Wall Street has wondered for some time how profitable the Apple (NASDAQ: AAPL) iPhone is. First, numbers of analysts pulled the device apart and found out what each component cost. That probably gave a good sense of how much the margin was on the hardware.
But, there has always been a sense the Apple was making a great deal from AT&T (NYSE: T). This was based on the idea the the phone company gave Apple a bit of its service plan revenue in exchange for have an exclusive right to sell the phone in the U.S.
Now that Apple is coming close to closing deals to sell the phone in Europe, information is leaking out about what the consumer electronics company will make for calls placed on the device. According to The New York Post, T-Mobile will have exclusive rights to sell the phone in Germany but will pay "10 percent of the revenue from voice calls and data usage." If the German company is anything like Verizon Wireless (NYSE: VZ), it operations have an operating margin of 15%. So, they are giving up a very great deal indeed.
The paper also writes that Gene Munster, an analyst with Piper Jaffray, in July estimated that Apple collects $3 per month per iPhone subscriber from AT&T for voice calls and data usage, as well as $8 per month for every new subscriber who signs up for AT&T with the device. But, if the T-Mobile deal is as good as its looks for Apple, the estimate of what AT&T gives up may be too low.
The bottom line: If the iPhone is not a huge hit at bringing in net new customers to these cell carriers, then they have made very bad deals.
Douglas A. McIntyre is a partner at 24/7 Wall St.
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Reader Comments (Page 1 of 1)
8-26-2007 @ 8:50PM
David Dennis said...
Actually, you could very well be wrong.
Verizon makes a 15% gross margin after sales commissions and expenses at their stores.
iPhones are largely sold at Apple's stores and AT&T pays no commissions or salaries to Apple's salespeople.
All Apple is doing is effectively charging AT&T for use of their brand. Their brand is driving traffic to stores and enabling AT&T to avoid paying commissions or even employees to sell the phone.
Furthermore, it looks to me like it's primarily Apple, not AT&T, that's paying for iPhone advertising. This is another enormous expense normally associated with the carrier that doesn't need to be paid.
Salespeople at AT&T stores have alleged that they are not getting commissioned on the iPhone and as a result there have been documented cases of them refusing to sell iPhones or bad-mouthing them. So even at AT&T stores, it seems likely that the iPhone is likely to be saving substantial amounts of money on commissions, albeit in a not terrifically ethical way.
If this overall analysis is correct, this could be an excellent deal for AT&T - it gets customers relatively inexpensively, an they are mainly high-spending customers who get expensive data plans and the like.
D
8-26-2007 @ 9:35PM
Neil Anderson said...
The probability of gaining new customers and switchers seems likely considering data from AT&T.
8-27-2007 @ 12:25PM
Rhett Mash said...
D,
Your enthusiastic comment elaborating on the details makes me want to say you work for Apple. Whether you work for Apple or not, I'm going to spill my thoughts.
If people think AT&T got suckered into it, that's nothing compared to how we consumers are getting ripped off. Traditionally, phones are sold by carriers at a loss and the money is made from the service over a period of time. Hence, the locked phones, etc. In this case, the consumers pay Apple approx 55% over the cost of goods of the phone. I agree that you need to take R&D, marketing, etc into account, but even after all that, Apple is making a substantial profit on each iPhone sold. If that wasn't enough, Apple wants to screw AT&T and the consumers over.
No, I don't work for AT&T. I'm also a big fan of Apple products, but after iPhone, I think Apple as a company _stinks_ of greed. Sad that we all thought Microsoft was a monopoly...
8-27-2007 @ 2:43PM
george scandalis said...
Rhett,
Actually, the consumers aren't getting ripped off in any way shape or form.
They don't have to buy it.
Just like they don't have to buy a Mercedes either.
There are lower cost alternatives for the iPhone, they just don't have the feature set that the iPhone has, just like the Ford Fiesta doen't have the feature set a Mercedes has.
Simple huh?
11-21-2007 @ 6:56PM
jim said...
iphone is the single greatest invention that happened in the US for at least 10 years. It benefits the WORLD. Palm and Blackberry have nothing like it. This is literally a handheld computer.
The fact that Apple advertises its gem seems logical.
I heard from an Apple employee that Verizon was
offered the deal and turned it down in the US.
Europe runs on GSM. Germany has the right to give it to T-mobile. What is the problem?
When the europeans get this phone the sales will blow off the US sales since the GSM is universal there and Verizon is not GSM here in the US.
Oh by the way, Finland better watch it with Nokia since they too have nothing like this.
Hang on tight, buy Apple now before it is too late and after 200 million Europeans get to play.
Oh, just forgot, now there is going to be an iphone in China. Can you believe again in American technology or is there something missing in this picture?