Let me begin by saying: don't worry, this is not yet another 3G iPhone hype post that you can find all over the internet. Instead, this post is based on some recent information about the meaningful implications for Apple (NASDAQ:AAPL), as a stock. We all know that the first iPhone was a semi-success, but now that AAPL will be releasing an even better version, expectations are much higher.
The initial hype surrounding the first iPhone was about growth. "Oh, this will be a huge growth product for Apple..." The point is that apparently now, not only will the iPhone be a growth story for Apple, but it could also be a huge margins story.
Portelligent (via EETimes) released research stating that it thinks that the new iPhone will cost as little as $100 to produce, when the first generation iPhone cost around $170 to produce. Note: It hasn't actually gotten its hands on a new iPhone and disassembled it. Instead, it has done some channel checks in terms of components to gauge pricing and come up with this sum. Although this can be a pretty accurate estimate, I just want to throw that caveat in there. However, even if that figure is only slightly off, the point is that AAPL will still be seeing huge margins, and here's why.
AAPL is Billy Badass when it comes to component pricing. If you're familiar with the company’s tactics, then you know they aggressively buy components to ensure its competitive market advantage. The Yankee Group's Carl Howe gives a timeline of AAPL's business savvy:
Apple paid $1.25 billion in 2005 to guarantee flash memory for iPods through 2008; that purchase made it nearly impossible for other flash music players to have competitive supplies and profit margins. Apple reportedly negotiated another similar deal in 2007.
Howe also made the following powerful statement:
In fact, if these numbers are true and the carriers are subsidizing the phone, the iPhone 3G could end up being the most profitable product Apple makes. But more likely, this means that Apple has a lot more pricing flexibility than analysts have given them credit for.
The point is that AAPL will be paying much less for components this time around due to technological/engineering advancements and the bullying approach they take in the component space. The display will most likely cost them half as much this time around. Additionally, AAPL will be getting memory for the phone on the cheap and in turn can sell it to consumers for nearly five times as much as it got it for. The point is that AAPL has significantly reduced its input costs this time around; even with more/newer components in the phone.
In terms of pricing, the phone will most likely sell for $399 straight up no-contract or $199 with the AT&T subsidy for a two-year contract. These figures already show the huge margins AAPL will be seeing with this product. The AT&T subsidy is actually a great thing for AAPL because it will be selling the phones to AT&T at full price ($399 or so), and then, AT&T will take the hit in terms of the subsidy to guarantee that it gets customers in the door buying the phone and signing up for two years of service. There is zero risk for AAPL there, and it doesn't take a hit if this fails.
Why is all of this important? Well, we all know the iPhone is a growth story for AAPL. What I don't think most people realize is the huge margins AAPL will be seeing with this product. With all the high-tech gadgetry inside this phone, people assumed it would cost a pretty penny to produce so AAPL's margins wouldn't be very high. On the contrary, since it sounds though as if those revenue figures would be massively understated. The Mac computer has been the driving force behind AAPL's success all along as it continues to steal market share and crank out sales of Mac Books and Mac computers.
This is the perfect silhouette for what the iPhone very well could be. Mac computers equal high growth, plus high margins. If the new iPhone follows this same formula, then, come September/October, AAPL could see a meaningful boost to its bottom line. Moreover, the best part is, AT&T will be taking the hit by providing users with the subsidy. This gives the iPhone a very competitive price point and many of the features the first generation iPhone lacked.
In the end, all you really have to ask is what does Apple do best? It creates high margin products that people HAVE to have.