PALO ALTO, Calif. -(Dow Jones)- If the US$499 and US$599 price tags of Apple's new iPhone are giving you pause, you aren't alone.
A recent survey by ChangeWave Research, Rockville, Md., found that almost a third of people not interested in purchasing the sleek, touch-screen device blame high price.
While the expected price may not drop anytime soon, several analysts who have estimated the cost of making the iPhone say Apple has the flexibility to lower the price tag. Some of their estimates also suggest the company could generate a substantial profit on the product, scheduled for release in June.
One observer projects an iPhone gross margin as high as 49%, well ahead of the recent company average of 31.2%. And even the lower margin estimates suggest substantial profit from the sale of each device.
So far, Apple has not said whether less expensive models are in its plans. The company acknowledges privately that lower prices are possible over time, but has shown a determination in the past not to cut product prices too quickly. Apple also declines to discuss the gross margin it expects on the product.
Anticipation over the iPhone has run high since Apple Chief Executive Steve Jobs unveiled the device at the Macworld show in early January. Investors have been eager to know whether it represents a broad new product category for the company - and whether Apple will meet its goal of selling 10 million iPhones in 2008.
Many analysts believe this target of 1% of the cell phone market is achievable. But if price becomes a hurdle, the company appears to have room to move it lower, says Andrew Rassweiler, a senior analyst at the research firm iSuppli.
Rassweiler analyzed the components he expects to see in the phone and says the cost of making the $499 iPhone is $245.93 and the cost of the $599 iPhone is $280.83.
"I think if anything, we've been fairly conservative and maybe overestimated what's (needed) in the (phone)," he says.
There does appear to be "enough wiggle room in the design of the phone," agrees Richard Doherty, research director of Envisoneering Group, a Seaford, N.Y., research firm.
Given Apple's ability to negotiate component contracts with suppliers, the phone could cost even $100 less than the iSuppli estimate, says Doherty, who predicts Apple will roll out lower-priced models within 18 months.
The phone's price also could see reductions from AT&T's Cingular, which has an exclusive distribution deal in the USA. At Macworld, Apple said the iPhone's present price would require a two-year service contract. But the company now insists the contract details have not been announced, and Cingular spokesman Mark Siegel says his company is not yet ready to disclose its pricing plans. The reticence suggests Cingular may have special offers for people who sign up for various service offerings.
In addition, other carriers will push rival phones to keep Cingular from getting a traffic boost from the iPhone, says Rob Enderle, principal analyst at the Enderle Group, a San Jose research firm.
Samsung Electronics and LG Electronics already have announced touch-screen models, and speculation surfaced this week that Microsoft may be interested in testing phone technology for its Zune music player. As a result, Enderle says there may be "some price erosion" in the iPhone.
"I would not be surprised to see the price get lowered" whether by Apple or Cingular, says Jonathan Hoopes, an analyst at ThinkEquity Partners who doesn't own Apple shares and whose firm doesn't conduct banking for the company.
Debate On Margins
But some analysts are less convinced, and they question just how much margin Apple has priced in the product. According to iSuppli's component estimate, the iPhones presently come with gross margins ranging from 46.9% to 49.3%, says Rassweiler.
This is well above Apple's average. In the fiscal first quarter ended in December, for instance, Apple reported a company wide gross margin of 31.2%, and analysts say its Macintosh computers and iPods sell with lower gross margins of about 25%. Software, services and peripherals help bring up the total.
Apple declined to comment on the cost breakdown, as well as the company's margins on computers and iPods.
Not surprisingly, the big difference between the iPod, Macintosh and iPhone margins has some analysts questioning the iSuppli breakdown.
Andy Hargreaves, an analyst at Pacific Crest Securities, says he anticipates the iPhone gross margin to be 20% to 25% - not that much different from the Macintosh margin. As Apple gets more efficient at producing the phone, and as negotiations with component suppliers bring volume discounts, the margin will rise, but not right away, says Hargreaves, who owns Apple stock but whose firm doesn't conduct banking business for the company.
John Jacobs, director of notebook research at DisplaySearch, an Austin, Texas, research firm focused on flat panel displays, also takes exception. The iSuppli breakdown didn't include an LCD screen with enough resolution or touch-screen technology responsive to satisfy Apple, Jacobs says. Both add cost.
DisplaySearch estimates the cost of $499 iPhone to be more than $300, suggesting a gross margin with a percentage in the mid-30s. Apple could eventually produce a lower cost phone, but not for some time, Jacobs says.
"I see them staying at the high end for at least quite some time," Jacobs said.
If so, the strategy would closely mirror the way Apple has marketed the iPod. As new generations of iPods came out, Apple often added more memory and new features to high-end models, but held their price steady. After several years, it began introducing lower-priced models.
-By Mark Boslet, Dow Jones Newswires, 650-496-1366; mark.boslet@dowjones.com
(END) Dow Jones Newswires"
Posted to the site on 12th February 2007
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