Why Apple's iPhone Will Succeed

| About: Apple Inc. (AAPL)

I have read article after article, on this site included, about the reasons why the iPhone will fail to ship Apple's (NASDAQ:AAPL) forecast of 10 million units in 2008. Having spent a lot of time covering wireless and working under one of the Street's top ranked wireless analysts for some time, I believe most of the negativity is baseless.

First, people gawk at the price. Uh, the iPhone is priced competitively with most other smart phones and has a $200 to $300 MP 3 players embedded. The iPod, which has 70% plus market share in Apple's target market for the iPhone, in the US, shipped about 20 million units in the fourth quarter alone, so it wouldn't take too much cannibalization for an iPod replacement cycle alone to drive strong unit sales.

Also, Cingular will likely subsidize the cost of the phone by at least $150. Carriers love the idea of adding higher ARPU customers that use data plans and extensive SMS and MMS services, so subsidies should be expected. This means the phone will likely cost consumers about $350 to $450, or inline with the new Treo 750v at Cingular and the soon to be launched Blackberry 8800.

Second, Cingular has about 60 million subs. The average replacement rate on these subs is about 1.5 to 2 years. At the mid-point, the company will sell about 35 million phones in 2007 to existing customers. Given the large installed base of iPod users, their replacement rate, iPod cannibalization, and the potential for churn at other carriers looking to change to Cingular to grab an iPhone, it's not too hard to get to 10 million units.

Third, Apple will likely announce at least one more phone this year, possibly at the lower end with a modified OS with a longer battery life that is geared more towards iPod users than pure wireless customers. This will eliminate some of the pricing questions as the phone will be priced competitively with the Pearl from Research in Motion (RIMM).

Fourth, Apple's first offering includes Wi-Fi, making it one of only a handful of phones sold in the US with such capabilities. This will, among other things, make it possible to browse the web at home or in hot-spots at higher speeds than Cingular's 2.5G network.

Fifth, the current iPhone does not support 3G. The company said it is sold on EDGE because it is more widely deployed right now. Cingular will continue to build out its 3G network this year, as will other carriers, and the company will likely release a web-browsing friendly UMTS based phone before year end.

Sixth, it's still not clear to me whether or not Apple will sell the phone in its retail stores, but this is another channel. Apple stores have higher average sales per square foot than most luxury retailers, which I extrapolate to mean that Apple customers that make their way into retail stores are not shy about opening their wallets for cutting edge technology.

Seventh, a virtuous cycle of higher iPhone shipments leading to higher Mac shipments will likely get underway this year as the iPhone runs Mac OS X thus creating a platform for interoperability that rivals no other wireless/PC platform on the market. The end result will be great comfort among consumers looking to switch to Apple for their computing needs.

I have written in the past about my expectation for potentially 30 million iPhones to ship in 2007. I stand by this despite the negativity.