Five Reasons Why Apple's iPhone Is More Disruptive Than You Think

Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients today ahead of Apple's earnings report (due one week from today). Key excerpts:

iPHONE IS MORE DISRUPTIVE THAN YOU THINK. As AAPL prepares for 4Q07 results on 10/22, we want to look beyond the quarter and highlight five iPhone factors that make iPhone more than just a phone. Also: 3 principles we use in following AAPL: think non-linearly, "Old Steve" vs." New Steve" and Watch what they do, not what they say.

• #1 IT'S PERSONAL. iPhone is emerging as a new category of device: a personal digital lifestyle device that -- as opposed to a phone or Blackberry -- contains all your personal "stuff": music, photos, web, chat, email, social sites, etc. iPod made digital music portable; iPhone makes your digital life portable.
• #2 IT'S ABOUT VIDEO. Video is the next big driver for AAPL in a year or so. While iTunes movie choices are limited today, we see that changing when we expect an installed base of ~67mm video-enabled iPods by next year.
• #3 DIRECT CONNECT. In contrast to the existing phone model, AAPL has recast the model from handset vendor/carrier/user to handset vendor/user.
• #4 STAY IN TOUCH. There are other smartphones with music and touchscreens. AAPL's compelling competitive advantage -- via iTunes -- is its ability to organize/update/add/fix.
• #5 WATCH THIS SPACE. One of the other advantages of the AAPL model is its ability to add new functionality (e.g., 3G, games, corporate email, third-party apps).

· AAPL 4Q07 EPS PREVIEW: EXPECT SOLID RESULTS/OUTLOOK. Driven by continued momentum in Macs/iPhone, coupled with new iPods, we expect AAPL to report 4Q07 results -- due 10/22 after market -- ahead of our $0.83 EPS est. (Street at $0.84) on revs of $5.86bn (Street at $6.05bn) -- and a favorable outlook (but possibly conservative relative to Street expectation as is usually the case)..

Comments

[Tom B]

Good article.

"While iTunes movie choices are limited today, we see that changing when we expect an installed base of ~67mm video-enabled iPod"

People misunderstand the iPhone price cut. It's all about getting H.264-enabled devices into the marketplace as as as fast as possible. Right now, there's still lots of on-line video encoded in inconvenient (Flash), obsolete (WMV and MPEG-1 and -2), or proprietary (DiVX) formats. Once we all get on a clean, open, 21st Century standard (H.264), it will help move the whole video market forward. You can get really amazing compression levels with little loss in quality-- I have. Of course, the price cut also creates a World of Pain for Nokia, LG, etc.

[samij]

note to bear stearn

#1 mobile phones have been personal as long as they have existed
#2 aapl is having huge troubles with video content owners, and those are now spreading to music side as well
#3 this is really how the us market operates, good for industry as a whole if it changes
#4 how does this differ from other smartphones, except that you can't add new features to a iphone through adding new software as you can with any other smartphone. so iphone is only limiting user choice
#5 what kind of nonsense is this? apple cannot just add 3g to existing iphones. it will have to be a whole new iphone.

[Tom B]

"#2 aapl is having huge troubles with video content owners, and those are now spreading to music side as well"

The content "hoarders" will have to capitulate or will be left behind. Personally, I'd take YouTube over NBC/Universals' drek, anyway. The thing content ownerd need to be thinking about isn't Apple; it's BitTorrent. People want a convenient and legal way to do things, though, given a choice.

Music side: Nobody's managed to launch a successful music competitor to iTunes yet, and AMZN is the only player that might have a credible play-- unless Apple decides to undercut them on price (should they choose to do that).

[samij]

"The content "hoarders" will have to capitulate or will be left behind."

in the long run yes. the bs note referred to next year, there's no sign that content owners will jump on itunes anytime soon, on the contrary.

regarding position of itunes, your point of view is us centric. so is that of apple. if apple wants to keep up with the competition, it will have to start thinking globally and stop treating the rest of the world as an afterthought.

[Tom B]

"regarding position of itunes, your point of view is us centric"

Probably. That's where I live. As an individual investor, I have limits on how much I can track the global market.

With regards, again, to Video: 2009 could be an interesting year in the US market; analog TV will (supposedly) be phased out. I think content providers will have a strong incentive to "make nice" with Apple and work out their differences before then. I think we'll move incresingly to IP delivery of TV, concurrently.

Peace.

[Dan Poarch]

#1 You must be kidding. There is nothing "personal" about phones. Until recently you couldn't get your numbers on or off the phone and carriers wouldn't move your contacts for you. Let alone dealing with inept and impersonal sales reps.
#2 Video content owners are having the troubles. Apple is just trying to line their pockets with money but they don't like the terms. Meanwhile, people are more interested in YouTube than the movie theatre because it's easier to get to.
#3 I agree. The US mobile market is suffocating itself under its own arse.
#4 The iPhone is infinitely expandable. How? It has a full browser that can get nearly anywhere a desktop browser can. As well, the iPhone may be opening up to more development. Please understand Apple. They keep control over the platform so the user doesn't get cheated or confused. See PCs for what I'm talking about. Apple hardware always works as promised, PC hardware rarely does.
#5 It might be a whole new phone and you might see it January. Apple is constantly one-upping itself and leaving the industry light-years behind.

[hugo]

wtf...
have you read the article?

[Werlingdervish]

Finally, a person who gets where Apple is going with their ultra portables. I for one am on the road using my iPhone to track stock news, do trades in etrade and make comments like this. Plus the stock widget is good enough to follow my stocks at a quick glance even without wifi. As Apple builds into its new newton and its slim
tablels etc. the post PC era of no more ugly boxes will have firmly taken root.

[Vik]

Mate, I have been able to do stuff like that since 2003.

[contreras]

Me too. This is the "beauty" of the iPhone. A great marketing campaign and a "follower" market. That's the reason why in the US (and only in the US) people think that Apple invented the GUI, the Mouse, the Taskbar and the mp3 player... this is very sad...

[hugo]

"[...] ability to add new functionality (e.g., 3G, [...]"

That's erroneous. 3G is not a functionality that can be added to existing phones. It requires different chipsets inside the phone, => a new model.

[Vik]

I am amazed... is this iPhone or some outer space vision we are talking about?

It is just another phone, in fact less than most other phones on the market. Let's not forget that the US is not the most advanced place for mobile phones; and hence so much noise about a phone which is not even 3G. I think the real test will be in Asia.

Most of the stuff that is being touted has been around since the past few years. So the big deal is what exactly?!!!

This article reads like a marketing brochure by Apple... the value of reading this piece? well that is any body's guess.

I think it is a good idea for analysts to state if they own the stock in question and if they received free sample phones; just adds to the credibility.