The Power of the Apple iPhone: Will People Switch to AT&T Just to Get One?

Frankly, I never thought I would still have long positions in Apple (AAPL) with the stock at $124 per share. I have been trimming it as the stock has climbed, but somehow I still have not managed to close out the positions completely. Despite the fairly high valuation, there is still a lot of momentum at Apple and a high probability that numbers are still too low. Macintosh sales are growing faster than any PC brand, and it is entirely possible that the company can give video-on-demand [VOD] and Netflix (NFLX) a run for their money.

That said, the iPhone hype is a little worrisome. Not only is the stock running up heading into the late June release date, setting it up for a pullback in coming weeks as investors sell the news, but iPhone projections seem to be getting a little optimistic. I’m not going to bet against Apple, because they have proved naysayers wrong over and over again, but let me give you an idea as to why I am beginning to wonder if they can live up to the hype this time.

Apple shares got a boost recently when Piper Jaffray analyst Gene Munster upped his price target to $160 and projected 2009 iPod shipments of 45 million units. He came up with the latter number by assuming a 7% North American market share for the iPhone, a 3% share on the other continents, along with the average retail price falling from $542 this year to $338 in two years. Munster has been overly bullish (and right) on Apple for a while now, but I wonder if that will cause him to stay on the train longer than he should.

My hesitation in accepting these projections as easily attainable is in large part due to the exclusive service contract Apple signed with AT&T (T) for U.S. distribution of the iPhone. In order for Munster’s numbers to be right, it appears international sales will have to be breathtaking. In the United States, the big four [Verizon (VZ), Sprint/Nextel (S), AT&T/Cingular, and T-Mobile) have the vast majority of wireless customers (about 200 million as of the end of the first quarter). AT&T only represents 30% of that total, so if the other 70 percent of people want an iPhone, they’ll have to wait five years or switch service providers.

Switching might not be a big deal, but AT&T gets some of the worst customer satisfaction ratings in the industry. When AT&T bought Cingular, they were the two worst in terms of satisfaction and network reliability, which caused many to poke fun at the merger. Just how many people will want to switch to AT&T just to get an iPhone? To me, that is one of the top obstacles Apple will have to overcome if the rosy forecasts coming from Wall Street are going to be met. And even if Apple does sell 45 million iPhones in 2009, does the stock price already reflect those expectations?

Deciding whether or not to sell the rest of my clients' Apple shares has been a tough decision. For now, I have trimmed back larger positions to be average-sized at most. There is currently enough potential for me to hold onto some shares, but given I am getting a little skeptical - Apple is no longer is a large position in the accounts I manage.

What do you think? Will a five-year exclusive deal with AT&T hurt iPhone sales? If you are an AT&T customer, are you planning on buying an iPhone? If you are with another provider, will you switch to AT&T to get one?

Disclosure: Author is long shares of Apple at the time of writing.

AAPL and T 1-yr chart:

Comments

[dougout:]

Chad,

Your question is a good one. I switched from Verizon to AT&T/Cingular specifically for the iPhone. I got AT&T's cheapest phone (until I can switch it for the iPhone) and so far reception is better and, unlike Verizon, no calls have been dropped.

mckalias

2007 Jun 11 04:39 PM

[rpark21643:]

Will buy iPhone in January when Sprint contract ends

2007 Jun 11 05:24 PM

[jgphoto1:]

"Deciding whether or not to sell the rest of my clients' Apple shares has been a tough decision. For now, I have trimmed back larger positions to be average-sized at most. There is currently enough potential for me to hold onto some shares, but given I am getting a little skeptical - Apple is no longer is a large position in the accounts I manage."

While I can understand that the altitude is enough to make shareholders a bit dizzy, giddy and frightened, it might help to take a rest, look up and ponder the long view. This is not some local hill at the state park, this is a friggin mountain. This is Everest. And once you get your bearings you will begin to realize that we have only completed the first leg of the climb. Weekend warriors, hedgies and those with their noses hopelessly buried in charts will bow out and pat themselves on the back for a nice double. Investors with vision and guts will press on because soooo much farther to go before that even get close to that peak.

Yes the iPhone has been hyped, analyzed ad nauseum and to some degree success has already been factored into the share price. Yes expectations are high but I think the current buzz will pale in comparison to the buzz generated when customers finally get their hands on it. This IS a revolutionary product in terms of it's elegance, integration, user interface and software (which BTW has now been opened up to third party developers). Those who dissect and it and claim there is nothing new here fail to see that the iPhone is more than the sum of it's parts.... which is the secret of formula of Apple as a company as well. It's not about the parts, as important as they are....it is about the design, integration and simplicity of the whole and how it "connects" with other species in the same ecosystem and ultimately how it connects with the user. What Apple offers in it's various product lines is nothing short of the anecdote for a fragmented, overly complex user experience otherwise known as modern life.

All the buzz and hype we have seen to date speaks volumes about the clutter of the mobile space pre iPhone. Once it comes out and people can get a first hand experience of the touch screen, seamless integration and the power of top shelf software it will be a must have for anyone who can afford it as well as many who can't. The road to this holy grail reaction will have been paved by the hopelessly convoluted user experience we have all been forced to accept by default. Furthermore, and this is already in evidence, you will see Apple's ability to either inspire or pull out the best in their partner AT&T. So count me in as one who has been waiting and will switch to T. If T can manage to roll out an equally simple and attractive plan there will be no stopping this train.

But in terms of the stock the iPhone is merely the tip of the iceberg. Even if it is only a mild success the stock has a long run ahead of it, stretching out over the next several years. This is an excellent company flush with cash that just keeps getting better with age. They have the discipline to selectively focus on picking their projects carefully and giving them the attention needed to make them best of class. And right now that includes several classes, any one of which is capable of growing and sustaining monster companies. What Apple brings to the table is best of class software and UI/design and that is the underlying leverage that will allow them to compete head to head and beat the established top dog in any given arena. And the biggest arena is right in their own back yard, desktop and laptop computing. There is still 94% market share out there waiting to be taken.

Hardware, software, MP3, media distribution (music, audio books, podcasts, video, TV, film), phone, servers, retail distribution (check out the the just updated Apple site and hugely expanded third party software offerings now available at the online Apple store). Whereas Apple has historically been dependent on third parties for distribution it now controls a large piece of that distribution and now profits from the distribution of selective third party hardware and software while at the same time generating an additional halo effect around it's own products, not to mention higher margins.

Apple is a company firing on all cylinders right now and the halo effect(s) are just beginning to light up and mutually and reciprocally spread like wildfire to all other units regardless of which unit you might designate as the original halo. Meanwhile Apple's competitors (Dell, Microsoft, CompUSA, Blockbuster, Netflix, Tower Records, Nokia, RIMM, Motorola,....) seem dazed and confused by comparison. Apart from product halo effects Apple has captured the imagination of youth, Hollywood, the creative community and is increasingly on the radar of corporate IT professionals who are trying to penetrate their organizations with Apple products as a means cutting back on endless trouble shooting busy work. All of the Apple products, user segments, distribution dynamics, and a large unintended helping hand from the competition is gradually setting up a tipping point of epic proportions. While it might be bumpy day to day the long view is steeply up. Catch the dip and keep climbing.

Disclaimer: Long Apple as a result of the observations outlined above and not vice versa.

2007 Jun 11 11:00 PM

[danel:]

I´m from Europe and we can´t wait when it will be available here. Everybody here wants iPhone! Bye bye Nokia :)

2007 Jun 13 08:17 PM

[rlh:]

Will buy iPhone when Verizon contract ends in February. No doubt about it.

2007 Jun 12 11:41 AM

[rsusich:]

I still cannot understand why Apple gave AT&T an exclusive for 5 years. Reception in the Bay area for AT&T cell phones is at best marginal. Tertmination fees of 175 dollars to switch into AT&T to pay another 599 dollars is at best asking Joe Sixpack to fork over $$$$.

2007 Jun 12 12:24 PM