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Prior to its June 29th release, Apple's iPhone had already seen the kind of media hype and expectation that other consumer products could only dream of. If the iPhone proves as successful as the hype, it could benefit a number of companies involved in its manufacturing and distribution, while sidelining their competitors.

Additionally, the iPhone could potentially invert the existing power dynamic between cell-phone handset manufacturers and the telecommunications companies that control the mobile networks on which these handsets operate. Today, service providers dictate terms to handset manufacturers, often specifying the features that should be included in a device, the messaging and marketing the company should employ, and even the price that can be charged for it. Apple changed that dynamic. Because of Apple's past success designing game-changing consumer electronic devices such as the iPod, it was able to strike a different kind of deal with cell phone carriers. AT&T had to cede virtually all control over the device to Apple in exchange for an exclusive deal on the phone.[1]

iPhone's getting a debut other consumer electronics would die for.
iPhone's getting a debut other consumer electronics would die for.

A survey done by ChangeWave research showed that as on 1st Apr 2008, an extraordinary four-in-five iPhone owners (79%) report they're Very Satisfied with their iPhone - a significant lead over number two RIM (54%) and far ahead of all other major manufacturers. This shows us how well the iphone has done amongst users. [2]

Image: Smart_phone_satisfaction.gif

Contents

[edit] IPod Cannibalization

It’s not a surprise that sales of iPods have been slowing. Since we live in a world of limited resources, growth cannot persist indefinitely. As iPod sales have grown to staggering heights, the Law of Large Numbers takes effect. To continue its FY07 31% unit growth rate, Apple would need to sell close to 70 million iPods in FY08, which is one-half the 140 million total sold over 6 years. At that growth rate, iPod sales would be 200 million FY12. It’s Highly unlikely that annual sales volume would ever achieve that level. Unit growth has been trending towards a rate in the teens, possibly single-digits. Last quarter, Q1 2008, units increased 5%, compared to 50% growth in Q1 2007. Yr/Yr 2007 growth rates were 24% (Q4), 21% (Q3), and 17% (Q2). Unit growth was 31% in FY07, compared to 75% (FY06), 409% (FY05), 371% (FY04), and 149% (FY03).

Image: Applechart1.jpg

iPod unit sales only grew 5% yoy for Q1, but dollar sales increased by 17% due to a higher average selling price (ASP). After 8 consecutive quarters of declining ASP, the Touch reversed that trend as ASP rose last quarter to $181/unit. You would have to go back 6 quarters to find a higher ASP. Boosting the ASP is a very positive sign in light of the slowdown in volume. Going forward, ASP will be the key metric to focus on.

iPod sales have mirrored the S-curve, which generally depicts the product life cycle. There are 5 stages in the PLC. Initially, sales growth is flat and then begins to increase in the introduction stage. The product enters the rapid growth stage, where sales increase at an accelerating rate. In the slowing growth stage, sales increase at a decreasing rate, finally to a point where sales turn flat as the product enters the maturity phase. Sales growth turns negative in the decline stage.

Image: Applechart2.jpg

To avert the Decline (or mature) stage, product innovation is needed to rejuvenate sales growth. Introducing improved models with new features can sprout a new curve from sales growth reaccelerating. The S-curve then takes on a more scalloped shape.

[edit] Companies that benefit from the iPhone's success

  • Apple, Inc, as the producer of the iPhone, stands to gain from its success. The components used in the iPhone cost Apple around $220 for the $399 iPhone (excluding the cost of assembly), suggesting margins in the 50% range. [3]
  • AT&T has an exclusive contract with Apple, and the iPhone will only be available on AT&T's cellular network. If the iPhone proves to be a success, it would be a competitive advantage for AT&T and could draw customers away from other cell phone providers
  • Synchronoss Technologies (SNCR) runs AT&T's internet customer service system, including phone activations. Synchronoss makes about $8 for every iPhone that is activated. A successful iPhone launch would boost their revenues.
  • Google has partnered with Apple to provide its maps / directions service over the iPhone. Google has previously said mobile applications are an important part of the company's future growth;[4] the success of the iPhone could further Google's leadership in this area.

[edit] Component suppliers that benefit from the iPhone's success

Apple uses a number of contract manufacturers and suppliers to make its products. Most are Taiwan-based. While shares of some of these companies are listed on U.S. exchanges as ADRs, others can only be purchased through the Taiwan or Hong Kong stock exchanges.

  • Balda AG (FRA:BAD) is a German company that makes what technology experts believe[5] is the most expensive single component -- the touch screen. At $60, the screen represents 30% of the cost of the iPhone components.
  • Samsung Electronics Co. makes the main microprocessor that runs the phone's operating system and various applications. [6]
  • Infineon Technologies AG (IFX) makes the chips that power the iPhone's wireless data capabilities. [7]
  • ARM Holdings (ARMHY) licenses the technology used in the iPhone's CPU.[8]
  • Hon Hai Precision Industry Co., the world's largest electronics contract manufacturer, received the initial order to assemble 12 Million iPhones[9][10]
  • Quanta Computer (TPE:2382), a laptop manufacturer, received an order for an additional 5 million iPhones, apparently destined for sale outside of the United States[11]
  • Catcher Technology Co. (TPE: 2474) makes the casing for the iPhone[9]
  • Primax Electronics (TPE:2336) which makes digital camera modules for cell-phones and is a supplier for the iPhone[9]
  • Entery Industrial Corp. (TPO:1333) is a flash memory manufacturer and a supplier for the iPhone[9]
  • Unimicron Technology Corp. (TPE:3037) is a printed circuit-board manufacturer specializing radio frequency (RF) modules. It is a supplier for the iPhone[9]
  • Texas Instruments (TXN) makes a power management chip. [12]
  • Marvell Technology Group (MRVL) supplies the chips that allow the iPhone to connect over Wi-Fi networks [13]

[edit] Companies that benefit from the iPhone's failure

  • Motorola makes cellphones such as the "Q" which would compete with the iPhone -- both the Q and the iPhone combine a cell phone and PDA, and both compete in the more expensive end of the cell phone market.
  • Reasearch in Motion's Blackberry device, which is industry standard for corporate email, could be challenged by the iPhone. While RIM currently dominates smart phone sales among consumers, the Apple iPhone has had tremendous success and continues showing momentum in this market. Meanwhile, the longstanding woes of Palm (PALM) and its Treo are accelerating. However, the iPhone's lack of a keyboard may make it difficult for the iPhone to compete with the blackberry among business users. The graph below shows the current market share in the smart phone category (as referred to the March 17-24 ChangeWave survey of 3,597 consumers[14])

Image: Rimvsaaplcurrent.gif

  • Sprint and Verizon, which will not be able to offer the iPhone to their customers, would benefit if the iPhone proved to be more hype than substance.

[edit] What is "success" for the iPhone?

The iPhone already faces high expectations. Steve Jobs has said the company expects to capture 1% of the cellphone market by 2008 -- which would correspond to 10 million handsets sold. The goal is ambitious but not unheard of -- Motorola had sold 50 million RAZR handsets as of July 18th, 2006 -- about two years after the phone's launch.

However, the phone faces several challenges:

  • The phone does not have a keyboard, a standard feature of PDA-devices aimed at business users (business users make up the bulk of phone purchases above $300). However, it does have an onscreen keyboard with adaptive technology that many reviewers have found easier to use than standard smart phone qwerty keyboards.
  • The phone will only be available from AT&T wireless (formerly Cingular Wireless) in the US
  • The phone will not be compatible with next-generation 3G wireless networks that allow for high-speed internet access.

[edit] The launching days: recent iPhone news

As expected, crowds swarmed the Apple stores on and after June 29th--according to the LA Times, half of the West Coast Apple stores sold out on the very first day. Cnet.com's Jaffray estimates first weekend sales tally to about 500,000. The iPhone seems to be living up to its hype--reviewers are not gushing, but they're almost uniformly pleased.

The launch wasn't all golden for iPhone, though--until a few days after launch, about 2% of new iPhone owners faced a nightmarish activation process. (Macworld's Dalrymple relates his "iPhone activation disasters" here.) Most of these issues have been resolved by now; it remains to be seen how big an effect this will have on iPhone's sales.

Recent speculation about the possible introduction of a smaller and less expensive iPhone was received so well that Apple's stock jumped to a new all-time high (as much as $134.50) that morning, according to the Associated Press (see Apple's WikiChart entry, July 10th, 2007). But the rumors haven't been confirmed, and doubts resulted in a gradual decline later in the day--iPhone's hype aura is a volatile catalyst in more than one direction. (Patents filed earlier in the year that seemed to show an iPhone/iPod nano hybrid fuel the speculation.)

[edit] Footnotes and References

  1. The Wall Street Journal, February 17, 2007 "How Steve Jobs Played Hardball in iPhone Birth" http://online.wsj.com/PA2VJBNA4R/snippet/SB117168001288511981-search.html
  2. ChangeWave Research Blog
  3. Business Week, July 2nd, 2007 "Taking the iPhone Apart"
  4. The New York Times, April 20, 2007 "Big Money in Little Screens", http://www.nytimes.com/2007/04/20/technology/20mobile.html
  5. Business Week, July 2nd, 2007 "Taking the iPhone Apart"
  6. AP, July 2nd, 2007: "Techies Rush to Dissect Apple's IPhone" http://biz.yahoo.com/ap/070702/apple_iphone.html?.v=24
  7. ZDNet, July 2nd, 2007: "Infineon a big winner in iPhone teardown".
  8. Engadet, July 1, 2007, "iPhone Processor Found: 620 MHZ ARM CPU".
  9. 9.0 9.1 9.2 9.3 9.4 The Wall Street Journal, January 11, 2007: "Taiwan Makers May Wring Big Profits From iPhone"
  10. Engadget, November 15, 2006: "Hon Hai Cops to iPhone Contract" http://www.engadget.com/2006/11/15/hon-hai-cops-to-iphone-contract/
  11. Digitimes, May 29th, 2007: "Quanta Reportedly Enlisted as Second iPhone Contract Maker" http://www.digitimes.com/telecom/a20070529PB202.html
  12. AP, July 2nd, 2007: "Techies Rush to Dissect Apple's IPhone" http://biz.yahoo.com/ap/070702/apple_iphone.html?.v=24
  13. AP, July 2nd, 2007: "Techies Rush to Dissect Apple's IPhone" http://biz.yahoo.com/ap/070702/apple_iphone.html?.v=24
  14. ChangeWave Research Blog
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