Volume sales are key to new Apple iPhone strategy


Apple Inc will make less money off each new iPhone, but Wall Street expects only a minor impact on the company's bottom line as the cheaper price spurs mass-market buying.

When Apple Chief Executive Steve Jobs unveiled the iPhone 3G on Monday, he slashed the price to $199, just half that of the original model, in a move made possible by carrier subsidies worth hundreds of dollars per phone.

Apple previously received a slice of monthly subscription revenues collected by carrier partners such as AT&T Inc, an unusual arrangement that analysts said kept handset prices high and dampened consumer interest.

The big questions are how much the new iPhone, with its faster cellular connection and satellite location feature, costs to make, and how much carriers will pay Apple to hit that $199 price point.

Toni Sacconaghi, an analyst with Sanford Bernstein, estimated Apple's profit would be between $250 and $450 per phone, compared to about $500 for the previous model after adding in two years of monthly service payments.

As with any product moved from the high end to mass market, Apple hopes to make up the difference with volume.

Apple hopes that consumer gadgets like the iPhone and its popular iPod media players will help convert people into buyers of its highly lucrative Macintosh computers, which have been gaining market share in recent years.

Demand for the cheaper iPhone 3G is expected to be “highly elastic” - economic speak for the ability of price cuts to drive sales significantly higher.

That dynamic was reflected in the views of analysts, many of whom raised their estimates on iPhone unit shipments for 2008 while lowering profit forecasts for Apple by a few pennies per share or holding them firm.

Caris & Co. lowered its fiscal-year estimate on Apple earnings to $5.32 per share from $5.35 per share, while Deutsche Bank kept its forecast of $5.20 per share.

“We expect the move from a revenue-sharing payment model to a subsidy model with the carriers to be essentially revenue neutral to Apple, while the lower prices points will drive incremental iPhone units,” Goldman Sachs analyst David Bailey said.

“The impact to revenue and earnings will not be resolved with precision near-term, but our analysis suggests that the impact is small as the subsidies will roughly offset the loss of the revenue-share payments,” he wrote in a research note.

Apple shares rose $4.03, or 2.2%, to close at $185.64 on the Nasdaq on Monday. The stock has climbed 55% over the past three months as investors regain confidence that the company isn't being hit by broader woes about the economy and consumer spending.

In a rare stumble by a company hailed for its manufacturing prowess, Apple said it had already run out of original iPhones, leaving a gap of about a month during which it won't sell any of the devices.

“They underestimated demand. They didn't produce enough. They weren't really sure and they wanted to make sure the inventories were cleaned out,” said Shaw Wu, an analyst with American Technology Research.

But the iPhone 3G's cheaper price, faster Web-browsing and addition of an online store to buy new programs such as games and mapping services from other developers should create pent-up demand that will drive up sales when the new phones arrive on July 11.

For example, Pacific Crest analyst Andy Hargreaves said he raised his forecast for iPhone shipments in the second half of 2008 to 8 million units from 7.2 million units, and 2009 sales to 15.5 million from 14 million.

“As a product cycle, we believe iPhone is in its infancy,” Hargreaves said. (Reuters)

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