Apple's $199 iPhone Is a Game-Changer

According to reports, AT&T (T) is preparing to subsidize $200 of the cost of Apple's (AAPL) new iPhone. If this is true, watch out. The Apple market share story just entered a new realm of mad growth.

Remember what happened when Nike (NKE) hooked up with Michael Jordan? The $199 3G iPhone is Apple's MJ. The world is about to change. By Christmastime, if you're not ichatting, igaming, or ipoding on your mobile device you will be severely outdated. It is rumored that the new applications will allow the iPhone to access your home computer and your home television. This technology will allow users to stream any movie, television show, or song directly to your phone over the 3G network.

Other applications will turn the phone into a remote control, video recorder, flashlight, scientific calculator, business email device, and hundreds of other cool apps from the SDK developers. It was assumed that because no subsidies had been offered for the 1st generation iPhone that consumers would have to pay at least $400 for the new version. AT&T's move just changed the game.

Unfortunately, this iPhone explosion is going to cause some casualties. The first was Palm (PALM). CEO Ed Colligan ignorantly "laughed off the idea" that the Cupertino, Calif.-based company would experience any immediate success in delivering a device to the fastidious smart phone market. "We've learned and struggled for a few years here figuring out how to make a decent phone,'' he said. "PC guys are not going to just figure this out. They're not going to just walk in.'' Poor Ed, since that statement on November 22, 2006 his stock has dropped 32% to $5.80 a share. My sources tell me that the Treo makes a better paper weight than a smartphone.

Palm might have been the first casualty but they won't be the last. The next wave starts with Research in Motion (RIMM). RIMM's stock price as of market close on Wednesday sat at $121.78 reflecting a p/e of 54. As a company, not only is RIMM a one-trick pony, but their one trick is a one-trick pony as well.

Let me explain. According to a recent study by ChangeWave, 56% of Blackberry owners cite email as the primary appeal to own the device. The famed physical keyboard only received a 5% necessity rating. What's going to happen when RIMM customers discover that they can get the same email functions on another phone that also features the best music, video, web browsing, touch screen, and other business apps for only $199? RIMM's growth rate will decelerate and their story will begin to fade.

Until this point, RIMM has been able to compete on price; the $199 eliminates that. What about the cheap consumer market? The $199 price break effectively eliminates any line separating business smartphones from cheap residential use phones. The fire that has been started in the smartphone market is about to spread to the residential market. The AT&T price cut, combined with Apple's international expansion plan, officially opens up the iPhone to the 1.1 billion-unit cell phone market. Growth rate weakness will be felt by the entire industry from Motorola (MOT) and Nokia (NOK) to Verizon (VZ) and Sprint (S).

Investors have failed to grasp this iPhone story. On February 26th BMO analyst Keith Bachman declared that Apple's three growth drivers - the Mac, iPod, and iPhone - have been reduced to just one: the Mac. I do agree that the iPod's days as a growth driver are over, however, I do believe that iPhone growth hasn't even begun to be priced into Apple stock.

Many are still wondering if Apple can meet the sales goal of 10 million this year. I've got some new numbers for you all to think about. Try 25 million phones sold this year and 100 million phones next year. The less expensive iPhone is a game changer. This could be the greatest market share story of our generation. Any money manager who isn't invested in Apple should be required to take a breathalyzer.

The anti-Apple people are like the anti-Jordan guys during the Chicago Bulls run of 6 NBA championships. It just doesn't make much sense; you're missing out on history. When my kids ask me about how amazing Jordan was, what if I had to tell them that I was actually a Clipper fan? My kids would laugh me out of the room if I tried to tell them how great Danny Manning, Charles Smith, or Gary 'the General' Grant were. The time has come to be long AAPL and short RIMM. Don't be caught on the wrong side of history.

Disclosure: Long AAPL.

Comments

[seeksome]

Game changer,best of breed AAPL stock is on the move HIGHER! I was smart or lucky enough to get it in the $120.'s earlier this year and I am one happy camper! For wholesale prices on Apple and other electronics please visit my website...Thanks!

[nave]

couple points:

1. the $199 price point will definitely help sales. however...
2. how many people are ready to pay $20/mo extra for the data plan?
3. while it is easy for smaller businesses to move over to att/iphone why would corporations move away from what they're used to (blackberries)? biz users don't need the multimedia (usually).
4. didn't apple sign a 5 yr iphone agreement with att (and vodafone in Europe)? for them to really start moving huge volumes, they need to either get out of the att/vodafone deal and let other wireless companies start selling iphones officially.
5. once they get out of the deal, they can also start developing cdma versions

until some of the issues above are addressed, i think your figures are overly optimistic

[Jeanne M Calamore]

I certainly applaud your exuberant iPhone sales goal numbers. 25,000,000 iPhones sold this year would really be a game changer. Steve Jobs is a certified genius. Since I'm long AAPL, I guess I won't have to take the breathalyzer. History is about to be made.

[LiquidSoapDispenser]

Finally an iPhone with a fast data connection. Add to that a very reasonable price, and I agree, Apple is going to sell a lot (MORE) iPhones!

[Brewer]

Another great article. All the news about Apple is good now and all the news about Microsoft is dire. This is the exact opposite of the days when MSFT were making actual market gains (think waaaay back people) and yet their stock just sits around 28-29-30.

Apple is taking it's computer market back from Microsoft quite dramatically, but the market is oblivious to this fact.. And, as with the iPod, they really have no competition whatsoever in the phone market. I can't for the life of me think of any reason, aside from 'Wintardation' that made RIMM go up 5+% today. That is just stupid. Blackberry hasn't a chance against iPhone let alone iPhone II.

If iPhone II allows video to be streamed from your computer at home, think what that will mean for their computer business!

Another tidbit today is that Apple has an agreement with the major movie studios to get iTunes movies on the same day as DVD release. Also, Rogers has an agreement for iPhone in Canada (prior to this the iPhone had to be unlocked.

There are so many things Apple can do now. What about a TV with Apple TV reciever built in? They could build it themselves, or market it with LG, NEC, etc... They could release OS X for all PCs. They could partner with Dell, HP, etc... who are BEGGING to sell OS X.

And remember, the stock did NOT go down after the iPhone release, so just because it normally dips on ship, that doesn't mean it will happen next month.

[Peter Lynch]

"My sources tell me that the Treo makes a better paper weight than a smartphone."

My sources??? Ever heard of the Centro? 1+ milion others did...

Check your sources again.

[Apple Reality]

What if ATT decides to subsidize the iphone by $200 (as it does with RIMMs products) only to make the data plan comparable in cost to RIMM's ($40 or $50). No one seems to realize that while edge is pokey on the iphone, $20 a month for all you can eat data is a bargain. ATT probably realizes this and will increase the cost of their iphone (3G) data plan.

[Viva Newton]

"PC guys are not going to just figure this out. They're not going to just walk in.''

LOL what a moron.. more so considering there would be no Palm or Graffiti without Apple , Palm was started by an ex Apple employee
and the Newton/emate had all the Palm features (more actually) including the graffiti recognition software LOL I can't stop laughing about these corporate morons ... Although I am sympathetic with Palm
because they always supported the Mac , it's because of people like Ed Colligan they are in the shit not because Apple or Rimm have a better product.
They had years to come up with a new device but when CEO's gets cocky about their product that's where they end up.. in the crapper
Rimm is doing the same thing , feeling confident Apple can't touch their precious corporate market , let's just wait and see

[ApplSaus]

I bought a Gen1 iPhone a couple of months ago and have been extremely pleased with it. A longtime Mac user, the biggest observation i can bring to the table is that the iPhone is not a phone at all. It's the coolest, most unified, personal entertainment, data management and communications device ever conceived. Now, I could be mad that they're going to sell the 3G version for $150 less than what I paid ($350 for a refurb from Apple.com), but I knew the risk and bought my iPhone knowing fully well that the new one would be out in a few months (although I thought it we be at a $499 price point). Also, I'm in long on APPL stock at $36.65 so how can I complain? If you bought a Gen1 iPhone, buy a few shares of APPL tomorrow and by the 4th of July, you'll have made more than enough to buy Gen2. Invest Different. Go Long and Prosper. PMY

[hardrookwar]

Yay, $200 phone subsidy! Wait, $480 data increase ($20/mo. over 24 month contract). ATT seems to be counting on the Total Moron factor to drive new iPhone sales. I guess no one went broke underestimating the American public, right?

[Danny Miracle]

Great post - thanks for representing Danny! Good thoughts on Iphone but what about the Sprint Instinct coming out in June? I heard it's like Chalmers 3 pointer as a real game changer with Sherron Collins speed.

[Oh Blah Dee Blah Dah]

RE: "how many people are ready to pay $20/mo extra for the data plan? "

That is why Apple's phone has an "i" as the first letter: "INTERNET."

No one should buy an iPhone, if they don't expect to be able to get on the INTERNET.

Apple's contribution is that it got the carriers to give UNLIMITED mobile internet access for a very reasonable $20 per month.

[Nextel Accessories]

$20 a month but you get what you pay for.....Edge network is horrible.

[User 159136]

seems like more and more people are finally starting to get a glimpse of the massive possibilities with the iPhone. 100M next year seems about right - once global adoption is blessed so phones are no longer unlocked, this will explode even more than it has already. And once they build the ecosystem around the iPhone, it's game over. There will be a lot of companies that Apple will steamroll over once they build the ecosystem. Even Mr. Softy one day if they play their cards right. The student has become the teacher, grasshopper.

[finance ninja]

I'm long AAPL as well because we are in a weak market right now and Apple continually is able to receive growth from a market with less money. Also note to EVERYONE who got their $600-1200 rebate check from uncle sam guess where some of that might go? to buying the iPhone.

[FreeRange]

Discounting the iPhone is a terrible idea. It really isn't a phone but a full on computer that also has phone capabilities, and its a device that is easily integrated through great software to your computer, itunes, ipod. And it's far far far easier to use than any other device out there, and oh by the way, there ARE more expensive phones out there, but guess what, the carriers heavily subsidize them so you have no idea what their true worth/value is other than you signed a 2 year contract to get one for free or for say $99 - why not pay for a device what it is actually worth, and let the carriers discount THEIR services when you buy one. After all, they are the commodity, not the iPhone. The carriers in the US have totally screwed consumers by subsidizing phones and then dictating to the manufacturers what features and functions the phone can have thus suppressing innovation in this country. Apple builds great products that people want, by the 10's of millions - I'm long on apple and am perfectly happy with their current growth rates - selling the phone at a cheaper price cheapens the brand and the perceived value of the iPhone and will hurt apple in the long run. Quit being short term thinkers! There is plenty of pent up demand at current prices - 10's of millions around the world are on the fence waiting for the 3G iPhone.

[User 159136]

AppleSauc said it best ... "the iPhone is not a phone at all". exactly, it's a trojan horse to build a network from which Apple can generate limitless revenue streams. the first example of this is the fact that AT&T is paying people $200 to buy the iPhone and use their network because they are making $90 / month on each user so they pay it off in 2 months. the iPhone is a network, not a phone. and Apple, and a whole host of other companies are going to generate countless revenue streams from it.

[Oh Blah Dee Blah Dah]

RE: "$20 a month but you get what you pay for.....Edge network is horrible. "

The EDGE network was the ONLY way to kick-start the iPhone. The U.S. and Europe, at that time, had very little 3G networking up and running. AT&T expects to 3G rolled out across the U.S. by the end of 2008

The 3G iPhone will take care of the EDGE delay. Then, EVERYONE will want an iPhone.

[Oh Blah Dee Blah Dah]

RE: "Yay, $200 phone subsidy! Wait, $480 data increase ($20/mo. over 24 month contract). ATT seems to be counting on the Total Moron factor to drive new iPhone sales. I guess no one went broke underestimating the American public, right?"

The iPhone at this time is sold with a 24 month contract, so $20/mo. over 24 months is the SAME after the $200 rebate as it is NOW. The difference is that you get the iPhone for $199, a lot less, and the contract period is expected to remain the same.

No morons here!

[The Dude]

"According to reports....."

No, actually, this rumor has a single source, and it's Scott Moritz. If you follow the people that follow Apple, you know that he has a terrible track record in the Apple prognostication category. He has little credibility. Actually, he's a fool.

Don't put much faith in this.

[deep]

I'm in India and I have over 20 friends with an iphone. Every single one loves it. Everyone that doesn't have one gets irritated because people that have the phone use it as a quick and accurate resource, and they feel stupid speculating on everything.

"I heard a train crashed in China"

"Who lost on American Idol last night?

"Did that movie get good reviews?"

"What happened at that rally for Tibet?"

It's a wonderful thing to be totally up to date with the entire world while working to educate a village in India...

[peeg]

seems like wishful thinking

[REB]

I agree with you. What hasn't been mentioned is the youth market. The initial price was beyond the range of most of the youth market. A subsidized price will help; but it will be the new games that will push youth sales higher soon after June. Universities are already experimenting with iPhone/iPod Touch Wi-Fi campus communications, giving new freshmen one or the other.

The number of useable software programs will explode by Christmas creating more good word of mouth. Apple will be developing microprocessors for hand held functions for their devices with the engineers of the recent acquisition. Their many patents portend an integrated view of the technological future for personal use where only they can provide the integrated solution.

[Sara]

Scott Moritz is a flat out liar. This is the same guy that said we would have an ultar portable back in November, the same guy that said we would have an iphone nano by christmas, the same guy that said there was a production cut on the iphones, the same guy that said ipod production was cut in half, the same guy that said the iphones release was a disappointment only having Apple announce 5 days later that they had sold 1 million of the things. This guys source is the guy he sees in the mirror. He talked AAPl down all last year and was wrong on every account, now he is setting up its customers for disappoinment in a purposeful and knowing intent. This man has NO credibility he should be writing for the enquirer or the star!

[aplman]

nave said "5. once they get out of the deal, they can also start developing cdma versions"
DUDE,
CDMA is a dead technology even Verizon will be moving away from CDMA in the future. 4G is where it will happen. Apple absolutely picked the best battle with AT&T. AT&T was purchased at the same time the iphone came to market. AT&T is great in most areas of the country. What we don't need is a CDMA version. We need pressure to be put on Verizon to update their technology.

[wallawallabingbang]

Scott Moritz is a douchebag.

Go Apple!

[reagan]

300 by New Years. Bank on it.

[User 186936]

Guess I'll hang onto my 980 shares, which started at 245, split twice, and are now scary up there. That was one year's IRA purchase - the best investment I've ever made! The only one, by the way, that my broker didn't like, argued with me about, and keeps telling me to sell. Like he ever gave me a stock like Apple! Best he ever did was a 4 bagger, over 10 years.

[Partners in Grime]

An iPhone for that price? Apple won't be able to make enough to keep them on the shelf.

[LongAPPL]

The real kicker to this story is the PA Semi deal. Add to the discounted price the future possibility of a PA powered "super iPhone". An iPhone with a one-of-a-kind chip that runs faster, at 1/5th the power, with on-the-chip security, and BAM! We are talking upside way ahead of the competition for a long long time.

[InvestorsLive]

www.investorslive.com/blog

following RIMM / AAPL as well - great breakout charts

[Yourope]

The user and professional reviews do not seem to agree with Apple fans... And thus the sales are falling sharply.

As you can see 30 phones are regarded better than the iPhone. That isn't very impressive at all.

alatest.co.uk/cellular_phones/c-8/?limit...

[wallawallabingbang]

Scott Moritz has no shame and is part of the Cramer & Savitz thestreet/barron's cabal. He is seldom correct. These manipulators talk things up and fabricate in order to set up a 'tree shaking' by the hedge funds after retail investors have bought the stock. The rumor comes up false and the stock plummets.

I'm long Apple stock, but I don't like what I see. SEC?

See "Jim Cramer admits to Stock Manipulation - from YouTube" on basherbusters.com.

[macemx]

Brewer says: "All the news about Apple is good now and all the news about Microsoft is dire."

SO true. That's the impression anyone gets from daily bits and pieces of news - but when you list Apple vs MS news stories side by side, it's really eye-opening. Like this: www.mactivist.com/wall

No one will mistake that page for a complete or unbiased compilation of news; it's no one-stop resource for investment decisions! But it's interesting to ask: If one were to deliberately compile only positive MS news and negative Apple news, just how short would the list be? (Hint: Very!)

While people (and investors) are picking up the "Apple is hot" story piece by piece, I think many of them are missing the scale of the quiet sea change taking place – with the iPhone, with media downloads, with the Mac in homes, schools, and even enterprise. That's fine with me, as I keep scooping up Apple shares in anticipation of the coming day when the world catches on to what's happening!

[Tom B]

"I'm long Apple stock, but I don't like what I see. SEC? "

Manipulators are forever pulling out this SEC stuff whenever they want to drive the price down

[wallawallabingbang]

Tom B, for the record I'm long until the cows come home...

Perhaps you misunderstood me.

I don't like the blatant manipulation by Moritz, Savitz and Cramer.

Is that more clear?

I've got no interest in seeing the stock go anywhere but up, as it should based on its offerings and potential.

[Tom B]

"I've got no interest in seeing the stock go anywhere but up, as it should based on its offerings and potential."

Understood.

[Mike Cooper]

Is Schwartz forgetting about the economy? $199 sounds like an incredible deal compared to last year. But this year, a recession year, the IPhone is an expensive toy no matter how you look at it. This move will stabilize IPhone sales nothing more.

[Tom B]

"the IPhone is an expensive toy no matter how you look at it."

Perhaps you deliver newspapers or serve hamburgers as a vocation, but many people regard cell phones as an important business tool, allowing easy, mobile communication. Many of us rely on web-based as well as people-based data. A mobile FULL FEATURED web browser has way for uses than "joke of the day" or Yahoo's latest dope on Britney Spears.

[kip]

First thing I don't like about iphone is its closed SDK which requires developer to use Macintosh to do the development, huh imagine development on mac.

All iphone is about is the usability and the new look factor which is good for few but as a core enterprise user I cannot do without keyboard which would certainly slow me down in replying to lot of emails.

If you dwell deep into blackberry technology they have better technology for enterprise data than what iphone does now, in terms of security, timeliness of push, enabling of enterprise applications and many other. You cannot simply strike off blackberry .

Last but not least iphone craze lasts for as long as some one else does not release another super touch screen device. Android platform is on the way and let us see how it does.

[Zach Bass]

It's a red herring. The subsidized cost will be included in the contract. What this does do is open up AT&T to introducing different pricing models, perhaps some that don't include unlimited bandwidth.

-zach bass
www.zachbass.com

[bill stenner]

interesting comments.. i havent used my shuffle in probably close to a year. I would agree with both pro comments regarding iPhones and Blackberries. The business side of things tends to favour blackberries so i see bringing them into the argument as a non-issue. People used to brag about apples way back when extolling their greatness or superiority. For desktop publishing or graphics work that was the case. Then Microsoft caught the initial internet wave and steamrolled them. Apple is back and competition is a benefit rather than something bad. Any of you that dont believe that are lacking in perspective. Just as Apple has got the jump on the competition for now dont be suprised to see the tide change at some point. I would also question just how green your apple is... technology comes at a price and your electronics are one of the greatest polluters on the planet. If you are only interested in share price or usability.. well you might want to consider the usability or functionality of the planet. Hippies became yuppies. I hope that some of you might learn from the past..except youve mistaken the past for the future.

[Kev]

Looks like apple is playing chess, while everyone else is playing checkers. Can you say check!

[J Lazerow]

Those who believe this will result in a binary outcome with only one winner and all others losers aren't paying attention to the aggregate market for these devices. I've also never known Apple to subsidize any product as it hurts the perceived value in the long run. Scott Moritz is notoriously bad at these predictions and any article predicated in this is suspect. Your numbers of 25 mln this year, 100 mln next year are ridiculous. They'll do closer to 15 mln and 30-40 mln next year. Still reason to be long Apple but not nearly as egregious.