AT&T Subsidy of Apple's iPhone Would Have Dramatic Effect - Bernstein

What happen to Apple (AAPL) iPhone sales if AT&T (T) subsidizes the cost of the phone for subscribers? The answer, says Bernstein Research analyst Toni Sacconaghi, is that they would sell a lot more phones, to the benefit of both companies.

As Sacconaghi notes, there has been recent speculation that AT&T will provide a $200 subsidy for the pending-but-unannounced 3G iPhone, bringing the phone’s cost for consumers down to about $200. (Current models are priced at $399 and $499.) In a research note this morning, Sacconaghi took a look at what would happen if AT&T does choose to subsidize the next generation iPhone - and why it makes sense for both sides.

• Sacconaghi notes that that sales of the Motorola (MOT) RAZR doubled when its price dropped from $500 to $150 - and doubled again when the price went to $100. “Motorola’s experience with the RAZR in 2005 suggests that price elasticity in the mobile handset market is very high,” he writes. He thinks that it is realistic to think AT&T’s iPhone sales could easily double with a $200 subsidy. “We have long held that the iPhone’s high price has been the biggest limiting factor on its sales,” he adds.
• Sacconaghi notes that AT&T recently indicated that average revenue per subscriber from the iPhone is in the mid-$90 a month range, compared to less than $60 for the average post-paid user. That additional $720 in revenue over the course of a two-year plan provides plenty of room for the company to subsidize the handset and benefit from the additional volume a price cut would create.
• He notes that the economics of a subsidized iPhone could be even more attractive for AT&T if they up the cost of a data plan to $30 a month from $20, which he notes is still less than the unlimited data plan for the Research in Motion (RIMM) Blackberry; he says an increase could be justified by the fact that a 3G phone user would likely consumer more data.
• Sacconaghi says a jump in iPhone sales would likely cannibalize sales of the iPod Touch, which is sold at price points of $299, $399 and $499. But he adds that the overall impact would be positive, since the iPhone is more profitable for Apple than the Touch given the fees the carrier pays back to Apple.
• Sacconaghi also thinks that offering subsidies on the phone would pave the way for factory-unlocked iPhones. He notes that up to half of current phones are being unlocked and used on networks other than those authorized by the company; he thinks that “the availability of factory-unlocked iPhones would further stimulate overall iPhone sales.”

Comments

[bajaman2008]

This is just another example of how much upside exists in aapl.

[fatcat]

I've been wonering all along what the unlocking was doing to the revenue stream...now the're talking factory unlock!!

[Peter Lynch]

>>>But he adds that the overall impact would be positive, since the iPhone is more profitable for Apple than the Touch given the fees the carrier pays back to Apple.<<<

T is not dumb. I doubt that they will subsidize the iphone by $200 AND still give Apple the same amount of revenue share it current has. Most likely scenario is that the subsidy will come out of Apple's revenue share.

If the $200 subsidy does take place, this just goes to show who flawed Apple's current iphone pricing/revenue strategy is. Apple has underestimated the impact of gray-market unlocked iphones, and they are hurting carriers' iphone sales all over the world.

And the $200 subsidized iphone will not only hurt the itouch sales, it will also hurt all ipods sales. Apple is in a tough spot.....is Jobs willing to cannabalize its own ipod/itouch sales to grow iphone's revenue?

[samij]

Maybe Sacconaghi should take a closer look at Motorola before using it as a model of how to run a cell phone company :)

[billddrummer]

To samj,

The Razr was a successful product distributed by an unsuccessful company. Motorola's biggest problem seemed to be not investing enough in R & D to continue innovating after the Razr became a hit. Meanwhile, all the other handset manufacturers continued to enhance their products, and the Razr ended up losing market share after all.

With AAPL finally introducing the G3 phone domestically (available in Europe for some time) a subsidy from T would make sense to broaden the phone's appeal. I'd get one, but not without a subsidy. Until then, I'll keep using my 2 year old Nokia 6102.

[samij]

motorolas biggest was exactly what the analyst in the blog entry above suggests apple to do: drive down the price of one desirable "hit" or "killer" product the company manages to produce.

the winning strategy in mass market gadgets is segmentation the product line, producing different customer groups with somewhat different product while maintaining the price point relatively stable within each product category.

a very good example of such strategy is the ipod line of apple. another example in the cell phone business is the product line of nokia, which gets new product targeting some segment once a week, not once a year.

in the long run, i expect apple to follow those examples with iphone, not that of motorola.

[Tom B]

"Apple has underestimated the impact of gray-market unlocked iphones, and they are hurting carriers' iphone sales all over the world."

You don't understand the "inner game". The point of the iPhone is not to sell iPhones, however profitable they may be. The point is to get developers using the iPhone SDK. These guys automatically learn how to write software for the Macintosh, and, thus, become likely "switchers" and serve to diminish the Mac vs. Windows "developer gap". More Mac apps leads to more Mac USERS.

[Jeremy Elliott]

Tom B is right. I know we've been buzzing about 3G ever since we were standing in line on the the 2.5G release day. No matter how many Gs you get, there are three words that keep making Apple successful over its competitors regardless of form-factor: software, software, and software. What tipped the scales in iPod's favor aver all those look-alike 2.5" HD boxes that played mp3s? The software. Why are Mac sales accelerating faster than other PC sales? The software. The entire key to iPhone's future is in the developers acceptance of the SDK and the trampoline effect widespread acceptance of iPhone as the next--and first--truly handheld computing and gaming platform will have on revenues. I recall a table Q&A on stage 7 months ago between Gates and Jobs at some developer's conference. Each was asked to compliment one another, and it was there that the normally tight-lipped Jobs let it slip. He said that the biggest bright spot in Gates's career that he wished he would have picked up on earlier was Bill's ability to open up his platforms for partnerships with the right developers--harnessing and leveraging the talents of outsiders. Jobs isn't making the same mistake twice. iPhone is a Wii controller for a 3D game to a 13-yr old and a CRM portal to a 35 yr old sales exec. Even MS is developing with the SDK! Forget 2.5G vs. 3G vs. subsidized retail prices..... it's the software, stupid.

[J Lazerow]

"You don't understand the "inner game". The point of the iPhone is not to sell iPhones, however profitable they may be. The point is to get developers using the iPhone SDK."

What? I thought they were selling the iPhone to make a profit. Besides, Apple wants to be a mass market company. The developers provide an important part of the iPhone ecosystem, but don't believe for one second that their primary goal in selling the iPhone is to switch developers. It has to be much broader than that.

[TanToday]

AGAIN.

Everyone looks at the "nits" counting this segment, vs that segment.

It is *THE SYNERGISTIC SYSTEM©™" that makes this puppy so adorable. Forget this or that, it is the "BORG EFFECT©™" at work here, everything is ASSIMULATED, added to the total, the stores feed the product, the iPhone feeds the system, the iPod feeds the system, the OX feeds the system, and EVERYTHING works, works on the first try, works together, and the INTERFACE to everything is so close, that you learn ONE, you have basically learned them all.

I have been a TECH NUT for 30years now, and have seen them all come and go, but I have NEVER EVER seen RABID slavish adoring passionate opinionated FANBOYS and GALS as deeply in love with, and committed TO the APPLEBORG©™ intake system. I mean, what other company has people standing in LINE all night long to buy whatever new product is coming out? Who gets the amount of pre-release HYPE for anything and everything that AAPL does, sure every now and then, a "hottie" gets legs, that is the EXCEPTION but for this crowd, they follow these things like "Parrotheads" with Jimmie Buffet tours.

This is like a snowball rolling down a hill now, every few feet it rolls, it gathers up more mass, more momentum, and becomes more and more formidable.

Just about the only thing that could put the Kabosh on this now, is the early demise of one skinny turtlenecked aging geek.

{ disclosure, long 2,000 shrs }

[Paul Clisby]

Sacconaghi is a douche. He deliberately pumps expectations every time, then proclaims doom when Apple fails to meet. His Cassandra-lovin' ass should have been fired months ago. Or investigated by the SEC.

Preferably both.

[wallawallabingbang]

Savitz and Toni are continually trying to either pump or dump Apple stock. SEC? SEC?

They set up expectations based on rumor. Savitz is a crappy blogger, Toni is an azzahola analyst, and Moritz, who started the rumor, is a lying sack of squat.

It may happen, but don't count on it. Those clowns can't drive Apple's agenda, sorry.

Go Apple.

[Brewer]

Some comment posters above understand Apple much more than most. APPL has always been about software (though they are a hardware company, you buy the hardware to get the software).

It is most definitely about synergy of all products, they are all complimentary.

And the SDK s hugely important, and will get many many Windows developers to see first hand how much better the development environment is in OS X. The iPhone runs OS X, so developing for it allows one to clue into development for Macintosh.

In computing, everyone is a specialist. You invest huge amounts of human capital into a system. The operating system controls all (this is one thing Billy Gates understood, though he was clueless about many aspects of technology, he understood the business side and knew when he saw a great product (Macintosh) that he could rip off for many years without ever actually inventing or creating anything, just copying whatever Apple did.

Getting the developers frothing to develop for iPhone and by extension the Macintosh was a stroke of genius. And a great many of those new Mac sales are going to the technically savy. You can see it at any tech conference.

[Brewer]

Rumor has it the iPhone II will allow you to stream movies and music from your computer at home. Apple is very open to windows, they don't shut windows users out as Microsoft always does to Mac users without fail. But I expect this feature should only work on Macintoshes. IOW, buy and iPhone, and so long as you have a Mac at home, it doesn't matter much how large the RAM disk is in your handset.

[adan]

$200 off, yes....