Turley Muller

Apple's AT&T Deal: Setting the Record Straight

Apple didn't make the deal with AT&T for subsidy, or to get the price low enough. In fact, the first generation iPhone wasn't subsidized, and it launched for $600. Then reduced to $400/$500. The 2nd generation was subsidized to $200/$300.

The reason Apple sought exclusivity was because it wanted to have more leverage over software services. iTunes music downloads, App Store etc... Apple wanted to offer these services with out AT&T rejecting or taking a cut. AT&T and other carriers sell music, apps, ringtones, etc. Also, Apple wanted to develop visual voicemail, and AT&T had to partner, Apple also wanted to have control on distribution, warranty, service, etc. Apple didn't want to carriers to slight its product or brand.

The iPhone switched to a subsidy model, and at the same time, the monthly service fee increased minimum of $10, and for many $20, because of the SMS messages increased in price and decreased in allowance. So average plan went up $15. That's $360 over 24 months.

If you read the comments from Apple COO, he said prices haven't changed. In UK and France, the price to the end user didn't decrease.

I am not saying the price will go up, I said the subsidy may go up. People refer to the subsidy that AT&T is paying Apple, in the sense of how much the wholesale price is, hence the price Apple is getting since we only see the subsidized price. But it's misleading. The subsidy is just the difference between the price the carrier pays and the price it charges to the end consumer. The price to the carrier is $599. It charges $199. Therefore it absorbs $400. In some countries the price to the consumer is $100 or $50, and some carriers it's free. So, some carriers are subsidizing the device $600 since it's giving away the phone.

What Marshall is saying is that the price Apple will get will drop from $650 to $500, and the carrier will still charge $200. Therefore, Apple's profit margin will decrease. I am saying the profit margin will remain steady, because the carrier's profit margin doesn't change since it's still getting the same price for service.

Now, the price to the end-user could fall in conjunction with the wholesale price, as we have seen this already. Apple dropped the 3G from $599 to $499, and the AT&T didn't alter the subsidy, so the price to the customer fell from $199 to $99, with Apple still receiving $400 above discounted price.

In some instances, carriers do pay higher subsidy/ wholesale price when the device is exclusive, and then push for a lower price when device goes to other carriers resulting in lower wholesale price. hence subsidy, and eventually end-user price. This is because normal handsets didn't increase the ARPU typically. The monthly fee stayed the same, and exclusive handsets helped attract/retain customers, but usually that effect is negligible.

The iPhone caused customers to upgrade to more expensive plans, ie data. Very few people had unlimited data plans, and it was hard to sell them when the devices were so poor. Internet on the BB and Treo I had was unusable. It wasn't worth it. The iPhone makes it worth it. So people upgraded plans, and the ARPU increased from $50 to $100.




On Nov 26 01:31 PM najdorf wrote:

> To think that Apple is going to be able to extract the same amount
> of subsidy without offering exclusivity is insane. Apple made the
> deal they made with AT&T because it was the only way to get the
> price low enough to make the iPhone a mass-market product. Even
> if you're the world's #1 Apple fanboy, you know that the knock on
> Apple is that their products are overpriced. By handing AT&T
> a monopoly that will generate years of profits in exchange for up-front
> subsidies, Apple is able to handle that problem. If anyone can sell
> the iPhone, you will see a reduction in subsidy and eventual price
> cuts by Apple to get the phone into a mass-market-acceptable price
> range. They cut the deal with AT&T because the hotness of the
> phone and the limited initial production capacity allowed them to
> do so on favorable terms. If you think the price is going to go
> up/remain steady, please name one historical consumer electronic
> good the price of which has increased or remained the same as more
> people produce and sell it.

Apple's AT&T Deal: Setting the Record Straight

The subsidy could increase in theory. The subsidy is just the amount that the carrier is discounting below its wholesale cost.

The point is that the wholesale price won't change. The price of the 16GB is $599.
Apple sells to BBY for $542, probably same to WMT, and probably sells to AT&T for (nearly $599). Reason resellers get a slight discount is because of inventory risk is higher and receive less marketing support, etc.

AT&T essentially sets the end-user price, according to amount of discount or subsidy. It offers the end user $199 price with contract, and reimburses the reseller (BBY/WMT) or Apple for full retail price, which is $599. If BBY or WMT wants to sell for $179. or $129, then it would cut into their margin. WMT or BBY could use the sales commission or bounty that AT&T pays for originating the service contract (~$50-$150) to subsidize the price reduction.

Apple said the pricing doesn't change when moving from exclusive to multiple carriers. Let's say Apple is selling iPhone for $600 to carrier A which is exclusive. After a period of time, it ends and Apple may offer to other carriers. Carrier B & C want to carry the iPhone. Apple says the price is $600. If they don't want to pay that much, then they won't be getting the iPhone. If they agree to $600, and then Carrier A objects and says it doesn't want to pay that much since it lost exclusivity, then Apple can say fine, then don't buy it, I'll just sell to B & C then.

If AT&T wanted to drop the subsidy to $300, then it would have to raise the customer price from $199 to $299, which won't happen because competitors would out-price them.

Some international carriers subsidize the entire cost, hence paying $600 subsidy. Some only subsidize $200 or none. It truly is a function of the contract and monthly service revenue


On Nov 25 09:47 PM peter02l wrote:

> How about if the new carrier matches the current subsidy to gain
> sales?

On Nov 24 05:26 PM RLLH wrote:

> I'm not sure I follow your comment that the subsidy won't drop with
> multiple carriers. Isn't it worth more to have a monopoly on a product
> that being one of several carriers?

Apple's AT&T Deal: Setting the Record Straight

I don't think Apple is overvalued here, rather fairly valued. I would only be buying here if I didn't own any shares. I don't know if we will see a significant pullback though, but if it does, that would be a good buying opportunity.


On Nov 25 03:48 PM slam stocks wrote:

> The IPhone with all their applications is the most amazing device,
> it's not better than Blackberries for calls or emails used in business,
> but still very good. Besides the business executives, the unit with
> so many other functions is the best available.
>
> Notwithstanding, I totally agree AAPL is far overpriced for a stock.
> they are priced for perfection. Compared to HP the difference is
> enormous: Market Cap 54%+, PE 2X+, PEG 34%+ & P/S 5X+. A good
> company with tremendous growth potential, but not at these prices
> and waiting for a pullback.

Apple's AT&T Deal: Setting the Record Straight

Exactly....


On Nov 24 07:54 PM nexusil wrote:

> @RLLH....Apple is the company with the product. They sell iphones
> for $600 (16GB) only out of charity. What the carrier sell's them
> for Apple could not care less, for iphones are perfectly inelastic
> and quantity demanded would not change.
>
> When Apple opens up to multiple carriers in the U.S it will be a
> pricing war between carriers and how much of a balance sheet hit
> they (ATT, VZ, S) are willing to take. If ATT sells the iphone for
> $0, it does not matter to AAPL as they still receive $600 no matter
> the circumstances. In fact, the carriers will in all likelihood bid
> up the wholesale price in such a war to secure the limited number
> of iphones. $1000 (as it costs in China), or even $6000 is not unimaginable.
> The carriers will have to surrender all their profits to APPL or
> exit the industry.

Apple's AT&T Deal: Setting the Record Straight

Well, that's what many have thought. However, Apple said that wasn't the case per the CC.

The subsidy is really just built-in financing, since the ARPU is so much higher for iPhone relative to the typical AT&T customer, due to the required data plan.

For carriers overseas, some subsidize the entire handset cost. It depends on the monthly plan. This is true for China Unicom. The iPhone is free with the most expensive monthly plans, and only slightly subsidized with the cheapest rate plan.

Apple sets a price to the carrier or reseller, and that's the price- take or leave it. So it's up to the carrier to set the price to the end user.


On Nov 24 05:26 PM RLLH wrote:

> I'm not sure I follow your comment that the subsidy won't drop with
> multiple carriers. Isn't it worth more to have a monopoly on a product
> that being one of several carriers?

Authentidate Has Significant Opportunities for Revenue Growth

Ankit- Terrific report. Very detailed, comprehensive, balanced, and thorough. You make a strong case for hockey stick growth. If ADAT services are able to get traction, that's exactly how it will go down. The network effect and power of being able to penetrate a large customer base just by capturing key contracts. We are just waiting on that adoption ramp, which has been so tough due to the reluctance of physicians/hospitals to undertake the needed healthcare IT modernization.

Some corners of the healthcare industry have implemented the next generation IT infrastructure. However, it's still a small portion of the overall industry. Yet, progress is being made, and should accelerate with all the government programs and mandates. One adoption hits a threshold, it will begin to cascade. It's all about being in the right position when it happens.

Expect Apple's December Earnings to Grow 37%

The iPhone will in china will get wifi in a matter of months. They use a WAPI standard and at the time of production WIFI wasn't approved. It was approved after the iPhone went into production so I expect to see it included in the next production run


On Nov 10 04:14 PM Michael J. Golde wrote:

> Question: Are any mobile phones in China permitted to use wi-fi?
> If so, why is AAPL prohibited from doing so? The Chinese are generally
> unfair competitors so it wouldn't surprise if they purposely put
> AAPL at a competitive disadvantage in their own market.

Apple: Weaker Dollar Will Benefit Revenue Growth and Margins

Thank you Sir, much appreciated


On Nov 03 12:57 PM Julian Ivan-Alexander wrote:

> Turley Muller .. as usuall leading the way most analysts fear to
> tread: towards insightful, well-informed, big-picture lateral-thinking
> analysis.
>
> Is it any wonder Wall Street always gets Apple wrong and the independents
> get it right?
>
> Nice piece Turley.

Apple: Weaker Dollar Will Benefit Revenue Growth and Margins

How many Windows Mobile phones are being sold these days???


On Nov 03 02:31 PM Shaftsinker wrote:

> In the event of a continuing decline of the US dollar, the edge provided
> to other computer manufacturers and Microsoft will significantly
> outperform Apple.
>
> The increased strength of the Euro and Yen relative to the US dollar
> will pale in comparison to the strength of the currencies of emerging
> economies, where Apple's presence is negligible and PCs dominate.
>
>
> My point is a declining dollar will merely help Apple's competitors
> bridge the gap. While Apple may still lead the pack for other reasons,
> it will lag its competitors in the edge provided by a sinking USD.

Apple: Weaker Dollar Will Benefit Revenue Growth and Margins

Exactly... You totally get it.... Apple doesn't compete on price, It's highly differentiated. It's the fact that currency translation will lead to earnings surprises, or if Apple cuts prices it will stimulate an replacement cycle among current users as well as enticing those pondering jumping the fence.


On Nov 03 02:41 PM thotdoc wrote:

> I believe that Apple does not really compete with other PC makers;
> Apple provides a certain feel good to owners of its products. Everyone
> else sell machines that do things.
>
> If that is correct, and I think it is, comparing Apple to other machinery
> makers is not really a comparison that will lead you to a good decision.
>

Apple: Weaker Dollar Will Benefit Revenue Growth and Margins

Hello!
That's not the point! the point is that ASPs and GM will rise due to currency translation. Not competition. As other astute readers have opined, Apple doesn't compete with other PC firms on price because it offers a differentiated offering.


On Nov 03 02:31 PM Shaftsinker wrote:

> In the event of a continuing decline of the US dollar, the edge provided
> to other computer manufacturers and Microsoft will significantly
> outperform Apple.
>
> The increased strength of the Euro and Yen relative to the US dollar
> will pale in comparison to the strength of the currencies of emerging
> economies, where Apple's presence is negligible and PCs dominate.
>
>
> My point is a declining dollar will merely help Apple's competitors
> bridge the gap. While Apple may still lead the pack for other reasons,
> it will lag its competitors in the edge provided by a sinking USD.

Palm Has a PREcarious Channel Issue

Sell-in is what is counted as sold and recognized in revenue. Sell-through doesn't have any accounting implications in terms of revenue recognition. Certainly it plays a role in what the next quarter's sales or (sell-in) will be.

The accounting rule you are referring to about the six months doesn't apply to Pre, it's for specified elements not yet delivered, but will in six months and it's value is known. An example would be- buying a computer that includes new OS for free when in comes in two months. If management knows that it will sell it for $50 to others, then the revenue from the computer can be recognized, and just the $50 is deferred until delivered. if VSOE can't be established, all of the revenue has to be deferred.

The Pre accounting is totally different. PALM may time to time provide free software upgrades. They are not specified, so the revenue is amortized on straight-line basis for 24 months.

It doesn't matter how long a phone sits in inventory with respect to it's economic life. The economic life is based on concept of how long the device still retains value before it becomes obsolete. New software upgrades might not be supported for older phones, so the rationale is that after 24 months that the device is introduced, OS upgrades will still likely run on that device, but in 3 years? or longer ? no guarantee. OS upgrades are developed around the most recent devices. Like there are features in iPhone OS 3 that only work on 3Gs and some that won't work on the 2G iPhone (MMS) and it's possible that OS 4 won't run at all on 2G iPhones. as iPhone hardware becomes more advanced resulting in more powerful software not capable of running on old hardware.

Apple does the same thing, when iPhones are sold to carriers or resellers, it's a sale and it starts amortizing the revenue even if it's not sold to an end-user for months. There are probably iPhones in Russian carrier inventory that could be 6-12 months old.

I didn't realize, and I would agree many didn't know that Palm's sell-through included sales to non-carrier resellers. In Apple's case, since they distribute direct to Best Buy and Wal-Mart, as wells as carriers, there isn't a 2nd tier distributor, so Apple's sell-through is units sold + change in channel inventory.

I estimated that activations were 600K-650K, not I see why that's too high., Analysts didn't underestimate sales (in the sense of activations), if they based them on in-store activations at Sprint. I knew end-user demand had to be lower. Great find, thanks for pointing this out, terrific analysis.

New XM SkyDock Offers Sirius Investors Nice Profit Margin

That's 50 million devices, not 40 million---- 30M iPhones + 20M iPod touches

Apple: Exploding iPhone Profits

Stephan... Hell of job here, fantastic work. Seeking Alpha needs more articles like this as it's of tremendous value. Not surprised though, being that you are submariner which are the brightest in the armed forces. Thanks for sharing your work.

Apple: Exploding iPhone Profits

t0000-
Dividing the current DR by 4 to find next quarters DR recognition is slightly flawed.

Current DR comprises of revenue to be recognized over next four quarters, but each quarter the amount isn't equal. There is only one period of 3Q07 sales left to recognize, and 2 qtrs of 4Q07 and 3 of 1Q08 left as well.

So these amounts (sales from Q3,Q4 '07 ,Q1 '08) that are included in current DR will obviously not be recognized equally over the next 4 quarters.

I don't know if that makes sense. I didn't realize this phenomenon right off, and it really is only important when trying to ascertain the mix of iPhone revenue reported for the quarter. Take a look at this link.

spreadsheets.google.co...

According to my estimations, Apple recognized 1,474 in DR for Q3. So 223 was from current period sales. Your estimate of 50 from handset sales is about what I have. Leaving the balance to accessories etc. as you mentioned. 2,900 in Q3 handset sales (50 recognized) is 362 per quarter (2,900 / 8 qtrs) with 7 periods of 362 and the final being 312 (362 - 50)


On Sep 05 10:17 AM t0000 wrote:

> You need to back all the numbers
> out and start from scratch to find aapl's true iPhone sales revenue.
> When doing this the figure that apple reported of 1,698 is almost
> irrelevent in this procces.
>
> The way apple got to that figure was to divide current D/R by 4 =
> 5,467/4 = 1,367, that is the base number that apple would have reported
> if all iphone sales stopped 1 year ago. Now add 331 to 1,367 gets
> you 1,698 and what was reported. So apple added 331 to recognized
> revenue from Q3.......And only about 50 was from the actual iphone,
> the rest is from acc/carrier/other.
>

> By the way not trying to be malicious or anything just trying to
> help out and if anyone has any questions I would be happy to try
> and help. As I know appl's accounting is not cut and dry.