The Fate of Tyrlon and other Dubious Things

With the announcements yesterday about the new iPhone and the new pricing schemes, many investors sold off some of their stock.  This is not unusual for Apple though, as their stock almost always loses value the day anything new is announced.  I think it is a case of super high expectations and nothing Apple can do really surprises people anymore since it was “expected” that the new iPhone would have 3G and GPS.  If it hadn’t, the stock would have tanked even more.

Looking at the current numbers today though, the stock is up several points already and seems to be going strong.  The question is if Apple’s new iPhone business model can succeed and maintain their profit margins on the devices.  Under the old business model Apple shared part of the proceeds of each sale with their mobile phone providers and in return Apple also got a portion of monthly subscription fees from the cell phone companies (24% was the rate for the deal with AT&T).  For the iPhone 3G, Apple has cut new deals with the mobile phone providers and cut the price of the iPhone itself in half.

Under the new system, Apple keeps all of the sales proceeds of the device itself, while each service provider keeps the full monthly revenue from their subscribers as well.  According to AT&T press releases about profit guidance for next quarter, they also pay a subsidy to Apple to keep the cost of the device so low.  This is why the new iPhones require a 2-year service contract with AT&T (or another provider if overseas) in order to be purchased.

Some of this makes me wonder if this is an attempt to stop some of the phone unlocking that has gone on to get away from the exclusive partners that Apple has chosen around the world.  However, moving forward it looks like more and more providers are being allowed to use the phone in foreign markets and Apple claims that they will have rolled out the iPhone to over 70 countries by this fall.

The new business model seems to rely on quantity vs. high margin, so Apple needs to sell millions upon millions of the new iPhones in order to maintain a high level of profitability.  The early adopters definitely paid a tax to help fund future development though, given estimates put the actual cost of the first iPhone at around $200 and Apple was originally selling them for $600 which is a 300% markup on cost.  I wonder how much the new iPhone 3G actually costs Apple to make since they’ve now had to include 3G and also a GPS receiver in the device.  Surely the iPhone 3G is actually costing Apple more to make even as they cut the prices in half.

Will mass market adoption work for profitability in the long run?  Only time will tell  - but one other thing to consider is that sales of the iPhone seem to be tied somewhat to increased sales of Macintosh computers as well.  So, if Apple can sell 50 million iPhones in the next couple of years they might get further market share in the PC market as well.  With Apple currently trading in the mid 180s, I would guess that Apple still has enough support to reach at least $220 a share.  I guess only time will tell…

If you enjoyed this post, make sure you subscribe to my RSS feed!