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A lot has been written about the new 3G iPhone, its price and its impact. Now it’s time to shift attention to the most important question about this device: How much money will it make for Apple and its carrier partners? While I don’t have any […]

A lot has been written about the new 3G iPhone, its price and its impact. Now it’s time to shift attention to the most important question about this device: How much money will it make for Apple and its carrier partners?

While I don’t have any concrete financial projections, after reading some of Wall Street’s better analysis and taking clues from my own sources, I can offer some observations, which I’ve packaged in a Q&A format here:

Q: Why did Apple agree to a price subsidy?
A: Mass adoption. AT&T Mobility CEO Ralph de le Vega told the WSJ that it was all about getting the device to the mass market. “I think this is going to reach people that would otherwise never put $199 into a mobile device,” he said.

Q: Is subsidizing the handset going to cost AT&T and other carriers, like UK-based O2 (which is offering a free version with premium packages)?
A: Yes. In the WSJ interview, de la Vega says, “It’s going to impact earnings in 2008 and 2009 in a negative way, but will turn very profitable in the long term.”

Q: How much of a hit will the subsidy be to AT&T’s revenues/earnings?
A: The company says between 10 and 12 cents per share. According to Stifel Nicholas analyst Christopher King, this assumes that AT&T gets around 5.5 million incremental gross subscriber additions and a $200 subsidy per phone in both 2008 and in 2009.

Q: AT&T says the subsidy agreement with Apple will become accretive starting in 2010. Likely?
A: “For AT&T to meet its 2010 accretion goal, we believe the company will have to significantly accelerate its market share over the course of the next 12-24 months, among the most lucrative, post-pay subscriber base,” Stifel’s King writes in a notes to clients. “With the current levels of wireless penetration, we believe this implies AT&T must take subscribers from other carriers.”

I don’t see it happening either, especially since other handset makers will undoubtedly have some tricks up their sleeves with which to respond to the iPhone. The window of opportunity to sell a lot of phones for Apple is not unlimited.

Q: How many 3G iPhones does Apple hope to sell?
A: UBS Research estimates that the company is looking to push out between 10 million and 15 million 3G iPhones, based on their checks with vendors and parts suppliers. But even despite the subsidies, UBS analysts expect the final number could be closer to the lower end of that range. By way of comparison, Motorola sold about 11.3 million Razrs the first year — with subsidies, global distribution and multiple carriers in the very same regions. And that was one of the best-selling phones ever.

Q: How much money can Apple make selling 15 million units?
A: Assuming Apple gets $399 per device from the carriers (using Stifel’s math of a $200 subsidy) and most of the devices sold are the low-end model, Apple could make $5.98 billion. Of course, the numbers could be much higher if the high-end model becomes popular. So a reasonable guess would be between $6 billion and $7 billion. This will be a profitable enterprise for Apple, according to analysis of the iPhones parts by research firm Portelligent. The materials currently costs about $170, but that will soon go down to $100 as volumes scale.

Q: Will it impact Nokia and RIM?
A: I wouldn’t bet on it, despite the fact that in Nokia’s home market of Western Europe, Apple has not only addressed the lack of 3G connectivity but signed some huge distribution deals. At 15 million units, the iPhone will be marginal compared to Nokia’s offerings. Nor do I think that RIM will keel over, though I do think this puts the kibosh on RIM’s consumer play somewhat.

Q: Who loses?
A: My bet is on Motorola and Palm. Motorola is just a rudderless Titanic right now, and is especially vulnerable because it doesn’t have anything that it can use to compete with the likes of an iPhone. Similarly, Palm just doesn’t enjoy the cachet it used to, and the lower-priced iPhone makes the $99 Centro look a tad dowdy. Given how much AT&T has riding on the 3G iPhone, I am betting they will purposely promote this to the detriment of others.

Q: What about the iPhone ecosystem — who’s making what inside the 3G iPhone?
A: Infineon is making the baseband and RF transceiver, while Samsung is providing the application provider. Forward Concepts analyst Will Strauss says the GPS chip is based on Broadcom’s Global Locate technology (and not a Broadcom chip, as we had initially reported) that has been licensed by Infineon. Time to re-check that information again.

PS: I promise this is the last iPhone post till all the hoopla dies down.

  1. How about the money from the iPhone Application Store? Not many talking about that one yet. More on my blog:

    http://smoothspan.wordpress.com/2008/06/10/3g-iphone-shuns-saas-for-longer-term-opportunity/

    Best,

    BW

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  2. [...] (after the launch)                             GigaOM                                [...]

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  3. I appreciate the info, Om, but I seem to be missing any real knowledge of this “alleged” 3G network that AT&T seems to have quietly built. Am I nuts, or did this just fall out of the sky? The U.S. has been so far behind in real 3G development that I thought we were just going to jump straight to 4G and WiMax. I must have a blind spot here.

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  4. Motorola sold about 11.3 million Razrs the first year — with subsidies, global distribution and multiple carriers in the very same regions. And that was one of the best-selling phones ever

    The RAZR was a US hit, not an international hit. The iPhone from what I have seen inspires international lusting despite missing some key features. If the iPhone drops for Rs. 8000 in markets like India(Steve promised some kind of price parity in his keynote) – expect a very very different reaction than the Razr ..

    Who loses? A: My bet is on Motorola and Palm.

    Hard to argue with that one.. Though now the market is clearly segmented. Non Computer like phones are relegated to the feature phone arena, This includes music phones like the walkman etc. These phones will probably take over the market of the free phones. The smart phones will be running a stripped down desktop os like linux, windows or mac osx …

    I do not see the point of adding a data plan (which at 30 bucks a month is quiteee a lott) to a Razr2 , LG Voyager or the ilk, If I needed to get a 3g data plan I will get a iPhone or blackberry HTC etc. And without a 3g data plan these phones stop being very smart …

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  5. Terry:

    “SAN ANTONIO, Feb. 6, 2008 — AT&T is casting a wider Net for mobile customers this year by building out its network to make catching a high speed wireless Web connection easier coast-to-coast.

    AT&T Inc. (NYSE:T) today announced highlights of the company’s 2008 wireless network expansion plans, including the deployment of third-generation (3G) wireless broadband service to more than 80 additional cities in the United States through the course of the year. The planned expansion is expected to deliver AT&T 3G services to nearly 350 leading U.S. markets by the end of 2008, including all of the top 100 U.S. cities. The 3G initiative will include the roll out of more than 1,500 additional cell sites nationwide.

    Other plans for the new year include completion of the nation’s first High Speed Uplink Packet Access (HSUPA)-enabled network by the middle of the year. The AT&T 3G network now delivers typical downlink speeds ranging between 600 and 1,400 Kilobits per second (Kbps), as well as faster uplink speeds, ranging from 500 and 800 Kilobits per second (Kbps).”

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  6. “Q: How many 3G iPhones does Apple hope to sell?” I assume your answer to this question was qualified by the words “during CY2008.” Apple sold 6 million non-3G iPhones priced from $399 to $900 in 6 (for the most part it was 4) countries over 11 months, where maybe 40% escaped to early adopters in other countries.

    Now it will be selling iPhone 3G priced at $199 to $350 in 22 countries for 5.5 months, and 48 more countries for let’s say, on average, 3 months. First, the cost of the phone puts it in a new segment (though both segments are in smartphone-extra-data-plan-required territory.) Next, the addressable market is now 4 to 5x as large; countries in which many early adopters were willing to pay $600 for the first iPhone. There is demand.

    All this to say I’m projecting 15 million more sold by end of Dec with revenue recorded immediately.

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  7. Razr was definitely an International Hit, It was a Crave everywhere. Pretty much like the iPhone. Its different matter altogether that the iPhone packs in a Lot more substance over the just Style factor the Razr offered.

    Who Loses ?

    My answer would be definitely NOT Motorola. Motorola has already lost almost everything in the 3GSM market share & pretty much doesn’t have anything to compete with the iPhone. If its not at all competing nor does it have the market share in that area, what does it have to lose ?

    I would say the biggest loser due to the 3G iPhone & iPhone 2.0 is going to be RIM. Now the iPhone can do everything the blackberry does and more. Only thing holding back RIM customers was the enterprise connectivity & their carrier contracts.

    Unless RIM has something up its sleeve, I see people saying by bye to their BlackBerrys …

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  8. This means that the first generation iphone is an overpriced piece of crap.

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  9. Om,

    Your calculations exclude the revenues that Apple drives from teh 30% cut from apps as well as its healthy revenue share from search and other ad supported models.

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  10. @ Valleyguy, you are absolutely right. . These are projections around the device and hardware sales/revenues. I have no idea how the apps are going to do, sell or even make money. I walked around WWDC and up until the time I get to use the device and download some apps, I am not even going to pretend to even know what apps-will bring to iPhone. In other words, lets wait and see.

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