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News   - 09/18/2007

Losing Money on the iPhone and Making It Up on Volume

Apple is likely to make so much money from its share of iPhone usage fees paid to wireless phone companies that it can sell the product at a loss and still make money. It can even cover the cost of its $100 rebates to people who bought the phone before it cut the price to $399.

Thatís the conclusion of Toni Sacconaghi, an analyst with Sanford C. Bernstein. In a report issued late last week, Mr. Sacconaghi undertakes a complex analysis that concludes that Apple is receiving significant payments from AT&T, a carrier with exclusive US rights to the iPhone, for the privilege of partnership. This is similar to the deals Apple is reportedly about to announce in Europe.

The report estimates that Apple will sell seven million phones in its fiscal 2008, generating $1.05 billion from the sale of the phones and $715 million from carrier payments. Thatís 41 percent of Appleís iPhone revenues.

Before we get to the fine print, hereís why it matters. The iPhone could have an overall impact on the economics of the phone industry. It has put a hardware manufacturer in a highly unusual position of strength relative to the carriers (Verizon, AT&T, etc.). Theyíre accustomed to calling the shots about what devices get access to their network; not so with the iPhone. It carries its own weight with consumers.

Mr. Saccanaghi, after discussing the issue with various players in the mobile phone ecosystem, estimates that AT&T could afford to pay Apple $15 a month over the lifetime of a two-year contract. That adds up to $360 in payments. And thatís considerably more than the $200 to $350 that AT&T pays other retailers (like Best Buy, Radio Shack) for customer sign ups, Saccanaghi writes.

What does it mean?

Apple could conceivably sell the iPhone hardware at a substantial loss while still generating greater profit per iPhone than it does from the highest-end iPod.

Sounds like a good deal for Apple, with a caveat. If Jobs decides to drop the price of the iPhone, he might consider offering a rebate to existing customers beforehand.

Source: NyTimes.com    
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