Apple Drops Operator Revenue Share for iPhone Content Sales

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SAN FRANCISCO (Dow Jones) Apple has dramatically changed the business model behind its iPhone in a gamble that counts on higher volume sales replacing iPhone revenue now received by Apple on a recurring basis.

The Cupertino, Calif., computer maker said Monday that, starting July 11, carriers will sell a new third-generation iPhone for $200 less than it has charged for older versions. Apple will then collect all of the initial sale price, it's believed, while operators will then keep 100% of the fees consumers pay to use the device.

Under the business model in place for a year now, carriers paid Apple a percentage of both the higher iPhone price and the fees consumers would then pay carriers over the life of their contracts.

Apple also signaled Monday that it has shed another vestige of its old iPhone sales model. In a securities filing, Apple disclosed that agreements it has reached with scores of other carriers are "generally not exclusive with a specific carrier."

Under the former business model, Apple reached exclusive deals that allowed only one operator per country to sell the phone. That strategy, while building up demand, was criticized as cloistering the iPhone from a potential huge audience.

The changes will begin to take effect next month when the 3G iPhone goes on sale. Third generation, or 3G, refers to cell phones that are compatible with some of the world's fastest wireless Internet networks.

In the same filing Monday, Apple said it will continue to receive a cut of service fees supporting the older version of the iPhone that's been on sale for a year.

There's debate now as to what impact the changes will have on Apple. Shareholders seem to have soured on the prospect for now. Piper Jaffray analyst Gene Munster suggests shareholders leery of the loss of recurring revenue were largely responsible for Apple shares closing trading Monday down 2.1%, or $4.03, to $181.61.

But Munster says he's "much more comfortable" now that Apple will sell between 12 million and 14 million iPhones this year, thus exceeding its 10 million goal. He also sees Apple selling 45 million iPhones next year, which is the kind of volume that could more than make up loss of Apple's split of service fees.

Charles Golvin, an analyst at Forrester Research, said the lower price will indeed goose sales, which is critical to the success of Apple's new iPhone business model.

As Apple Chief Executive Steve Jobs "put it himself, there are a ton of people who would love to have an iPhone but couldn't commit to the price," Golvin said, adding that there is no question this is the right move. "A lot of people will take the plunge now."

-By Ben Charny; Dow Jones Newswires; 415-765-8230; ben.charny@dowjones.com; and Roger Cheng, 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires

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