New iPhone Rules: More Apple Revenue, Fewer Unlocked Phones

SAN FRANCISCO (Dow Jones)--A change in the way Apple sells its upcoming iPhone could increase how much the consumer electronics giant makes on each phone sold, potentially boosting the company's revenue by billions of dollars, as well as reduce the number of potential lost subscribers.

While the consumer will be paying about $200 less for each iPhone, Apple is seen as making more money, thanks to the subsidies that the phone's carriers, including AT&T, will pay. While the companies involved won't comment on the plan, industry observers now suspect the subsidies may total more than $300 a phone, giving Apple an extra $100 or more on each phone sold.

Based on analysts' forecast that between 35 million and 45 million iPhones will be sold before the end of 2010, that could add $4 billion or more to Apple's top line.

Carriers likely are more willing to pay the high subsidy because of a simple change in the way iPhones are sold - Apple now is requiring a service contract at the time of sale. The move is seen cutting down on those iPhone buyers who "unlock" their phones and use the devices on other cell phone networks.

This action should help carriers benefit as much as possible from their iPhone relationship. It was estimated that about a quarter of the first-generation iPhones were unlocked, preventing those carriers from collecting the monthly subscription fee, which generally ranges between $70 and $130.

In addition to the service contract requirement, Apple also has surrendered its right to part of that monthly subscription fee.

Apple's highly-anticipated iPhone 3G, which also doubles as an MP3 player and mobile Internet device, goes on sale on July 11.

In the U.S., exclusive service provider AT&T will charge $199 for an iPhone with an 8-gigbyte hard drive and $299 for a model with a 16-gigabyte hard drive, as long as the buyer also subscribes to its cell phone service. It also will sell an iPhone contract-free, at $599 and $699 respectively, and then give buyers an option to use AT&T services without a contract.

With new details about iPhone subsidies this week, equity research analysts say their assumptions about the iPhone's average selling price were too conservative, thus helping to expose the unexpected gains Apple's likely to see.

Thomas Weisel Partners' Doug Reid this week raised his average selling price estimate by $120 to $520. That makes for an additional $1.9 billion to Apple's top line this year, based on his assumption of 16 million iPhone 3Gs sold between July 11 and December.

Analysts reckon Apple is pocketing as much as $352 per iPhone sold, based on estimates carriers pay about $525 per phone, which Apple is thought to spend about $173 to make, according to iSuppli, which tracks manufacturing costs.That means Apple could make between $12.3 billion to $15.8 billion in gross profit on the iPhone over the next two and a half years.

Apple might do even better in a few years. The cost of manufacturing the iPhone is expected to drop by at least 30% by 2010, according to iSuppli, which tracks the costs of components for high-tech goods.

Apple spokesman Steve Dowling declined to provide additional details about its arrangements with carriers or its pricing strategy.

Apple's stock price, which has jumped 43% over the past 12 months, likely reflects some of the iPhone optimism. Nonetheless, RBC Capital Markets analyst Mike Abramsky recently raised his target for Apple shares to $220 from $200 because of "upside potential to iPhone estimates."

Apple shares recently slipped $2.52, or 1.5%, to $172.05.

The move to require a service contract at the time of sale was driven partly because of hackers, who have siphoned away tens of millions of dollars from Apple and AT&T since the iPhone debuted in June 2007. The hackers, who post their unlocking software to the Internet, have bedeviled Apple and AT&T, and have unlocked an estimated 1.5 million iPhones.

The service contract requirement as well as the lower price for consumers is seen reducing the number of unlocked phones. By expanding iPhone sales into scores more countries this year, Apple will also able to sate pent-up worldwide demand, which will also help battle unlocking.

"My bet is unlocking iPhones will diminish," said Jay Freeman, a partner at technology consulting group Santa Barbara, Calif.-based Okori Group, and an active member of an underground iPhone development team that provides unlocking software. "Some people will look at the iPhone and say, 'It's just so cheap to switch now to (AT&T) rather than unlock their phones.'"

AT&T says that's important. Because of the big subsidies it's giving customers, the company stands the risk of not recouping the entirety of what it paid Apple for the phone if customers aren't locked into a contract.

"Under the current model, where we are subsidizing it, it's very important to get the service activated," said AT&T spokesman Michael Coe.

For its part, AT&T has said it expects the subsidies to Apple to cut into its earnings by 10 cents to 12 cents a share this year and next. Based on AT&T's roughly 6 billion shares outstanding, that equates to projected costs of $600 million to $720 million a year.

-By Ben Charny, Dow Jones Newswires; 415-765-8230; ben.charny@dowjones.com

(END) Dow Jones Newswires

Posted to the site on 2nd July 2008