Effects of iPhone release: lost iPod sales? huge iPhone margins? Cingular?

So I've been thinking a lot more about the iPhone launch (as you can see from previous posts) as well as preparing for case interviews. I've been doing too many cases on growth strategies and can't stop thinking about how the iPhone will affect the carriers, Cingular, Apple, and iPod sales.

I've come to the conclusion that ...

1. iPhone will have double margins to counter iPod cannabalization
2. Apple's profits should see a 10% boost
3. Cingular will improve its customer mix, with more tech-savvy, higher spend customers

Let's observe what's happened in the past couple days ...

1. The WSJ reports that RIM's stock price (the makers of BlackBerry) fell 7.9% following the iPhone announcement.

2. T-Mo and Sprint launched new phones (varieties of existing phones) and lowered their pricing on phones.

3. iPhones are only available on Cingular.

Impact on iPod sales:

The 4GB and 8GB sell for $199 and $249 respectively, a $50 difference for increased capacity. iPhones with similar storage will go for $499 and $599 -- a $100 difference for the same increased storage capacity.

So what's Apple trying to do here? My guess is that they don't want to cannabalize their iPod sales, so they've built in two margins in this product. One to compensate for cannabalization of traditional iPod sales (since you're not likely to buy an iPod now) and the second for the iPhone. I was in the market for an iPod for myself and my wife, but now I might hold out and go for the iPhone instead.

One indication of the higher margins on the iPhone is the higher pricing for additional capacity. They are charging $100 for 4GB extra on iPhone vs. an extra $50 for the same on an iPod. The extra $50 amounts to about an increase of margins of ~8% more.

Verdict: Apple's gonna recoup lost margins from iPod cannabalization

Impact on Apple's revenues:

I haven't checked the analyst ratings on AAPL recently but it's not surprising that the analysts are trying to figure this out. Toni Sacconaghi, an analyst at Sanford C. Bernstein, told the WSJ that "cellphones priced above $300 account for only about 5% of the global market."

Albert Lin, an analyst at American Technology Research, was quoted in the WSJ: "If Apple is aiming to sell 10 to 20 million units, that's a realistic and achievable goal." Steve Jobs, Apple's chief executive, said the company aims to sell 10 million iPhones through the end of 2008, which would account for about 1% of the annual global handset market.

But some analysts are skeptical, considering that the iPhone will be available only to Cingular Wireless customers and initially only in the U.S. It is scheduled to become available in Europe in the fourth quarter and in Asia in 2008. "Given the timing, geographies and the fact there is only one device, we think that two million devices could be sold in 2007 in the best instance," writes Nomura Securities analyst Richard Winsor in a report.

I suppose it's reasonable to expect Apple to gain 20% of the >$300 phone market in two years (10M units), but it's only available in the US through 2007 and only with Cingular. The 2M figure from Nomura seems like a reasonable estimation.

I'm going to guess that the margins on the iPod are 25%, so $50 and the margins on the phone are 20% for the 4GB iPhone, and 25% on the 8GB iPhone. This comes to about $100 and $150. If 4GB version accounrs for 70% of the sales, Apple's profits should increase by: 2M * 0.7 * $100 + 2M *0.3 * $150 = $230M

AAPL's earnings were $2B last year, so we're estimating an increase of about 11.5%.

Just looking at the recent stock chart from Yahoo! ... the stock jumped from $86 to $95 over the past few days, or about 10.5%. Not bad for back of the envelope calculations ...

Verdict: Apple's gonna make loads of cash

Impact on Cingular:

According to WSJ: For its part, Cingular said it expects to attract high-end customers who are willing to pay the price of the device and for the data services the phone could offer, prices for which the companies didn't disclose. Cingular wouldn't say whether it was subsidizing the cost of the iPhone, as carriers typically do for most handsets. On average, North American carriers subsidize $70 to $90 per phone, according to research firm Gartner Inc.

Even if Cingular sold the phones at cost, they would make it up from the data services, which are high margin revenue streams for the carriers. There's hardly any cost associated with an additional user checking their email on the network. In fact, the carriers probably want greater utilization on their networks to recoup the costs of infrastructure.

The iPhone could help Cingular increase the ARPU (average revenue per customer) significantly, especially over a 2 year period. I'm just going to assume that the data plan will cost $19.99, and related variable costs are $4, this brings it to $16 per month or $384 for the lifetime of the contract. And this is just for data services. I'm sure the voice revenues will be rather healthy.

What's even better is that Cingular might be able to pull high-profit mobile consumers from other carriers, improving the mix of Cingular's customers. The longer other carriers wait to respond to the iPhone, the more they'll bleed in high-end customers.

Verdict: Cingular's profitability should see a boost from this deal.

technorati tags:iPhone, cingular, analyst, aapl, apple

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