Written iPhone App Review
Late last year, Gene Munster, a leading analyst at research and investment firm Piper Jaffray, released a report aiming to answer some of the unanswered questions surrounding Apple’s plans for the future. Amongst predictions of a cheap Macbook Air, Munster hinted at the possibility of a new iPhone release in 2009.
Below is a full re-publication of those questions relating to the iPhone & iPod:
iPhone Related Questions:
What is Apple’s gross margin on the iPhone?
Using numbers released following Apple’s Sept. quarter, we now believe the ASP of the iPhone (from Apple to the carriers) is about $630. However, we also believe that Apple will be able to lower its price of the phone to carriers by up to $150 in the next 6 months, but maintain its margins, by leveraging falling component pricing. As such, we are modeling the iPhone ASP to be about $475 in the Dec. quarter. We believe the gross margin on the iPhone is higher than the company-wide gross margin, which will provide a source of earnings leverage as the iPhone grows as a percentage of sales in FY09. Note that we are modeling for the iPhone to grow from 5.7% of sales in FY08 to 18.4% of sales in FY09. Specifically, we believe Apple’s gross margin on the iPhone is in the high 30s or low 40s.
How far are we into the iPhone’s international rollout?
By the end of CY08, Apple has indicated that it will expand the iPhone’s addressable subscriber base significantly. In other words, the iPhone’s international rollout is still in its early stages. According to our checks on the iPhone international website, availability will grow from a subscriber base of about 660m subs in 44 countries in late Aug. to about 989m subs in 73 countries by the end of the year. This represents 50% growth in addressable subscribers ahead of or during the holiday quarter. For example, since Aug., three Russian wireless providers including MTS (61m subs), Beeline (42m subs), and MegaFon (37m subs) have launched the iPhone 3G. Also note that we continue to believe Apple will launch the iPhone with one or two carriers in China in CY09, adding either China Mobile (550m subs) and/or China Unicom (128m subs), which would further expand the sub base by 13% (China Unicom only), 51% (China Mobile only), or 63% (both Chinese carriers).
Will Apple release the iPhone in China?
We continue to believe Apple will launch the iPhone with one or two carriers in China in CY09, adding either China Mobile (550m subs) and/or China Unicom (128m subs). The company has indicated that it remains focused on launching the iPhone in China, but several hurdles remain. The dust has not yet settled in China regarding the licensing of the 3G networks among the major carriers. We expect the Chinese government to make announcements on the licensing within the next 1-2 months (possibly sooner). In addition, the inclusion of Wi-Fi in the iPhone may be a limiting factor in China. For example, Apple does not yet sell its iPod touch in China possibly due to the inclusion of Wi-Fi. Apple could solve this issue by creating a version of the iPhone software that disables the Wi-Fi features in the Chinese models.
When will Apple release a new iPhone?
Most investors believe the iPhone hardware will be the same throughout 2009 as it is today; we disagree. While Apple has indicated that it differentiates the iPhone from its competitors by software, the company has not addressed its strategy to segment the market by expanding the iPhone lineup as it has the iPod lineup. Specifically, Apple could offer a SKU at a lower price than the current $199 entry price and/or a premium SKU at or above the higher priced $299 16GB model. Apple could lower the price by removing features like 3G and GPS; alternatively, Apple could make a premium SKU with a sleeker design using higher-end materials, more processing power, better graphics and more storage. We believe Steve Jobs’ comments on the Sept. quarter conference call regarding Apple’s iPhone strategy in CY09 support our thesis of new iPhone models at different prices in CY09: “I think we have to be the best. And I think we have to not leave a price umbrella underneath us.”
iPod Related Questions:
How should investors think about iPod growth going forward?
Growth in the iPod business is clearly under pressure, with y/y growth coming down to 6% y/y in FY08 vs. 31% y/y in FY07. We are modeling for a -12% y/y contraction on a unit basis in the iPod business for FY09. That said, the iPod is an important product for Apple as an entry point into the Apple device ecosystem, and introduces users to other Apple products like the iPhone and the Mac. Moreover, Apple has indicated that there are currently 65m active iTunes accounts. Given the total 174m iPods sold to date (through Sep-08), this equates to 2.8 iPods per active iTunes accounts. However, we believe some users and families share a single iTunes account for several iPods. Assuming 2 iPods per person implies 87m iPod users (including older iPods that are no longer used). In other words, with 87m iPod users, Apple has a large addressable base for iPhone and Mac sales from which it can draw in the coming years.
How will Apple stores sell the iPhone 3G as a gift during the holidays?
Due to changes in the activation process (in-store instead of at home), the iPhone 3G is more difficult to purchase as a gift. AT&T offers gift cards for the iPhone 3G and voice and data plans, but a simple gift card is not as exciting as the phone itself. To solve this, it would make sense if Apple follows AT&T footsteps and offers an iPhone 3G gift cards this holiday season. If this is successful, we see it as a positive for shares of AAPL given most investors are not expecting a strong holiday period for the iPhone.
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