Ignore the iPhone Panic

"Millions of iPhones Go AWOL."

Talk about a hysterical headline. But that's how BusinessWeek distilled the discrepancy that came to light this week when AT&T (NYSE: T  ) said that it activated roughly 2 million iPhones last year. Apple (Nasdaq: AAPL  ) , by contrast, claims that it sold 3.7 million iPhones in 2007.

That's 1.7 million iPhones unaccounted for and which, apparently, aren't earning Apple the $10 to $18 a month in telecom royalties investors like me were salivating over not so long ago.

Others, such as Sanford Bernstein analyst Toni Sacconaghi, say that the discrepancy suggests that more than 600,000 iPhones are stuck in some warehouse gathering dust. The rub? Rabid iPhone demand is pure fantasy.

The electric apple juice acid test
What if Sacconaghi is right? What if demand is tepid? What if, instead of Apple selling 10 million iPhones in 2008 -- or, as some have suggested, 7 million -- Apple only sells 5 million handsets? And what if only half of those sold were via AT&T or authorized European carriers such as Telefonica's (NYSE: TEF  ) O2 or France Telecom's (NYSE: FTE  ) Orange?

Then, dear Fool, Apple would be on pace to produce more than $30.5 billion in 2008 revenue by my math, or at least 27% growth on the top line. My assumptions include:

  • $299 in revenue per iPhone sold
  • $120 in royalty revenue for each of the 2.5 million estimated activations
  • 3% growth in the iPod business
  • 30% growth in the Mac business, which has been expanding by at least 40% in four of the past five quarters
  • Other software, peripherals, and services accounting for 22% of total revenue. (This group has been responsible for more than 24% of revenue in three of the past four quarters.)

Skeptics will point out that moderate iPhone growth could be troubling over the long term. What if that's true? What if I'm right, and Apple sells only 5 million iPhones in 2008, and then experiences only industry average -- that's 9% -- growth through 2012? That assumes only 7 million iPhones sold that year.

And supposing average selling prices drop another $100 to just $199 in 2012? That's a mere $1.4 billion in handset sales. Ouch. Apple might not be worth much more than it is today if the iPhone becomes the next Treo.

What an unlocked phone could mean
But I doubt it will. Limited activations via AT&T, or any carrier for that matter, says little about the appeal of the iPhone. To the contrary; it suggests only that iPhoners want the freedom to choose their carrier.

That should surprise no one. Mac users have been rebellious since the days they began flying the pirate flag at Apple's Cupertino headquarters. And that's good news. The iEmpire under CEO Steve Jobs has a history of cashing in on its customers' hunger for the cutting edge.

What to do? How about charging pre-rebate prices for unlocked iPhones? You read that right. Want your iPhone unhinged? Ka-ching! That'll be $599, please.

No doubt AT&T, which has a five-year exclusive distribution deal with Apple, would pitch a fit over a move like this. But in business, money talks and kickbacks to Ma Bell for each unlocked phone sold could equal hundreds of millions in revenue. Do you really believe she'd turn it down?

And let's not forget that today's iPhone will look a lot different in a year, when varied developers will join Google (Nasdaq: GOOG  ) in creating software for the device. We don't know how much excitement the next iPhone will produce, but history shouts plenty.

So, Steve, why don't you and Ms. Bell go back to the negotiating table? Yeah, the iPhone numbers aren't great, but they aren't bad, either. There's an opportunity to seize here; an opportunity to boost volume and bring in billions in new revenue for you both.

In short: Everyone wins. Including, most importantly, your customers.

Read/Post Comments (0) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 564890, ~/Articles/ArticleHandler.aspx, 10/26/2016 11:24:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:00 PM
AAPL $115.59 Down -2.66 -2.25%
Apple CAPS Rating: ****
GOOGL $822.10 Down -6.45 -0.78%
Alphabet (A shares… CAPS Rating: *****
ORAN $15.94 Down -0.04 -0.25%
Orange CAPS Rating: ****
T $36.43 Down -0.27 -0.74%
AT and T CAPS Rating: ****
TEF $9.96 Down -0.04 -0.40%
Telefonica CAPS Rating: ****