Apple's iPhone Mistakes

Apple (AAPL) made two mistakes with the iPhone which hurt growth.

The first was to sign a five year exclusive contract with AT&T (T). It might have been the best option available to Apple at the time, but it is turning out to be a big bottle neck to growth in the U.S. and globally. 2 million of the 4 million iPhones sold through AT&T did not register on their network, but turned up in other countries, indicating a lot of pent up demand.

Second, the iPhone is cannibalizing sales of the iPod touch. A 16GB iPhone costs the same as a 32GB iPod Touch ($499). The iPhone has half the space but comes with a camera, a phone and the convenience of not having to carry two devices. The $200 price drop on the iPhone, although necessary, was probably a bit hasty and was not without consequence. Previously, Apple played a wonderful balancing act and it was not uncommon for an individual to own the iPod Shuffle, the iPod Nano and the iPod Video at the same time, but things got a bit mixed up as of late.

Just when customers had gotten used to 60GB of space and lots of video storage, Apple introduced the iPod touch, built for an even better video viewing experience but a mere 16GB of storage (recently upgraded to 32GB)-- the same as the Nano. The fog should clear up in another 2-3 quarters as Apple clears its pipeline and maximizes utility from older models.

Disclosure: Author holds a long position in AAPL

Comments

[Julian Ivan...:]

1) We don't know whether Apple signed a 5-year exclusive deal with AT&T or not. It could have been a 2-year deal, with AT&T having an option to carry the iPhone for a further 3 years but without preventing Apple from offering the device to other carreriers too, once that first initial 2 year exclusive period has expired.

2) Apple seem to have struck excellent terms with AT&T and the iPhone has proven to be one of the most successful consumer electronic launches in history.

3) I wouldn't call the launch of the touch a mistake. Its a shame it couldn't be launched with more memory at the outset, but the same could be said of the iPhone. However, sales of both items are en fuego, so I wouldn't call this a "mistake."

So in conclusion, I don't see either of the "mistakes" Appl made with the iPhone. Rather, I see the most sucesssful launch of any mobile phone ever (remembering it was initially only available in the US at launch), and the continuation of innovation in the iPod line sufficient to continue to drive demand and growth there whilst the iPhone product line is expanded.

At some point, people will stop worrying about falling iPod sales growth and rising iPhone sales growth, and realise that all that matters is that collectively, sales growth of the two lines combined (and they really are just one product line seperated merely by the presence or lack of cell phone cpability) is strong, rising, and likely to increase, given Apple's entry into the 1.2B/yr+ mobile phone market - a market some 10x larger than the current iPod market.

Its a matter of perspective. I don't see any mistakes, just flawless execution.

2008 Mar 26 05:04 AM

[ellsab:]

Tommo, I couldn't agree more, too bad people are always nit picking the little things without any insight onto what SJ was or is thinking. He has done wonders, and can only see the Iphone explosion in coming years. Very exciting actually!!

2008 Mar 26 06:28 AM

[Warnin:]

Opinions are like ---holes! And this one smells just as bad. This is one of the downsides of the internet. Someone who knows nothing can offer an opinion and the fact that it is offered provides credibility. I am sure this writer's previous bent was promoting the existence of flying saucers. The advent of camera phones has pretty much done away with the UFO. I am sure the credibility of this blogger will evaporate as soon as all realize he/she is uninformed and unemployed.

2008 Mar 26 10:04 AM

[samij:]

even if the artice was bad (which it actually wasn't, it made a perfectly valid point), the comments have absolutely no class. what's with these apple fans? steve can't do no wrong... there' a great piece about the phenomena on salon: machinist.salon.com/fe...

2008 Mar 26 10:53 AM

[Aleem Bawany_:]

Jobs' calls the carriers "orifices"--it is no secret that he hates them and would like to have them reduced to pipes. That is what the iPhone is setting to achieve and that is why it does not have the ATT branding with the ATT website as default and the ATT apps on the desktop (the walled garden approach). The fact that Jobs' is having to sign an exclusive contract with an industry whose practices he abhors and the fact that ATT gave up so much ground and the whole China Mobile deal going sour... are all indicators that this deal was anything but smooth sailing and that dealing with mobile carriers is not easy.

iPhone had excess inventory upon launch. The price had to be dropped. It was a compromise that hurt the bottom line. If that is not an indication of the company's lapse in demand expectations I don't know what is. The share's drop in price from $200+ to current levels and their last earnings call all point to execution glitches. The slump in demand for the iPod is also another indicator for the paradigm shift from PMPs to integrated phones--a shift that Apple itself has iterate.

I have accumulated a lot of AAPL stock at the 119-130 price levels and am extremely bullish on the company but these facts remain.

2008 Mar 26 12:18 PM

[Aleem Bawany_:]

Author posted the above comment.

2008 Mar 26 12:19 PM

[TA:]

'Apple could have sold 10 million iPhones the first 6 months, if it sold the iPhone throughout the world. However, Apple's approach is to "build a long term business" by initially selling in specific markets to see what works and learn how to provide its top customer support for a new product'

No, AAPL's approach is to squeeze extortion money from the wireless providers to lock in their market like they do with all their products(ie iTunes being the only ipod provider instead of the free market). They naturally are receiving kickback so it's going to take time, not everyone rolls over at once.

2008 Mar 26 02:42 PM

[tom1234:]

when i hear apple---i want financial results --and steve jobs is getting the job done ---i have no problem with the end justifying the means ---apple is not just a manufactor like a dell or rimm ---apple does get every base taged and scores the home run-
at&t did not have to take the deal ---there was no gun held to there head ---did not verizon walk away--just maybe at&t saw the iphone as a potential leader in smart phones --and what did they have to loose ---they still other phones to offer--so you have apple making money from all angles --not bad steve jobs

2008 Mar 26 06:47 PM

[Jeremy Elliott:]

As I've read how each of the carriers in each market have reported massive jumps in market share attributed to iphone-induced migrations, I think the upside for the carriers to go exclusive is obvious. As for Apple's upside, well, too many writers fail to do the math on the impact of those monthly residuals kicked-back from the carriers. A $280 margin on a great number of phones is a slaughtering of the sheep (see Motorola). A $280 margin on half as many phones plus a $15-$20 monthly kickback for 2 years deferred over the next 8 quarters is a sheering of the sheep. Sheering beats slaughtering--do the math. EDGE is slow, but 3G will be here come June, along with full enterprise support (bye bye, Blackberry) and a mind-numbing cornucopia of apps that will knock potential buyers on their collective cans. And those apps will open the door for iPod Version 2.0's growth story, not as merely a digital media player but as the first truly handheld mobile computing & gaming platform. End of cannibalization. This article's not too bad, and most of these comments are.

"Think about it. In your pocket, you have something that's broadband and connected all the time. It's personal. It knows who you are and where you are. That's a big deal. A really big deal. It's bigger than the personal computer." - John Doerr, Venture Capitalist (see Google's IPO for his history)

2008 Mar 26 07:05 PM

[peter02l:]

"2 million of the 4 million iPhones sold through AT&T did not register on their network, but turned up in other countries, indicating a lot of pent up demand."

How does this 5 year AT&T contract affect these overseas customers?

"Apple played a wonderful balancing act and it was not uncommon for an individual to own the iPod Shuffle, the iPod Nano and the iPod Video at the same time, but things got a bit mixed up as of late."

In cases where this might be true, I am willing to bet they were not all purchased together, but rather span many generation of these devices over several years. Therefore, rest assured, you will continue to notice such trends.

"Second, the iPhone is cannibalizing sales of the iPod touch."

First came the iPhone, then the iPod Touch. So if there is any cannibalization going on it should be in the other direction. But there really isn't. You can't make cell phone calls with the iPod Touch!

"The $200 price drop on the iPhone, although necessary, was probably a bit hasty and was not without consequence."

If it was, as you claim, necessary then the mistake would have been not doing it.

"Just when customers had gotten used to 60GB of space and lots of video storage, Apple introduced the iPod touch, built for an even better video viewing experience but a mere 16GB of storage (recently upgraded to 32GB)-- the same as the Nano."

Refer to your previous sentence. It contradicts this one!

" The fog should clear up in another 2-3 quarters as Apple clears its pipeline and maximizes utility from older models."

I am afraid, the fog will never clear up over this last sentence of yours. I have no idea what you mean by maximizing the utility from older models. As for Apple, in the next 2-3 quarters and beyond, it will introduce new products which will keep your mind in a perpetual fog.

2008 Mar 27 03:32 AM

[peter02l:]

Aleem Bawany,

You gave it away when you wrote this: "iPhone had excess inventory upon launch. The price had to be dropped."

I can only conclude that you were not around when the iPhone was launched. There was not enough inventory for weeks. There were even web pages (including later on the Apple site) that showed availability at Apple Stores for people to check.

You must have missed the intro at Macworld when Jobs introduced the AT&T CEO to say a few words. Clearly, the exclusive deal came about because AT&T did not act as others (orifices). AT&T accepted the offer and worked with Apple to support the iPhone before it was even developed - sight unseen!


This sentence,

"The share's drop in price from $200+ to current levels and their last earnings call all point to execution glitches."

is beyond description. It really shows the extent of your knowledge about Apple and the Market. And yes, I am saying this with utmost sarcasm. You are indeed a lucky man, or woman, if you have bought a lot of shares between $119 and $130.

2008 Mar 27 03:49 AM

[Aleem Bawany_:]

Peter021,

The slow roll-out is a launch strategy which has proven successful with many gadgets in creating marketing hype. If Apple was facing excessive demand it would not have cut prices.

The products have planned obsolescence and deprecating them ahead of time or delays in newer versions would lead to sub-optimal utility.

en.wikipedia.org/wiki/...

2008 Mar 27 09:20 AM

[Al:]

"If Apple was facing excessive demand it would not have cut prices."

If Apple was about to release the iPod Touch that did everything the iPhone did but make phone calls and take snaps, if these new iPod Touches had twice the storage memory and cost $200 less, who would buy an iPhone?

Apple lowered the iPhone prices to make room for the iPod Touch and to prevent the iPod touch from cannibalizing the iPhone sales.

Is there planned obsolescence in an iPhone or an iPod Touch when iPhone 2.0 and iPod Touch 2.0 are both just a software update away?

Wake up, the new Apple Inc. does not fit the mold.

Strange how you screwed up the iPhone - iPod Touch relationship and yet you were still were astute enough to pick up Apple stock at bargain prices.

2008 Mar 27 04:34 PM

[Jobby:]

I agree entirely with the article. I dont know what the other readers are talking about or where they get their info from. I wont bother going to the finer details or commenting on each of the above discussed topics, but would like to comment on the simplest of points raised above which was on the price cut. Anyone with a little common sense will know that if demand was really so high and going through the roof as some of you insist, then why would any company ever give such a MASSIVE discount and that also so close to the launch and create such negative publicity and upset its customers. I dont think I need to explain this any further. Its as simple as ABC. Think about it!

2008 Mar 28 02:59 AM

[seeksome:]

I am hoping a rebound put alot of cash in aapl at $125.00 hoping it will get back in the $200 range in the coming year.
seeksomething.com Iphones for a buck

2008 Apr 04 08:30 PM