Direction for iPhone Strategy?
On April 22, 2008, TechStock2000 posted the following:
One of the great strengths of the Apple executive team is that it is always listening to its customers. The engineers keep designing new products the we users love because they learn what we want - not in terms of specific features, but in terms of how we interact with the products. This is why Apple’s products have a better user interface than anything else available, and why users of Apple products are happier with those products than users of competing products.
The Apple engineering and design teams are not the only groups that pay attention to the customers. The marketing team has been busy for the past month or so, conducting some in-depth experiments with iPhone in Europe. One of the things that marketing professionals always want to know, but have a difficult time learning, is how much price elasticity exists for a product. Economic theory says that as prices are lower, generally volumes will be higher. But will the increase in volume overcome the lower amount of profit per unit sold?
Somehow, Apple has convinced several of its European carrier partners to cut the price of the phone. This is giving them wonderful real-world data with respect to price elasticity for that product. Is it a coincidence that the available stock of iPhones throughout the world seemed to disappear shortly after these price drops? Or did the price drops cause the available stock to drop because demand increased more than expected?
It is purely speculation on my part, but if the price drops resulted in larger-than-expected increases in sales volume, we can expect Apple to adjust its sales strategy in accordance with this new knowledge. Tim Cook and Steve Jobs both said that Apple is not wedded to any particular business model for iPhone. Could we see the iPhone sales model shift from the premium priced product currently being sold to a subsidized product (like other phones on the market)?
Keep in mind that Apple also is about to begin getting another, even more significant recurring revenue stream in connection with iPhone - its cut of revenues from the imminent sales of third party applications for iPhone.
Carriers would be much more comfortable with a change in business model from shared revenue to phone subsidy - it is the model that they know and love. Apple could make more money from such a shift as unit sales volumes skyrocket, which would also fuel even more sales of apps (remember that Apple will get 30% of all those sales).
One other great benefit of moving to a subsidy model - Apple will be able to openly sell an unlocked version of iPhone at an unsubsidized price, expanding the reach of the phone throughout the world and capturing the premium that is currently being taken by the industry that has sprung up to unlock iPhones and ship them to markets not yet served by Apple.
techstock2000 @ April 22, 2008
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Re: Direction for iPhone Strategy?-Scout disagrees
TS2K,
I respect your posts but I disagree with you this time. The business model SJ set up with the iPhone is brilliant!
I have been involved in the wireless business since it started and I don’t think anyone realizes what Apple is creating. Apple is receiving $10-$20 per month without providing any support on the cellular side, even for units they don’t sell themselves. Apple is also making money on the hardware, iTune, Applications etc. Compare that to an agent that makes $2 per month per customer, and $100 between commission and hardware and at least 50% of an agents time is spent servicing the customer, helping with billing problems, rate plans, etc. Apple only has to deal with hardware problems. We made a lot of money with a by far inferior contract.
Amazingly, it is a good deal for T as well, the iPhone users are cash cows for T. T finally has a platform to sell high end rate plans (high ARPU is the industry jargon) and sell tons of data, etc. If t would get their heads out of their asses and complete the 3G build out they will see even greater sales. T may decide to subsidize the iPhone unilaterally when they realize what they are making. Don’t underestimate how long it takes T’s army of accountants to analyze data (at least a year). T is ultra conservative, Verizon would have pounded T in the ground if they had not been too stubborn to meet SJ’s demands.
Everyone would like to see more iPhones sold. A wise old timer once told me sales are for vanity, profits are for sanity. I am not a computer guy, I am a phone guy, but I can’t imagine selling enough third party applications to make walking away from a $15 per month virtually pure profit revenue stream.
Look at RIMM, they can sell anywhere in the world and they only have 12 million units in service. I’ll bet Apple makes triple per phone vs. RIMM, it just takes longer to collect the revenue and Apple elected to realize the profit over two years. RIMM sells a ton of replacement phones per quarter, so of course they sell more units right now. RIMM had a big head start and in well under a year the score is RIMM 12M, Apple 4M.
RIMM $0 this quarter in revenue sharing, Apple $135 million (my estimate) and growing.
Apple has had time to study their customers and now they know how demand increases when the price of the phone is reduced. If Apple brings out a good , better, best before back-to-school or more likely before the holidays, I can’t even imagine how many they could sell at a $200 price point. Gene Munster is predicting 45 million units sold in 2009. Let’s say Apple has even 20 million units with the same agreement and they make $15 per month per customer, that is a mind blowing 3.6 Billion in profit for 2010 just in recurring revenue. $1 per share per quarter in EPS and that isn’t counting anything from the sale of the phone.
I believe Apple is waiting on T to complete the build out of their 3G system before rolling out the 3G phone, because the customer experience would have been horrible in 2007. This might explain why new countries are not being added at a furious pace. Japan and others need a 3G phone.
In my opinion, Apple should not even consider changing their agreement with T. If Apple wants to pursue different models in other countries like China, where they may never get a revenue sharing agreement, they should. T shouldn’t care, the only carrier that can activate an iPhone besides T is T-Mobile and they are not a threat. If you think t would renegotiate and give up their exclusive deal with Apple you are crazy. They aren’t stupid enough to let Verizon have such a weapon. T saw what happened when they lost their Motorola RAZR exclusive.
I’ll bet this won’t be a popular post, but if you look at the numbers, they are incredible. Apple knocked it out of the park with this agreement and no one else can duplicate it. Someday soon people will stop saying “Apple is all about the Mac”, the iPhone is going to be just as important and the iPhone is helping sell more Macs.
Scout
... MORE ... If true, this pricing strategy should make iPhone more obtainable for many millions of consumers. See TechStock2000’s excellent article on topic > HERE See also via > Appleot.org ... MORE ...