Apple’s (NASDAQ:AAPL) iPhone has seen tremendous success since its launch in 2007. But competition from Google’s (NASDAQ:GOOG) Android-based smartphones, Microsoft’s (NASDAQ:MSFT) Windows phones and Research in Motion’s (NASDAQ:RIMM) BlackBerry are gaining ground. The average price of an iPhone has declined from an estimated $868 in 2007 to $610 in 2010, an attempt by Apple to keep itself competitive in the smartphone race and maintain its market share. Although price cuts will boost iPhone sales, this could come at the cost of margins, which is already seeing a declining trend.
While we anticipate the average price of the iPhone will continue continue declining to around $408 by the end of our forecast period, Trefis members predict a slower price decline reaching $507. The member estimates imply an upside of 12% to our Apple stock price estimate.
We currently have a Trefis price estimate of $420 for Apple’s stock, about 28% above the current market price of $327.
(Chart created by using Trefis' app)
Competition Will Result in Pricing Pressure
Apple is already feeling the heat from Google’s Android platform for smartphones. According to IDC, Android’s share in the overall smartphone OS market will be close to 40% by the end of 2011, double Nokia’s (NYSE:NOK) Symbian, while BlackBerry and iPhone iOS will stagnate at 14.9% and 15.7%, respectively.  The research firm further predicts that by 2015 Windows Phone 7 will surpass iPhone sales with a market share of 21%. The growth will mainly come from its partnership with Nokia which will drop its Symbian OS in favor of Windows. We can safely say that Android and Windows will be the two leading smartphone OS providers in the years to come, and this will definitely put significant pricing pressure on Apple to maintain its market share.
Widening Addressable Market Could Save Margins from Declining
Earlier this year AT&T announced that it will reduce iPhone 3GS price to $49 from $99. Apple is also working on a new line of less expensive iPhone, which will be half the size of the iPhone 4. The move to offer cheaper iPhones should help Apple gain smartphone market share, but this could come alongside lower average pricing and reduced profit margins.
An expanding addressable market could, however, save Apple’s margins from declining further and boost sales. Apple can benefit significantly from the availability of iPhone 4 on Verizon’s network, which has a subscriber base of more than 90 million in the U.S. With AT&T acquiring T-Mobile, Apple becomes an indirect beneficiary as it has the opportunity to sell the iPhone to T-Mobile’s 34 million subscribers. This creates an opportunity for Apple to expand its market share (see The iPhone Opportunity and Risk that Investors Should Consider). As a result, strong annual growth in iPhone sales could prevent a sharp decline in iPhone’s margin and average price, as suggested by Trefis members in the chart above.
- Windows Phone to eclipse iPhone sales by 2015 – forecast, CNN, March 29, 2011