Uncovering Apple's Missing 2M iPhones

Piper Jaffray’s Gene Munster has weighed in on the much discussed missing iPhones issue, and has a different take than Bernstein’s Toni Sacconaghi.

To review: At MacWorld on January 15, Apple (AAPL) CEO Steve Jobs announced that had sold 4 million iPhones to date. Then Thursday, in a post-earnings conference call, AT&T (T) CFO Rick Linder said Ma Bell had registered about 2 million iPhones through December 31 (see full transcript). That raised an obvious question: what happened to the other 2 million iPhones?

Sacconaghi yesterday went to work puzzling it out. He noted that there were 3.7 million iPhones sold through December 31, leaving 1.7 million not registered through AT&T. He estimated 350,000 have been sold in Europe, dropping the unregistered total to around 1.35 million. He estimated that about 20% of the rest had been “unlocked” and were being used on other networks, with the rest in inventory with AT&T and the company’s European distribution partners. He calculated there were somewhere between 150-200 phones in inventory for every non-Apple retailer. And he concluded that the data suggests iPhone sales are not as robust as Apple’s sales data implies, and that March sales could disappoint as the market soaks up the current inventory.

OK. Now Munster’s take. He likewise uses 350,000 as the number sold in Europe. But he assumes that 25% of U.S. phones sold have been unlocked. That would be 838,000 phones. That leaves 2.5125 million phones eligible for activation. Back out the 2 million we know are activated, and you get inventory of 512,500 phones. Munster contends normal channel inventory for the phone is five weeks. If that is true here, it would imply sales of about 100,000 phones a week. Which would suggest annual sales of 5.3 million. Apple has said it will sell 10 million iPhones in 2008. Ergo, Munster’s logic would imply no excess inventory.

Hard to know who is right about the number of unlocked phones versus the number of phones in inventory. High numbers of phones in inventory would suggest the issues Sacconaghi raises. Very high numbers of phones sold and then unlocked suggests a different problem: lower back-end revenue for Apple. The company gets considerable revenue from AT&T on the back end. Munster himself has previously estimated that Apple gets $18 a month for every iPhone user that signs up. That comes to $432 over the course of the required two-year contract. If you use Munster’s figure of 838,000 phones sold but unlocked, and multiply by $432, that is $362 million in lost revenue.

Apple on Friday fell $5.59, or 4.1%, to $130.01. The stock fell 19% for the four-day week, and is now down 34% since the end of 2007.

Comments

[Richard Alv...:]

Toni Sacconaghi - Sanford Bernstein

Okay, can you comment on the number of unlocked phones that you believe were sold in the quarter? You had mentioned that on your last call.

Timothy D. Cook

We believe that the number of phones bought with the intention of unlocking was SIGNIFICANT in the quarter but we are unsure how to reliably estimate the number. In the DECEMBER quarter particularly, we saw sales increase across the quarter similar to what you would expect with the holiday gift-buying pattern.

But as we’re new in the business, we’re unsure when all the RECIPIENTS will ACTIVATE. Some people wait until their existing CONTRACTS EXPIRE, some may initially use the non-phone features only, others activate in the future, and so at this point we don’t have a precise estimate for you.

We see this phenomenon as being an expression of very strong interest in iPhone globally and in that way, it’s a good problem to have.

Toni Sacconaghi - Sanford Bernstein

Can you comment qualitatively -- you’ve given the number last quarter -- qualitatively, do you believe the percentage would actually be higher or lower this quarter, or is it too early to tell based on your experience?

Timothy D. Cook

It’s too early to tell. I would just say I think it is significant.

Toni Sacconaghi - Sanford Bernstein

Okay, and then final question; I think you had mentioned initially at the end of the first quarter of iPhone sales that you didn’t want to talk about iPhone channel inventory, that it was still a relatively small and insignificant product. Given that it has over $1 billion in deferred revenue, why are you choosing not to disclose that number?

Peter Oppenheimer

Toni, that’s not the reason we gave. We said that since we only have one channel partner in each of our first four countries, we’re not going to report the inventory but we are going to employ our proven systems and processes to manage the iPhone differently, or effectively.

Toni Sacconaghi - Sanford Bernstein

Thank you.

2008 Jan 27 09:27 AM

[Julian Ivan...:]

I posted this elsewhere so forgive the duplication:

Here's where the "missing" 1.4 Million iPhones have gone.


Oh woe is upon us! "Where have all our iPhones gone? Think of the children, the children!" This murder mystery comes to you courtesy of yet more time-honoured analysis by favourite AAPL-sceptic du jour, Toni Sacconaghi of research outfit Bernstein & Co.

There are numerous potential explanations for this, most of them completely reasonable. With four countries to keep stocked and about 5000 stores (including Apple's own outlets), it stands to reason that Apple will have several hundred thousand - I've always estimated about 500-600k - in the channel at any one time.

In addition, the vast number of iPhones given as gifts over Christmas may not have been activated straight away as people wait for their existing contracts to expire before signing up to the iPhone carrier in their country.
Sacconaghi is spreading his doubts about Apple, as he always has done. Remember, this is the same guy who said Mac sales growth would flatten, the iPod was doomed, and that Apple would likely never rise over $78 in 2007.
Please people, stop fretting about monsters in the closet. Yes, there could be a problem with excess iPhone inventory, but more likely, this is just the result of far more natural and unimportant dynamics. Keep the possibility of excess inventory in mind if you like, but there is no reason to obsess over it.
If you look at 600K iPhones in the channel (ie both in stores themselves, and also in distribution warehouses which supply those stores) its a pretty reasonable number to assume that around 120 phones would be available to each store at any one time.

Factor in the fact that by Apple's own account 20% of iPhones are bought to unlock, and of the 4 Million sold to-date, 800k will be "invisible" to AT&T, O2, T-Mobile, and Orange.

800k + 600K = 1.4M iPhones accounted for.

There, mystery solved. Can we get on with our lives now, sans-panic?

2008 Jan 27 09:54 AM

[theoilyboy:]

I can offer some non-technical information to this discussion. I live in Beijing China and own an i-Phone (not an i-Clone). I bought it about six weeks after it came out in the States. It cost me 4,000 RMB (about $540). It was unlocked and fully functional from day one using my normal SIM card. No problems ever with connectivity, GPRS, EDGE, etc. I love it. I bought my wife one about three weeks later. The cost had gone up to 4,200RMB. This was strange as phone prices have always comes down in time previously. Several of my friends bought them at later times. The cost kept steadily increasing in 100 RMB increments to where it is now RMB5,500 the last I heard.

Outside the States and Europe (and especially in Asia) buying an unlocked iPhone is easy. Supply and demand here is driving prices higher which means lots of people are wanting and buying these things. I believe there are far more unlocked phones working in other countries than some people think.

Hope this helps!!

2008 Jan 27 11:52 PM

[jbs:]

Why can't people accept that it is unknowable?

All the numbers in the world can't solve a problem when the numbers are based on estimates that are based on little-to-no information.

There is a tremendous amount if useless speculation on this point. Consider it unknowable, and uncertainty, and dedicate your time to a problem that can actually be solved.

2008 Jan 28 12:33 AM

[Tom B:]

"Why can't people accept that it is unknowable?"

The thing that IS knowable is that the MOT RAZR sold something like 100 M units over about 5 years. I would be surprised if an enormously superior product at a comparable price point would do any worse.

2008 Jan 28 01:35 AM

[NickB:]

Lets get this cleared up Apple only gets $10 a month for each iPhone.
www.wired.com/gadgets/...

2008 Jan 28 04:29 AM

[AI:]

@Jason: One other reason the price has gone up is that phones are currently shipping in the US with firmware 1.1.2, which to my knowledge cannot yet be unlocked through software. You can still use 1.1.2 phones on other networks using SIM cloning, but this is not an ideal solution. So right now your pre-1.1.2 iPhone is actually more desireable than the latest ones.

2008 Feb 03 11:19 PM