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?

Apple's 3G iPhone: Q4 Sales Estimates Are Encouraging

Ryan,

I disagree that this stock trades at a premium. trailing free cash flow is $6.84. For each 1 million iPhone units Apple sell going forward, $0.28 will be added to FCF/Shr. If Apple sells 25 million in FY09 that is $7.00 in incremental cash flow. I believe FCF/shr might top $13 in FY09. The subscription accounting of the iPhone revenue results in little impact to EPS, yet FCF will explode. Apple trades at less than 12x FY09 FCF/shr which, in my mind, is very attractive.

I know that investors expect a beat, and that is needed for a pop in the stock price, but I am taking a long-term perspective.

Apple's 3G iPhone: Q4 Sales Estimates Are Encouraging

@ DanDan,

iPhone revenues will continue to be reported over 8 quarters. Apple is not abandoning its subscription accounting. That doesn't have anything to do with carriers, it's the iPhone updates they offer for free over the expected 2 year life which is why revenue is spread over 8 quarters.

The first generation iPhones will still receive revenue sharing from the monthly payments- granted those aren't upgraded.

Look again at the conference calls and 10-Q. Nowhere has Apple said it will start recognizing iPhone revenue at time sold.

Did Apple Manufacture a First-Day iPhone Shortage?

This article is pretty ridiculous. It's comments sent in from an angry would-be customer who is delusional enough to think Apple is cutting off sales to manufacture hype and buzz?

From reports I got some ATT stores may have had a small hold back for Saturday morning. Many people have jobs and can't stand in a line all morning, thus it would be reasonable that a handful of phones would be available Saturday morning.

Fried from Little Rock went store to store to store Friday morning. First store he waited in line for, ,they announced white iPhone was all that was left. He was not having that, and went to a couple other stores - they were sold out,then found one with phones, but line was super-long. He decided to go to the office and check back at lunch but that store ran out, and he was told all ATT stores in the vicinity had run out. He was informed that they might get some in that evening, and to check back when store opens in the morning. He did, but were gone. rent-a-cop informed him that iPhones were gone right after doors were opened. Asked lady inside when more were coming, and she told him possibly next week, she wasn't certain.

Pretty much every ATT store nationwide had run out mid-day. If there were still a few phones being held, back, they would have been gone 30 minutes later. Still would have sold out.

What would Apple & AT&T rather have - a sound byte and hype or sales. What this guy is implying is that Apple rather have buzz that actual dollars, that revenues and profits aren't important to Apple. Who in there right mind would sit on inventory All day long when they could be selling it? I'm sure AT&T isn't concerned about earning sales commissions and hitting big revenue numbers, yeah right. AT&T would never go along and be told not to sell phones when there is huge line outside the door. If Apple had demanded that, I'm sure management at AT&T would have an array of four letter words for Steve Jobs. They are in the business to sell phones and contracts. AT&T is not a PR or marketing firm working to enhance Apple's appeal. Common sense. What;s next, the tooth fairy??

The idea that AT&T was sitting on any meaningful amount of

Only 35% of iPhone Buyers Will Get it For $199

I think there is some inaccurate information here. All iPhone users are eligible for upgrade prices. The original phone was not subsidized, thus there is no loss to AT&T for upgrading the phone.

Those who are ineligible are customers who bought a subsidized phone in the last year (or longer). AT&T has to recapture those subsidies before giving a subsidy on a new iPhone.

AT&T CEO Promises 3G iPhone Soon - Will it Freeze Demand?

Do people think 3G is going to be that much better? Sure it is, but how can people claim EDGE is so slow when there is not a 3G iphone to compare it to. It seems slow compared to WIFI, that's as fast as desktop. Even faster if using slow IE explorer.

I have had 3G on windows mobile phone and EDGE is most of the time faster than 3G was, which the phone and browser makes up for.

I think people get false impression due to the speed of wifi. 3G will speed it up a good bit, but will the internet ever be fast enough ???? Customers will still bitch. And that's the easiest target.

The phone not being 3G is not a good reason to hold out. I don't think it will make major difference since most of the delay is establishing a connection, then the data transfer is fast. The WiFi will still be so much faster it will both will still be slow. It won't help out with ATT's coverage and dead zones.

Verizon Finally Unveils iPhone Competition, Or "iPhone Equalizer"

"i-Killer" --They said the same thing about the Zune. And many other devices that were intended to compete with the iPod, Even if a product is better and cheaper, its very tough to overcome Apple's brand strength. With the iPod capturing 70-80% of the MP3 market says a lot. Imitating that device is simple compared to developing a iPhone look-a-like. Since the iPhone runs osX and Safari, duplicating the type of web navigation performance won't be easy.

These new phones can be a positive for the iPhone since they can familiarize Verizon customers to a experience closer to the iPhone. This can help users get in the habit of buying expensive multi-function handset devices. Most likely any sales the iPhone may concede in the near-term, they will recapture when the iPhone is available on the Verizon network. Apple is already a few steps ahead, and I doubt we will see lines of folks having to have these devices.

What's so bad about the AT&T network? I guess I am really clueless on this, I have had AT&T for ten years going back 2-3 carriers ago. I think it's fine, and it's gotten much better over the years, and I have no complaints. I know Verizon has the least complaints per 1000 customers, thus highest customer satisfaction, but don't see how it could be a significant difference. Some people talk about ATT like its the plague, am I missing something?