Apple.
Best time to buy
It will go up like GOOG

Actually, I will have to agree upon this, but it doesnt take a analyst to figure this out. Take a trip to your local Apple store and hang out in the iPhone sales area, now monitor the purchases and the demographic purchasing them and Quantities. Many of the buyers are clearly European, Most of the Baltic region, Far East and the Indian Sub Continent. And they are purchasing between 1-3 in Average. Clearly they are taking this across the pond to the farthest parts of the world and using it.
Apple should start selling unlocked phones without a cellular provider, it would reach a broader consumer base, who would repeatedly buy a product that has a lifetime ownership of 1 Year.

Sacconaghi is an idiot with a terrible track record on AAPL. First, he changes his story from last week. Then he maintains that it’s a negative because it is not providing AAPL with revenue sharing.
I can’t believe he calls himself an analyst.
Unlocked phones increase revenue. Maybe Apple will not take a monthly fee on it, yet tehy are selling more phone than if the only option were per Contract. Now don’t tell me the idiot did not calculate that in his original estimates. By unlocking AAPL sells more and makes less money per phone. By locking AAPL sells less with more revenue per phone. I believe in total it is a positive for AAPL no matter which way the phones are sold.

The biggest problem with the iPhone and unlocking is that it is only available in 4-5 countries.

I live in Canada and have 21 friends who all have working iPhones.

I would love to use an iPhone plan through Rogers (our national GSM carrier), but I can’t. So I pay more per month than I would with a plan. If Apple would release the iPhone in countries like Canada, Australia, Japan, etc. the number of unlocked iPhones would shrink.

geee, welcome to the show “Suck”onaghi. I pointed out the Chinese market issue immediately after the news of this “missing iphones” issue hit the streets. It’s not rocket science. And it’s definitely overblown. And of course Apple is going to drop prices and introduce a lower end phone. We’ve all known this forever as well. Is this guy providing anything of worth???

So, I guess Apple is the only one in the entire cell phone market that has phones that are sold and then unlocked? Why don’t you do a comparison of numbers and see how Apple’s phone stacks up against Crack Berry ,for example, in the number of unlocked phones?

I have a little over a month on my Verizon contract before I will be able to consider the devise. I’ve done my homework, even considering the purchase of an unlocked iPhone through a friends source who recently acquired one to use with T-mobile. Facts I’ve discovered might surprise you after reading the commentary on Apple’s much hyped devise: 1) from my experience.. T-mobile is not a better than AT&T (it’s not even a close call with my contacts speaking to me from both networks on any devise), 2) the hackers I pursued were only able to unlock the first generation of the devise (none of the “analyst” even seem to be aware of this fact which is followed by the serial numbers on the box) and Sacconaghi states here the companies done nothing, 3) most the hacked phones from my source went to Germany because they were paying $1,200 U.S. a phone according to my source and they’ve dried-up. If I could discover this by looking into buying an iPhone, why is no one reporting it? I might further add that the iPhone user I’ve spoken don’t just like using this devise, they love their iPhone. Seeing people using the iPhone on the street is getting pretty common place, you have to ask yourself, “Why are none of these reports or critics (analyst, reporters, executives from Motorola, Rimm, Nokia, etc) doing any coverage on customer satisfaction?” Let’s call it food for thought.

Sacconaghi and Cramer and the rest of them should be in jail for manipulating stock prices with ’stories’ about Apple.
Apple announce record profits - better than ANY other tech co. and the stock drops? Give me a break.
Who cares if the damn phones are being bought and unlocked? Its an amazing product that continues to expose the laziness and stupidity of all the other cell phone makers.
If only Apple would make a car - then we would see what pieces of junk we are all driving around in….

Fortune has about as much relevance in the financial world as Forbes.

This would only be a problem if analyst estimates actually reflected revenue sharing from the participating telecoms.

Why don’t you face it, you f’ed up big time by miscalculating the number of unlocked phones and then projecting erroneous inventory levels. And now when you finally realize that you f’ed up you’re trying to save face by re-directing attention back at Apple. Is this what you call fair reporting shoot first and then make accusations to save your butt later?

so, he admits that he was an a** for hinting the JOB lied about units sold and the phones were not sold but stuck in “CHANEL”. What a loser, now that he knew he didn’t have a clue what he was talking about, he is finding other ways to slam Apple. Agree that unlock phone will not bring in deferred revenue but that also means more iphone sold since people can use it on other networks. Beside, many analyst numbers doesn’t even include deferred revenue and the stock get slam. Basically any deferred revenue is a bonus to me. The fact that other users are buying unlock iphones just go to prove how popular the device is. Even without the revenue sharing, apple can still makes load of money just by selling the phone alone and with further enhancements and possibly other models, their number will just continue to go up.

It is my belief that Apple is in for a series of lawsuits in the European market, where a telephone producer, such as Apple, has no right in dictating the market by making exclusive deals, as done with AT&T in the States. If these are lost then Apple stands to lose even more as consumers will be able to purchase the Iphone and use it with thier choice of provider.
In the aspect of lowering the price then that is a must do. Not so much in the states as in Europe. The consumer in Europe can expect to pay 5-600 Euros ($700-$900) for the Iphone (in some countries over 1,000 Euros or $1400). Added to this price is the local service agreement. As most people in Europe I have talked to states: “I will not pay that for a cell phone when I can get a topmodel Nokia or Sony-Erricson with much the same features for less than half the price of the Iphone”. Granted these models may not have the design features of the Iphone but it is a bit much to pay for design only.
So overall I think Apple need to rethink its Eurpoean strategy.

” … specialist Toni Sacconaghi has taken a second look at the discrepancy …” ???

Shouldn’t this specialist have thought of that in the first place before he went popping off about his “warehouse” theory? He’s special alright - special needs!

How many more articles can Fortune produce slamming Apple in the next week? As many as there are “gray-market” iPhones?

1. The core problem for Apple has to be the lock-in with AT&T that I believe is locked in both directions. The iPhone in the US is very much coupled to AT&T’s success in building out its network.

2. Sprint should be kicking itself by now it didn’t sign on. I’d be much more interested in this as a Sprint product than AT&T product.

My current contract is with Verizon, and frankly I don’t trust Verizon. My experience with them is about as comforting as dealing with used car salesmen… I’m hoping Apple can break this mold, and the Verizon pronouncements about a new open network (although purely hype at this point) are certainly steps in the right direction.

dave

What a crock. It was clear that Apple wasn’t publishing BS numbers. Sacconaghi, together with Cramer and the other were just looking for another way of driving the stock down.

Phil,

Get a life and tell Tony to stick the PHONEs up his a**!

ex ped: …and you wonder why half your posts end up in the trash bin.