The usually excellent Cluster Stock comments on the change in Apple's iPhone revenue model and a recent Morgan Stanley report: "At $200 a phone, that's $5 billion of revenue. Despite the recent price cuts, Morgan Stanley uses an average unit price of $550 per phone. This seems far too high to us, but 27 million units at this price would yield almost $15 billion of revenue."
Hmmm. As a reader indicated in the comments section, the price cuts are due to AT&T subsidies, so the revenue to Apple is about the same. It doesn't take much checking to see that subsidies of $200 - $300 are not at all unusual in the industry (see e.g., Treo, BlackBerry, etc.) The offsetting issue is that AT&T is no longer giving the 30% of recurring contract service revenue to Apple. One assumes these figures are about offsetting (though it is interesting to wonder if whoever decided they were balanced discounted the revenue against Apple's cost of capital and how far it was discounted and what the provisions for revenue sharing with contract renewals and the like were).
One wonders if Cluster Stock counted AT&T service revenue to Apple as "iPhone" revenue before when the percentage of total Apple revenue attributed to the iPhone was calculated? What impact would this have on the calculations? I suspect the figures are pretty offsetting, leaving any future gain in iPhone revenue as a percentage of total revenue really subject to iPhone sales growth v. other sales growth at Apple (i.e., the new application store- new iMacs, Macbook Air, etc) and not the new revenue model which is probably pretty neutral.
Given this, some other things are being, I think, overlooked. Note what this does for Apple:
1. Apple now has a consumer priced device to drive volume, having shifted a good bit of this burden to AT&T. One expected this move since the original deal was cut before the success of the device was certain. Apple has been quite expert at price discrimination. Starting with $600 phones, slipping down to $500 and then $400 phones, and when they got a bit too aggressive rebating down customers who got caught just a month or two before the reduction. Apple proved, again, that they can command larger margins than anyone else in hardware. Once the early adopters were approaching saturation, they needed to shift down the curve and capture those customers. Since Apple had resisted subsidies early on, they now had a ton of room ($200 - $300 per phone) to head down without sacrificing revenue any more. It was AT&T's turn to pay. And why not? They had signed a ton of contracts from customers they did not have before the iPhone exclusive- and more importantly, taken many of those from their rivals. Apple knows what they are doing when it comes to price discrimination. (Consider how expensive their RAM upgrades are). Apple holds all the cards.
2. Apple's revenue is not tied directly to AT&T's service performance, or to AT&T's accounts payable lag or collections risk.
3. Apple is much freer to defect from AT&T now without impacting revenue. Note, the switch to "cash now" from "ongoing revenue" looks much better if Apple plans to bail on AT&T soon. (Assuming $300 in subsidies, and a doubling of sales due to the price drop, Apple pockets an extra $400 (another phone sale) and loses Apple's 30% take per month on around $70 in AT&T revenue, (probably more like $100). That looks to me like a breakeven for Apple after 18 months. But if Apple was giving up 3-4 years of contract revenue, Apple is taking a loss. What does this say about Apple's expectations for: A. Sales growth due to the subsidies. B. Length of the AT&T relationship?
4. Apple is pretty much locked into these lower magins now. Traditionally, this means Apple has medium term plans for a significant hardware development to return to the right side of the price discrimination curve. Subsidies can eventually lock a manufacturer into a network provider. That's dangerous, and Apple is not acting like they plan an exclusive AT&T marriage forever. I've speculated on the possibility of an Apple owned network provider in past. Doesn't seem impossible, but who knows?
