Tim Worstall

iPhone Launch

There’s something about the iPhone launch that interests me.

Fans appear not to have been put off by the fact that
Apple has agreed an exclusive deal with AT&T, the biggest US
wireless provider, so customers on other networks will have to change
providers and sign a new two-year contract.

In
fact, according to the survey, 67 per cent of those most keen on buying
an iPhone are subscribers on other networks. Analysts say the iPhone
could worry rival networks if customers start switching to AT&T
purely so they can have an Apple handset. AT&T says it has received
more than a million email inquires about the phone.

People who know this business better than I do might be able to provide the specifics here but Apple could be making an absolute fortune here.

The traditional way the handset market works is that the phone company subsidizes the handset. It might have a manufacturing cost of $300 or so, but if you sign up to a year or two year contract then you get the phone for free. Or at a discounted rate, at least.

It’s also true that the people who sign you up for the service get a chunky commission payment.

Now, I have no idea what the iPhone actually costs to manufacture, but Apple have a tendency not to subsidize their hardware. They might even be making a reasonable margin on the $499 retail cost.

But I assume that they’ll also be making the commission provided by AT&T to people who sign up new users to two year contracts…several hundred dollars a pop I would suspect. Plus, and given Jobs’ known ability as a negotiator, the handset subsidy that AT&T is not having to provide.

The company’s stock – which has risen by 30 per cent since the iPhone’s
unveiling in January – rose by nearly three per cent on the
announcement, adding two billion dollars to Apple’s market value, in
response to news that allayed one of several concerns about the device.

All of that might be explained by my very back of the envelope calculations (which if someone knows better, please do correct). It really wouldn’t surprise me if Apple was getting $100 or $150 or so in margin off the hardware plus another $300 or more from AT&T for every phone sold. 50% net margin on hardware? No wonder the stock has gone up.

In

8 responses

  1. Andrew Paterson Avatar
    Andrew Paterson

    Hence only idiots and mac nutcases will buy one. I’d expect Samsung, and those whose business is, you know, making phones, to have I-Phone killers on the market before christmas.

    Reply
  2. Gary Marshall Avatar
    Gary Marshall

    Tim, the web browser’s significant too. That wee Google search box generates revenue too.
    > I-Phone killers
    Andrew, don’t underestimate the power of fashion and hype here – the first iPod wasn’t as good as Creative Labs’ machines, but it *killed* them in the market. If the iPhone is good (which we can’t be sure of just yet) then it’s going to be a hard target.
    It’s interesting that you’ve mentioned samsung, because they’ve been a long-time Apple rival in the MP3 player space. And they haven’t dented the iPod. Sony Ericsson’s music stuff isn’t great, my Blackberry’s a wonderful device with a woeful music player, etc etc etc. Every single ipod killer to date hasn’t lived up to the label.
    I like car analogies, and I think Apple’s the BMW to everybody else’s Ford. The mondeo may be better car than a basic beemer, but the beemer’s the one people want on their drives…

    Reply
  3. Andrew Paterson Avatar
    Andrew Paterson

    Gary,
    Oh I have no doubt that the fashion and hype will have an effect, but mobile phones are not mp3 players. The turnover/advancements of phones is extremely rapid. The I-Phone’s spec is already sub-par in many respects- camera, battery life to name but two. Its biggest advantage is the gesture based OS, this is what Samsung et al have to catch up on and beat, it’s the coolest and potentially most powerful aspect of the I phone.
    The two year contract and the huge price render a new I Phone every 8-10 months a non starter, by that time the I phone will probably look extremely dated.
    A better car analogy is that Samsungs are the BMW’s, the well established car brand. I Phones are DeLoreans, cool, but not feasible in the long term, not with one, hugely expensive iteration that will outmoded sooner than you can say ‘Back to the the Future’.

    Reply
  4. Gary Marshall Avatar
    Gary Marshall

    You may well be right – although if Apple’s right and everyone else is wrong, this could have a seismic effect on the phone industry. There’s a good article in the New York Metro about this:
    Apple’s competitors, by contrast, find the prospect of the iPhone terrifying. “The entire fucking Western world hopes that it’s a case of imperial overstretch,” says the CEO of one of the planet’s largest communications companies. “But everybody is quietly saying, er, what if people want to buy a $500 phone? What if, er, people have been waiting for a device that does all these things? What if this thing works as advertised? I mean, my God, what then?”
    It’s not a pro-apple article by any means, but I think it’s a really interesting one.

    Reply
  5. Stephen Avatar
    Stephen

    “The I-Phone’s spec is already sub-par in many respects- camera, battery life to name but two.”
    Yes, but people don’t really care about specs. The “iPod (non)killers” all had far better specs than the iPod, but people still stayed away in droves.
    “Its biggest advantage is the gesture based OS, this is what Samsung et al have to catch up on and beat.”
    Oh, is that all they have to do? Should be easy then.. just develop a new OS, how long can that take? Three years? Five max.

    Reply
  6. Andrew Paterson Avatar
    Andrew Paterson

    Stephen, you honestly don’t think that mobile phone users are concerned about 6-8 hour battery life if used as a music player as well as a phone? You savvy consumer you.
    As for the OS point, it requires adaption of an existing OS, not the creation of a new one from the ground. What do you think the I Phone is working on? Hint it’s not something that’s 1.0.
    Tim adds: A variant of Symbian? Or Mac OS?

    Reply
  7. Andrew Paterson Avatar
    Andrew Paterson

    Tim- It’s using a mini version of OS X. Check out the HTC touch, which is another product with the gesture type input, bolted on top of a Windows Mobile OS.
    I honestly believe the battery to be the single biggest problem. I mean, let’s say you have a 1 and a half hour commute, listening to your tunes, and take a few calls during the day. Conceivably your I-phone might run out of juice on the train home!

    Reply
  8. Randy Avatar
    Randy

    Andrew, I’m not really concerned about the battery because it will be awesomely convenient to merely hook it up to my work PC or in my car when I commute, so in essence it shouldn’t even be an issue for most people.

    Reply

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