The iPhone’s new business model
“Twice as fast. Half the price.”
That’s the story about the new iPhone 3G that Apple is selling, and it’s a line that was echoed by Apple VPs and industry analysts in the Moscone West spin room after Steve Jobs’ keynote Monday.
“The new price point is a very big deal,” said Tim Bajarin of Creative Strategies. “With that, and the 70 countries, Apple is now a world player on the mobile smartphone stage.”
But it’s not that simple. There were a lot of financial details Jobs left out of his keynote that only emerged later in the day, in a 8-K form Apple (AAPL) filed with the SEC and a long press release issued by AT&T (T).
Apple alerted the SEC that although it had signed deals with 70 countries…
“…Under the vast majority of these agreements, Apple will not receive follow-on revenue generating payments from carriers”
AT&T, for its part, warned investors of…
“…potential dilution to earnings per share (EPS) from this initiative in the $0.10 to $0.12 range this year and next.”
What does it mean?
It means the iPhone has a new business model.
When the device was first introduced, Jobs was able to dictate some rather unusual terms. Customers had to pay full retail price for it (a practice almost unheard of in the mobile phone industry) and carriers had to share a sizable cut of their monthly revenue with the manufacturer (also virtually unprecedented).
Now, the carriers are subsidizing the cost of the phone, making up for it in monthly charges, and they are no longer funneling a share of that monthly revenue to Apple. As Piper Jaffray’s Gene Munster puts it: “Apple is basically playing by the rules that all other cell phone hardware manufacturers play by.”
Pressed for specifics, Munster speculates that AT&T is paying Apple about $400 for the 8GB iPhone and keeping $199 of that. It probably pays Apple about $450 for the 16GB model, he says, and keeps $299. [Update: in a note to clients Tuesday Munster came up with a slightly higher number. He now estimates that Apple is charging carriers, on average, $466 per iPhone. Toni Sacconaghi at Bernstein Research comes in with a range that goes even higher; he believes Apple will sell the new iPhones to carriers for anywhere from $350 to $700 each.]
This is a big change. Gone is that nice revenue sharing deal where Apple socked it away as deferred income over the life of a 24-month contract — a comfortable cushion against lean quarters in the company’s future, should they ever arise.
Gone too is the nice iPhone bonanza AT&T got upfront last summer by selling all those 8GB iPhones for $599 each (minus a small commission, perhaps $80, to Apple).
But don’t cry for AT&T. As its press release made clear, it’s going to make up for that by raising the $20 monthly fee customers pay for unlimited data services to $30. That works out to $240 extra over the life of a two-year contract.
“Half the price,” it turns out, actually costs customers $40 more.
But most people look only at the purchase price when they buy cell phones, and at $199 for the 8GB model, the iPhone is going look a whole lot more affordable to a lot more people. Munster, for one, believes that Apple will more than make up in volume what it’s losing in revenue sharing.
Munster had predicted that Apple would sell 12 million iPhones in 2008, beating its own 10 million target by 20%. With the new price point, he says, 12 million “should be a lay-up.”
And what about his famous prediction that Apple will sell 45 million iPhones in 2009 — a number that he acknowledges is “way ahead of the Street”? Munster is not raising that target, but admits he’s “increasingly comfortable” with it.
I don’t care about APPL finances or who gets what $, rich getting richer.
All I care about is why Jobs refuses to release a 32GB iPhone? I want the iPhone desperately, but 16GB does nothing for me, and I refuse to buy one until he doubles the storage. If they can make a 32GB touch, why can’t they do the same for the phone. Those 1-2 extra chips or whatever can’t take up that much space, squeeze em in, charge an extra $100 and I’m all in. Come on Steve, music - games - apps - video - photos - etc - all needs more storage space. I want to give you my money, but help me help you.
Two key shortfalls of the iPhone still remain: Until the iPhone can handle push email from company servers and not just POP3 email, and also be able to handle WindowsMobile apps such as Word attachements (opening & editing), it will fall short of the expectations of most business users.
@ cynik
The iPhones does cost $40 more. Your upfront price is lower but after 24 months you would have spent more money using a 3G iPhone than the first model that was released last year. Even though the unit (iPhone) costs $199 you have to think of the costs that are mandatory. Now when you buy the 3G iPhone you will have to signup for a contract in store, no more waiting and signing up at home on iTunes. This will dramatically reduce all those “unlocked” iPhones that were on the market.
Even though we will be spending $40 after 2 years with the new 3G iPhone, the upfront costs are much cheaper. Instead of paying $399 we will now pay $199. The extra $40 over 24 months we will pay comes out to an additional $1.66/month. This model will attract much more users than the old model.
The growing downturn in the national economy will eventually strike the heart of the AT&T wireless footprint. Competitive inroads by other smart phone makers will chip away at this number as well. Htc & Blackberry come to mind. As fewer people are in the “doing well category” financially, this will eat into Apple & AT&T’s customer base.
There is already growing sentiment that this new model doesn’t live up the its own hype and they gouge you on the 3g data plans now. So there’s a double whammy. Unless your in a secure job that has pay raises tied to the overall increase in the cost of living.. your under water.. can’t afford the mortgage, cable-tv bill (sorry cnn), or an Iphone. This is more the reality than this apple/att love fest.
“Extending 2 years would mean adding 2 years to whatever is currently left on your deal. That would mean 3 years if you had 1 year remaining right now. Resetting to 2 is the better deal.”
You are resetting to a new 2 yr. contract.
Also, Apple told AT&T which data plans to sell with the iPhone. Now they get to choose. All AT&T did was bump it up to the same plans they offer now on any other data device.
The same security features on the old iPhone will be htere in the new. If you unlock the new one and connect it to iTunes, it will disable the phone.
Here is why your article is half-baked:
- Apple does in fact not get a cut from carriers but it will get a cut from apps it will sell - how many doctors will buy many of the medical apps shown at the keynote? Many.
- How many new subscribers will MobileMe attract because of iphone? Not insignificant.
- How many developers does iPhone have? From what I can see here at WWDC, from none to now 4000 and waiting. How many other platforms have this many developers? And how fast is the base growing?
It is tempting to be contrarian and say iPhone can not be as great as it is hyped to be. But sometimes products may be outdo the hype.
Does iPhone have momentum? - What does that mean to you?
that you keep quoting Tony “I Haven’t Gotten an Apple Prediction Right Yet” Sacconaghi kinda makes you look dumb. or you two are collaborating on your own distortion field. or you’re getting kickbacks from incompetent analysts to make them look good. i don’t read you’re column all that often, but that’s just my opinion from outside both distortion fields
ex ped: He spells his name Toni.
Wrong again and as usual. As pointed out in the MDJ:
“Revenue sharing is indeed gone under this new model, but Apple has given no indication that the practice of amortizing handset revenue over 24 months (as “deferred revenue”) will stop. If Toni Sacconaghi’s estimate of US$350 to US$700 cost per iPhone from
carriers is right, then _that’s_ the amount Apple will recognize over 24 months.”
As Matt says in reference to you, “This is not “Are You Smarter Than a Fifth Grader” material, I admit, but it’s not rocket science either.”
Now that AT&T is not sharing revenue with AAPL. Why don’t they make IPHONE for Verizon, this will also add number of units sold to their bottom line.
ex ped: AT&T is said to have signed a 5-year exclusive deal with Apple
Badly written and confusing article. You got to do better than this especially for the Hype topics like iPhone.
Making the iPhone more accessible by lowering it’s buy-in price can only help Jobs’ desire to gobble up market share.
The competition would not be happy to see the iPhone’s cost go down…that was a significant reason why people stayed on the fence and didn’t jump on the craze.
With a price point of where this article states…I think I’m in.
12 million what a joke this Munster guy know nothing hes still thinking small potatoes….alot of investors and financial analysts should really stick their feet firmly on solid ground before they too end up floating in the clouds of hype and bring the economy even further down in dumps
our families phone contracts run out in july with another carrier. we will be running to the apple store to get our iphones, especially with the new prices. the apps are the real story behind the iphone, i can’t wait.
Taco: I’d like to see the source for your information… where has it been written that Apple is giving free upgrades?
Extending 2 years would mean adding 2 years to whatever is currently left on your deal. That would mean 3 years if you had 1 year remaining right now. Resetting to 2 is the better deal.
““u contract will be reset back to 2 years(not extended 2 years).”,
what is the difference, i dont get it?”
The difference is that if you have 1 year left now, you do not get 2 years added [extended], it gets set back to 2 years, supposedly.
For all the naysayers out there: The iPhone really works. It has changed my life — 30% of my internet use is now off the computer and on the phone. An extra $10 a month to do that much more conveniently (read: faster) is well worth it. The iPhone really works == much better than my much more expensive Nokia N95 ever did.
I think Jobs is even smarter than you all think. He don’t need no stinkin’ revenue sharing!
Note that the iPod Touch will be able to run almost all the new software. Down the line, this is going to spark a big jump in sales of the Touch. Further, almost all of those cool programs can be easily made to run on a full-sized Mac.
For Apple, in the last analysis, it’s all about growing market share….
“u contract will be reset back to 2 years(not extended 2 years).”,
what is the difference, i dont get it?
It’s what Peter in Los Angeles noted… It’s about the App Store
What about running business windows apps on the iPhone ? is that a reason / rationalization to get the 3G iPhone ?
Apple cannot/doesnot/willnot have any say in what AT&T charges for its rate plans. Just like EVERY OTHER cellphone manufacturer. Apple added faster data and some new features/software and cut the price. It is AT&T’s choice to raise the data plan price.
Apple is still playing catch up with Windows Mobile. All of these “so called new” features have been out for years. 3g service isn’t something new, about time AT&T realized that, but at the price they charge for data and cellular usage, it’s not a good deal.
As a business customer, I currently receive a 24% discount on my primary voice service, which was not available with the original iphone and its service plans. Gotta wonder if that discount will finally be applied for iphone purchases and service plans under this new agreement.
For those that are worried about the data plane..the data plan is going to be $30 for those that get the 3G iPhone. If you have/keep your old iPhone your data plan will stay $20.
As far as those with existing contracts AT&T has stated that you will be able to upgrade to the new iPhone for the same price as new customers($199/$299) but you contract will be reset back to 2 years(not extended 2 years).
And for those that just bought an old iPhone within the past month or so(not sure on the date) will be able to upgrade to the new iPhone for free.
Hope this helps clear up some of the misunderstandings out there
Adam, I’m sure your current contract stays in tact and then once you upgrade to the 3G phone and sign a new 2 year contract is when you will see the price increase.
I think they know better than to just up the price on existing iPhone Edge customers.
I believe now-a-days all businesses are geared towards platform models. Provide a platform for cheap and then charge premium for items that run on the platform. iPhone is pretty much headed in that direction. The phone acts as platform and softwares, tunes, etc are to be bought at premium.
In all this buzz I still haven’t read anything about QWERTY on the new 2.0 iPhone!!
It’s not just AT&T but I think the cost of plans for all cell phones have become inflated. When I can get a packaged deal for Digital Cable, High-Speed Internet and Phone with unlimited long-distance for less than what I pay for a cell phone that just has 1,000 monthly minutes plus unlimited text messages (not including anything else), it’s time to turn in the cell phone. I think cell phone companies/carriers need to work to keep costs with text and internet access to under $75/month. That’s the most I would pay for cell phone service. That $75 includes taxes and fees, so the actual “plan” cost would be more around $60-75/month. I also don’t buy into the sales pitch that using the internet on your phone is easier than a computer - sorry fat inflated cell phone internet costs are not worth the hassle of using the net on your phone (regardless of model).
I think it is very misleading to say that the “iPhone” really costs $40 more.
It doesn’t. The iPhone costs what it costs. It is the airtime that costs more.
THE AIRTIME. THE BANDWIDTH. From this article, one could get the impression that Apple having some sort of say in the price of air time. Well, they tried that by insisting on bulk data deals, but now they have moved back to selling hardware.
It is a smart move. The tax on airtime and the gifts of profits that government gives to suppliers is a huge scandal, a disgrace. Apple should avoid that game, and stay honest.
What does this mean for current iPhone users who want to upgrade? They are likely in the early part of a 2 year AT&T contract right now. Will they have to pay AT&T the typical upgrade bloated price ($400 and reset the 2 year clock)?
WTF! They are raising my monthly DATA price from $20 to $30? I smell a lawsuit coming when I try to pull out of my contract…
I’m surprised that this article omitted another important production: 2.0 software, which allows users to download applications and games from an online store on iTunes. This is potentially a huge revenue driver as well. Apple gets to keep most of the revenues from those sales (sharing the rest with developers). If iPhone users like myself were to download one or two apps from the store per month, it would easily offset any losses from the original single-carrier service rev share. Consider that ringtones, once considered a trivial component of carrier offerings, are now a multiple-billion-dollar industry. Apple clearly understands that this device is a platform for selling lucrative software, not just monthly contracts and hardware fees.
Finally an article that talks about how “Half the Price” is actually $40 more! Hope people spot that and don’t madly rush into the new Iphone.
In regards to unlocking the sim! Don’t forget that this is a 3G phone. So even if you get the phone unlocked, no every carrier has 3G service, which means you don’t get any of the fast broadband service. So if you unlock the phone and use another carrier, your still only going to get 2.5G service - i.e. slow browsing.
You knew a price increase was coming from AT&T, funny how Jobs didn’t explain that when he was jumping up and down about how they made the phone more affordable.
“Gone too is the nice iPhone bonanza AT&T got upfront last summer by selling nearly a million smartphones for $599 each (minus a small commission, maybe $80, to Apple).”
Philip,
What does this line mean exactly? It seems as though you’re suggesting that AT&T made $519 (599-80) per iPhone sold at the original price last year . . . but that can’t be right, can it? What’s that $80 commission to Apple? Just confused…
ex ped: That’s my understanding, although on reflection I realize that AT&T sold considerably less than a million iPhones last summer. The $80 commission, by the way, comes from a Wired article published last summer.
I bought an iphone in Dubai,but to my bad luck the screen of my phone stopped functioning and I do not know what to do how to contact your company,because this phone in not launched in Dubai. Please help me, I have paid a lot for this phone.
40 dollars extra is ignoring the time value of money….this is an article from Fortune? Isn’t that a magazine about finance and investing??
ex ped: Fair enough.
I’m hoping that this arrangement means that the iPhone 3G will be easier to SIM-unlock, now that AT&T and Apple are able to guarantee their respective revenue via contractual means (must activate at purchase, 2-year contract with ETF attached) rather than technical means (must “hack” the phone to unlock). T-Mobile will issue unlock codes for any phone you buy from them after 90 days. I hope AT&T is willing to do the same.
This article is confusing and inaccurate. What does “AT&T is paying Apple about $400 for the 8GB iPhone and keeping $199 of that. It probably pays Apple $450 for the 16GB model, he says, and keeps $399″ mean? This is very confusing since the phones are priced at $199 and $299
and are sold by AT&T and Apple.
Also, it is extremely likely that Apple will keep the sales proceeds as deferred revenue even under this new arrangement. Apple gets no deferred payments from
Apple TV and its sales are amortized over 24 months.
The amortizement over 24 months allows them to provide updates to the product without charging the customer again. So to what extent it allows for a cushion
against lean quarters will continue under the new arrangement.
ex ped: Typo on the price point fixed. Thanks. As for the deferred revenue on the sale price, you may very well be right.
Gene Munster said many months ago that he thinks Triquint will supply the power ampliphier to the new 3g I phone. Since that time he has never followed up on any detail. How about a definite answer.
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Silicon Valley veterans like to joke that Steve Jobs must be surrounded by a reality distortion field; if you get too close to him, you start to believe what he's saying. Thanks to the success of the iPod, the launch of the iPhone and the renewed interest in the Mac, Apple has made believers out of millions of customers - and made a lot of investors rich. But Philip Elmer-DeWitt believes that an ounce of skepticism never hurts when writing about the company. He should know. He's been covering Apple - and watching Steve Jobs operate - since 1982, first for Time Magazine, then for Business 2.0, and now for Fortune.
The 3 G I Phone…will only sell the products of now and future products that apple makes. I have been with Steve Jobs now for over ten years and he has never let me down or my family…