27 Comments

Summary:

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

  2. I’m Not Writing About the iPhone 3G » The StartUp Blog at PartnerUp Tuesday, June 10, 2008

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

  3. Terry Heaton Tuesday, June 10, 2008

    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.

  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 …

  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).”

  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.

  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 …

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

  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.

  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.

  11. @ Harry Nads. True in a manner that some Gucci shoes are over priced piece of crap. I agree and got rid of mine just in time.

  12. Saul Hansell fm the NY Times penned a piece yesterday mentioning that the service fm AT&T for the new iPhone will cost $10 more per month. Hence, over the life of the lock-in 2 year contract, AT&T should actually make an additional $240 per unit, minus the $200 subsidy means they make an additional $40 per unit. I’d say that’s a pretty nice return, and net-net, it’s the consumers that are actually paying for the subsidy, AT&T is just fronting the money ;)

  13. great post Om!

  14. Quoting wikipedia: “As of September 2007, the iPod had sold more than 150 million units”, since getting launched in 2001. iPhone is way more then iPod, so i am expecting at the least similar numbers.

    As for competition, i expect RIM’s growth or profit(if they sell of $50 a piece) to vaporize in the next 1-2 years. It will be very hard for them to recover from the missing mobile browser and better screen size. Even if they deliver a better browser of sorts later this year, getting started with developer traction grinds will be 1 year late. Not sure how many developers would be able to split their resources between developing for apple, google, mozilla, msft, opera, and finally RIM.

  15. This and That About the 3G iPhone | Mark Evans Tuesday, June 10, 2008

    [...] then more than makes it up later by raising data prices for iPhone-crazed subscribers. Meanwhile, GigaOm has a Q&A looking at how much money the iPhone will it make for Apple and its carrier [...]

  16. Would be nice to see speculative numbers regarding income generated from iTunes (software store and music (20 songs per device?)), as well as revenue generated from premium Mobile Me services.

  17. @Terry
    Contrary to your belief, the USA is blazing ahead in the 3G, 4g world. Other than the goofy closed networks in Japan and Korea, the USA is has the best 3g data networks. It is AT&T and Verizon who are pushing 4g LTE’s implementation.
    Sprint is aggressive but more like an aggressive grease fire.

  18. @Harry Nads
    Yeah, I figured that out a month after the first iPhone was released.

  19. Nokia will be hurt by the iphone. Let’s assume 10 million sales. Yes, peanuts compared to the 45 million s60 devices. But that is NOT peanuts compared to the smaller universe of E and N series smartphones. Nokia doesn’t break out those numbers, so lets assume they are 1/4 of Nokia s60 sales, or 15 million. that is in the same order of magnitude as iphone sales.

    What’s more what Apple is doing is sucking away Nokia’s profit share. Nokia MUST be making more on a $500 N96 than a $100 generic s60 device. Nokia will move volume, but lose the high end to Apple.

  20. Harvitpal Arora Wednesday, June 11, 2008

    hi Om,

    Can’t get enough of the IPhone so I have no qualms with more posts…keep at it!

    My 2 pennies/cents/paisae….

    Will it impact Nokia and RIM?

    Sure will, not Nokia so much in the short term but in the longer term it will. As for RIM, they will feel the impact within three months of the 3G iphone launch.

    You commented that RIMM’s consumer play may be impacted…that now makes up 50% of their unit sales!
    If there is even a 10% impact on that part of their business, thats going to be noticed…and then there is price competition. RIMM enjoys high margins, say good by to those across the full 50% of unit sales to the consumer play.

    Then we should all remember that, this is the tip of the ice burg…yeah RIM is coming out with their iphone killer and so is Nokia, HTC, Samsung, LG…and hey lets not forget…PALM!

    Then there is clincher…the dream phone…Android….Google…Schmidt…free push email…their push into the enterprise market with apps and all….plus I think we can all recall, Schmidt saying phones should be free (obviously supported by ad or other revenue)…thats not going to help RIM, Apple or any of the hardware players…it will come down to user experience with content/application access and usability…Apples in the lead and copying hardware is easier…the apps and content side…no one has hacked the ipod market yet!

    Does not look good for RIM…Nokia is large enough and has enough experience to get past this, plus they address a larger spread of market and they have been in this game with constant pressure on margins for so long.

    The whole game changes from this point in. Price is critical to all this and Apple has addressed this…in the US anyway!

    Who losses?…its all up for grabs I think…talking about smart phones is redundant I believe….what’s a smart phone? Except for the bottom most part of the market (may be highest volume sales due to developing market)..all phones today are pretty smart!

    The cost to build these so call smart phones will only get cheaper.
    Friend from India just returned with a 3G phone from India (made in china – TC something or rather) with dual sim, 3G, Bluetooth, Wifi, TV/FM receiver, email, touch screen, etc etc…for outright cost of US $110. Its no real competition to iPhone, Blackberry just yet, buts its a solid proposition for 100 dollars…its their implementation of software that needs addressing.

    I would be worried being long on RIMM….I must say I have a short position on them!

  21. Wireless Broad Band Sunday, June 15, 2008

    BSNL has decided to launch its Data Services on CDMA 2000 IX by using BSNL Internet Connect Card (ICC). The CDMA IX ICC will provide Internet Service @144kbps to computer users on their laptops as well as on desktops. This service will be available in all those locations wherever CDMA IX MSC based coverage is there. However, during roaming the said Internet connectivity will not work at present. The following two types of data Cards will be available for BSNL customers:

    (A) Network Interface Card (NIC) : For internet speed up to 144 Kbps.

    (B) EVDO Card : Internet speed up to 2.4 Mbps*

  22. good info..any info about the 3G’s date of India launch.

  23. McGuire’s Law » Blog Archive » Business Observations: June 23, 2008 Edition Monday, June 23, 2008

    [...] Inside the 3G iPhone Money Machine [...]

  24. How iPhone Could Resurrect Wireless Chip Makers – GigaOM Monday, July 14, 2008

    [...] Nokia N95 for granted, but middle America or even Europe doesn’t always see the point. But if housewives and teens clamor for iPhones, chip makers will [...]

  25. Hi

    Now, I am giving second thought to iPhone as it is available with EMI option as well. Saw this info on Airtel site (http://www.airtel.in/iphone3g)

    Hitesh

  26. Man I can’t wait for the new iPhone 3G S, my iPhone 1st gen really needs a replacer.

  27. iPhone 3G – Critical Mass Crashes In « thoughts on computing Wednesday, August 19, 2009

    [...] to the iPhone 3G Michael Arrington is lavish, Alex Miller is funny, Om Malik is well-reasoned, many analysts are ga-ga. Highlights [...]

Comments have been disabled for this post