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Apple released the iPhone on June 29th, 2007 to a thunderstorm of media hype and high expectations. A runaway success, 6 million iPhones were sold within one year of the original model's release.^[1] On July 19, 2009, Apple released the third-generation iPhone, coined the iPhone 3GS, priced at $199/$299 for new and upgrade-eligible AT&T customers. The iPhone 3GS is identical to the second-generation iPhone 3G on the exterior, but features improved processing speed and memory, as well as a 3MP camera, digital compass and videorecording functionality. The 3GS is on track to exceed sales of the iPhone 3G, which sold a million phones over its launch weekend in 2008. ^{[2] [3]}

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.^[4]

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. ^[5] In addition, as of November 2008, the iPhone dethroned the Motorola Razr as the #1 device in the world. It is the #2 device in the US and #3 device in the UK, but 2008 growth of over 100% in Latin America and Caribbean has pushed it to the top position.^[6]

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).

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.

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.

The new iPod Touch presents the opportunity for attracting new PMP users plus influencing current owners to “trade up” to a device at a higher ASP. The Shuffle should appeal to price sensitive consumers who previously weren’t willing to pay the high prices for iPods. These two factors should strengthen demand in light of a maturing market.

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. ^[7]
• 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.

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.

3Gs iPhone

• Samsung makes the chipset used for recording video. The chipset is the SoC S5PC100 from Samsung^[8]

3G iPhone

• Broadcom (BRCM) provides the touchscreen controller for the 3G iPhone.^[9]
• TriQuint provides three power amps in the 3G iPhone.^[10]
• ST Microelectronics makes the accelerometer which is the part that senses the phones orientation.^[11]
• Samsung makes the application processor and the memory chip for the phone.^[12]
• Infineon Technologies AG (IFX) makes the chips that power the iPhone's wireless data capabilities, as well as GPS system, power management, and UMTS tranceiver. ^[13]
• National Semiconductor makes the display interface^[14]
• Skyworks provides a power amp module.^[15]
• Linear Technology (LLTC) provides the battery charger and USB controller.^[16]
• Marvell Technology Group (MRVL) supplies the chips that allow the iPhone to connect over Wi-Fi networks ^[17]

First Generation iPhone

• Balda AG (FRA:BAD) is a German company that makes what technology experts believe^[18] 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. ^[19]
• Infineon Technologies AG (IFX) makes the chips that power the iPhone's wireless data capabilities. ^[20]
• ARM Holdings (ARMHY) licenses the technology used in the iPhone's CPU.^[21]
• Hon Hai Precision Industry Co., the world's largest electronics contract manufacturer, received the initial order to assemble 12 Million iPhones^[22][23]
• 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^[24]
• Catcher Technology Co. (TPE: 2474) makes the casing for the iPhone^[22]
• Primax Electronics (TPE:2336) which makes digital camera modules for cell-phones and is a supplier for the iPhone^[22]
• Entery Industrial Corp. (TPO:1333) is a flash memory manufacturer and a supplier for the iPhone^[22]
• Unimicron Technology Corp. (TPE:3037) is a printed circuit-board manufacturer specializing radio frequency (RF) modules. It is a supplier for the iPhone^[22]
• Texas Instruments (TXN) makes a power management chip. ^[25]
• Marvell Technology Group (MRVL) supplies the chips that allow the iPhone to connect over Wi-Fi networks ^[26]

Apple Planning on Designing Chips in House

Apple acquired P.A. Semi which is a fabless semiconductor company. Apple acquired P.A. Semi primarily for the purpose of designing the SoC's (system-on-a-chip) for future iPod's and iPhones. This is a potential blow to companies like Samsung, who makes the microprocessor for the phone, as well as possibly Intel who was trying to promote its Atom processors which are made for handheld devices like the iPod and iPhone. P.A. Semi will most likely work with Apple in the design of the processors, but because P.A. Semi is fabless, companies like Intel and Samsung may still get some business actually building the processors.

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. RIM has released the BlackBerry Bold which offers more multimedia features to compete better with the iPhone. In addition, RIM is will release the BlackBerry Storm 9530 which will feature a touch screen technology similar to the iPhone. 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^[27])

• Google's android operating system is being featured in the T-Mobile G1 smartphone. The G1 is not expected to be an iPhone killer, but it is the first move of Google to break into the smartphone market and gain a foothold on mobile web surfing. The G1 is priced just below the iPhone at $179.

• Samsung launched both the Omnia then the Instinct. Both are competitors to the iPhone.

• Nokia launched the Nokie N97 the same week the iPhone 3GS was launched. The N97 features a hard keyboard, an advantage over the iPhone.

Trends and Forces

Could the iPhone Replace Notebooks in China?

The average internet user in China is 25 years old, but in China, owning a computer is not socially acceptable yet.^[28] As a result, the Chinese youth pack into internet cafe's that are open 24 hours a day. The young demographic and their hunger for technology and the internet plays right into the hands of the iPhone. While computers are not socially acceptable, cell phones are, which means that the Chinese consumers may very well replace computers with smart phones, like the iPhone. Not to mention, the market for Chinese cell phones is already massive - China Mobile had as many as 574 million customers.^[29]

Japan Not a Fan of the iPhone ?

iPhone sales in Japan have been such a bust that Apple has decided to sell it for free (given that a 2 year contract is purchased as well).^[30] Reasons for the phone's lack of success point to possible shortcomings of the iPhone, such as the comparitively low megapixel camera and the inability to take streaming video (both highly coveted features to the Japanese). Other complaints from the Japanese have been reported to be the very high monthly data plans and the fact that the iPhone is not produced by a Japanese company. Whether this free iPhone market campaign makes an impact in Japan or not, Apple clearly has an uphill battle ahead of them in Japan.

However, AppleInsider investigated the Wired report and questioned its validity as reported in the article: Japanese Hate for iPhone All a Big Mistake. The author, Brian Chen, misquoted a source saying the iPhone makes a lame fashion statement. The source, Daiji Hirata, seeing that he had been misquoted responded that he'd never met Chen. ”I have never said 'And carrying around an iPhone in Japan could make you look pretty lame.' I think most Japanese think iPhone is the coolest item. At least I have and love iPhone.“

AppleInsider concluded that much of Wren's argument was rather inaccurate and unsupported. Yet, there isn't much dispute that iPhone sales have been somewhat soft in Japan, due to the array of competing devices along with the Japanese preference for homegrown technology.

The Rise of of iPhone Applications

At the release of the 3G iPhone, 500 applications are available with 10% of them being free and the other 90% being $10 or less.^[31] The rise of applications brings the iPhone, and other smart phones, that much closer to becoming handheld PCs. Companies like Sega are utilizing the accelerometer, which detects motion, to produce a game app. Other companies are producing apps that help build friend networks, and others are utilizing the GPS to notify you when you are near a restaurant you like or that a friend recommended.^[32]

On August 11, Apple announced that it had $30 million in application sales for the iPhone. In comments with the Wall Street Journal, Steve jobs said "This thing’s going to crest a half a billion, soon.... who knows, maybe it will be a $1 billion marketplace at some point in time…. I’ve never seen anything like this in my career for software.”

The launching days: recent iPhone news

First Generation iPhone

• As expected, crowds swarmed the Apple stores on and after June 29th 2007 -- 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.)

The 3G iPhone

The 3G iPhone was released on July 11th 2008 in 22 countries, and in the first 3 days 1 million 3G iPhones were sold. This makes the 3G iPhone one of the largest consumer electronics launch in history.^[33] The new iPhone is priced at $199 and $299 for the 8GB and 16GB versions, respectively. However, Gene Munster, a Piper Jaffray analyst, did a survey that found only 35% of buyers will be eligible for the price subsidy and that the average entry price level for an 8G will be more around $400.^[34] The 3G speed is about 3x as fast as the current EDGE service and battery life has been boosted to 10 hours of 2G talk time or five hours of 3G talk time, about five hours of browsing, 24 hours of audio, seven hours of video playback, and 300 hours-standby. In addition, it will feature real GPS capability. The new iPhone was released to 22 countries on July 11th and will be offered in 70 countries by the end of the year. As for iPhone applications, a survey taken of iPhone developers found that about 70% of applications were expected to be offered for free, and for the rest the price would begin at $10, but likely drop to $3 or less.^[35] Apple (AAPL) is initially offering 500 applications.

One concern about the new iPhone is its camera. The iPhone still has a 2 megapixel camera which is inferior to many of its smartphone competitors that have 3-5 megapixel capabilities. Apple may not put as much priority of the camera but a representative from Nokia called it the most important capability for a consumer purchasing a phone of this caliber.^[36]

3G iPhone purchases require committing to a 2-year service agreement which includes $30/month data plan. The cheapest voice plan offered is 450 minutes for $40/month. Thus, the minimum monthly service fee available is $70 (voice/data) yet text messages aren't included.

AT&T stated a no-contract 3G iPhone would eventually be offered for $599 for an 8 gig and $699 for a 16 gig.^[37] As of January 2009, AT&T has yet to make available non-commitment pricing.

The App Store

The Developer's Perspective

From the perspective of an iPhone application developer or any mobile software engineer, the iPhone is the most prime market, operating well even during the current worldwide recession and catering to the needs of the members of low socioeconomic status. ^[38] Due to this, mobile software developers face a seemingly unending supply of consumers who may buy a well designed application. Since the App Store ranks applications on both freshness and popularity, both new applications and popular old applications receive spotlight. This helps the developer publicize his application with little effort beyond the construction of the "App" itself.

There are many success stories due to the iPhone App store. One of the more popular success stories is Steve Demeter's $250,000 of profit after two months of releasing a puzzle game named Trism. ^[39].

The App Store and Apple

Applications on the App Store sell from $1-$10, with a few exceptions. Apple CEO Steve Jobs announced that Apple will keep 30% of the sales of an application and lets developers keep 70% of the income. ^[40] As of August 2008, Apple made approximately $30 million selling 60 million iPhone applications. ^[41]

A few controversies regarding the strict regulation of App Store applications bother iPhone App developers, none of which is cause for any concern to investors.

With the iPhone's and iPod Touch seamless integration with iTunes as well as the simple iPhone usage and computer usage, many consumers are turning to iTunes for the first time. Once a consumer is using iTunes they are very likely to be a repeat customer due to the copywrite code that makes the songs unable to be transfered to other portable devices.

Footnotes and References

1. ↑ Tom Krazit (June 26, 2008). The iPhone, one year later. cnet news.
2. ↑ iPhone 3G hits 1 million sales mark in 3 days. Know Your Mobile (Jul 14, 2008).
3. ↑ Apple Insider IPhone 3GS preorders
4. ↑ The Wall Street Journal, February 17, 2007 "How Steve Jobs Played Hardball in iPhone Birth" http://online.wsj.com/PA2VJBNA4R/snippet/SB117168001288511981-search.html
5. ↑ ChangeWave Research Blog
6. ↑ Marketwatch.com, iPhone Now the #1 Device Worldwide according to Admob, Novermber 19, 2008
7. ↑ Business Week, July 2nd, 2007 "Taking the iPhone Apart"
8. ↑ Engadget tear apart blog post
9. ↑ 3G iPhone Top Five Component Beneficiaries
10. ↑ 3G iPhone Top Five Component Beneficiaries
11. ↑ 3G iPhone Top Five Component Beneficiaries
12. ↑ 3G iPhone Top Five Component Beneficiaries
13. ↑ 3G iPhone Top Five Component Beneficiaries
14. ↑ 3G iPhone Top Five Component Beneficiaries
15. ↑ 3G iPhone Top Five Component Beneficiaries
16. ↑ 3G iPhone Top Five Component Beneficiaries
17. ↑ AP, July 2nd, 2007: "Techies Rush to Dissect Apple's IPhone" http://biz.yahoo.com/ap/070702/apple_iphone.html?.v=24
18. ↑ Business Week, July 2nd, 2007 "Taking the iPhone Apart"
19. ↑ AP, July 2nd, 2007: "Techies Rush to Dissect Apple's IPhone" http://biz.yahoo.com/ap/070702/apple_iphone.html?.v=24
20. ↑ ZDNet, July 2nd, 2007: "Infineon a big winner in iPhone teardown".
21. ↑ Engadet, July 1, 2007, "iPhone Processor Found: 620 MHZ ARM CPU".
22. ↑ ^{22.0 22.1 22.2 22.3 22.4} The Wall Street Journal, January 11, 2007: "Taiwan Makers May Wring Big Profits From iPhone"
23. ↑ Engadget, November 15, 2006: "Hon Hai Cops to iPhone Contract" http://www.engadget.com/2006/11/15/hon-hai-cops-to-iphone-contract/
24. ↑ Digitimes, May 29th, 2007: "Quanta Reportedly Enlisted as Second iPhone Contract Maker" http://www.digitimes.com/telecom/a20070529PB202.html
25. ↑ AP, July 2nd, 2007: "Techies Rush to Dissect Apple's IPhone" http://biz.yahoo.com/ap/070702/apple_iphone.html?.v=24
26. ↑ AP, July 2nd, 2007: "Techies Rush to Dissect Apple's IPhone" http://biz.yahoo.com/ap/070702/apple_iphone.html?.v=24
27. ↑ ChangeWave Research Blog
28. ↑ Apple's iPhone to capture Chinese internet market
29. ↑ Apple's iPhone to capture Chinese internet market
30. ↑ Wired.com, Why the Japanese Hate the iPhone, 2/26/09
31. ↑ iPhone Calls on Software Developers
32. ↑ iPhone Calls on Software Developers
33. ↑ Apple's iPhone Biggest Consumer Electronics Launch Ever
34. ↑ Only 35% of iPhone Buyers will get it for $199
35. ↑ $1.2 billion in iPhone Apps, Not Likely
36. ↑ 3G iPhone:What does Apple have against cameras
37. ↑ iPhone 3G plans around the globe
38. ↑ IPhone popular among poor
39. ↑ iPhone Developers go From Rags to Riches
40. ↑ Apple’s Latest Opens a Developers’ Playground
41. ↑ Apple Sells 60 Million iPhone Apps