Why a Million iPhone Sales In 74 Days Is Better Than You Think

| About: Apple Inc. (AAPL)

By Carl Howe

Both commentators and bloggers are continuing to claim that the iPhone million unit mark represents weak demand, including some commenters on my post from yesterday. Silicon Alley Insider Dan Frommer joined the fray with this commentary titled, Apple's iPhone 1 Million Is Below Plan:

Days after Apple gets hammered by the Street over iPhones sales, Steve Jobs tells us that he's selling plenty of fancy phones: 1 million of them in 74 days. The news, announced before the market opened, bumped up AAPL: Shares immediately jumped to $137. But now they're dropping down again, below $135. So is 1 million a good number or not?

It's not -- not even by Apple's own low-ball public sales goals. Jobs has announced plans to sell 10 million iPhones by the end of 2008 -- a year and a half after launch. But a million iPhones in 74 days works out to a little less than 5 million iPhones per year -- if you're selling them at a consistent rate. Apple sold 270,000 machines in the first two frenzied days it was on sale, which means it took 72 more days to sell another 700,000 phones. That's a 3.6 million annual run rate, which would give Jobs a total of 5.8 million by the end of 2008.

The iPhone hasn't been introduced in Europe yet, and when it does that run rate will certainly increase, as consumers there are comfortable with the idea of buying pricey phones without carrier subsidies. And Jobs obviously intended to cut prices -- eventually -- to boost sales again. But if Jobs was selling enough $600 iPhones, there would be no reason to drop prices by one third after just two months on the market. Lehman Brothers' Harry E. Blount, who had correctly pegged Apple's first weekend sales, predicted this move in July.

How much will that help? Remember that most potential iPhone customers can't buy one no matter what the price is without considerable hardship, because they have long-term plans with other wireless carriers other than AT&T. You may be more inclined to buy a $400 iPhone than a $600 iPhone. But if you're locked up with a two-year Verizon contract, you're not going to buy one at any price. We hear, second-hand, that Apple is running 25% below their internal sales goals, and we're in no position to confirm that. But we think that if the iPhone was on track, we wouldn't have seen a price cut this early, and we would have heard about 1 million units even earlier.

Click on the above image for a movie of iPhone availability for the month of July; Quicktime required

Most amusing. I say amusing, because the post conveniently ignores three important factors that make such a straight line extrapolation of the first 74 days silly:

  • Seasonal sales He is using straightline projections assuming no holiday bumps, which we know historically are important boosts. He also conveniently ignores the fact that summer is probably the worst selling time for consumer electronics.

  • Never expiring carrier lockups.The article assumes that if you're a Verizon customer today, you'll never become an ATT customer because of your two-year contract. But, over the next 18 months, three quarters of all two-year-contract carrier lockups will expire, creating new consumers who can be sold iPhones.

  • Near non-existent iPhone availability for three weeks. Everyone is focusing on estimates of about 700,000 iphones sold over 74 days. But in reality, iPhones were very hard to find for nearly 21 days of that selling period!. I've included a (admittedly very rough) movie showing iPhone availability at Apple stores during the first month of sales. Suffice it to say that if you wanted an iPhone during the period between July 1 and July 21, you had to be either lucky or determined to get one, because most Apple stores were out of stock of them.

This is a very typical pattern for Apple. Whenever it tries something new, various pundits bet that it will fail in the effort because, well, just because. BusinessWeek wrote the epitaph of Apple retail when it launched, and now those stores garner more dollars per square foot than any other retailer, bar none. The iPod was written off by Slashdot as "No wireless. Less space than a Nomad. Lame.", and the iPod is now by far the dominant music player. And now bashing the iPhone's success (which by the way, writers from Bloomberg and CNET to Suckbusters, not to mention John Dvorak, claimed would fail horribly) and price cut has become the latest journalistic parlor game.

But it's also important to remember that even with all the launch and sales-bashing, the iPhone remains one of the best-selling consumer products in history as measured in dollars, passing Microsoft Windows 95, Microsoft's XBox 360, and even the Nintendo Wii launches. At one million phones, Apple has pulled in about half a billion dollars in sales that will add to its balance sheet over those 74 days, And at the new price point and with the holiday season approaching, those numbers will only go up rapidly, regardless whether the actual sales for the year are 2 million, 3 million, or 10 million.

No matter how you slice it or try to discount it, the iPhone has already proved most of the aforementioned pundits wrong. If they want to claim that Apple didn't meet their expectations, that's fine. But any business writer or analyst who claims that selling a million units of a completely new product at an average price of $575 in a little over two months "isn't a good number" just is trolling for traffic. Last time I checked, half a billion profitable dollars in sales was real money in most people's minds. Claiming otherwise is just sour grapes.

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