At CES this week, reaction to the device was decidedly mixed. There were several consistent concerns. One, price. Two, the appeal of typing on a touch screen may be limited. And three, the decision not to choose a 3G network, which means data speeds will be fairly slow. And four…did I mention the price?
In a report issued yesterday, Toni Sacconanghi, hardware analyst at Bernstein Research, lays out the issues.
For starters, let me note that Sacconaghi is quite impressed with the phone itself. He says it “offers superior functionality to our expectations, mitigating some of our cannibalization concerns.” But a trade off for the functionality is the high price point: $499 and $599, depending on how much memory it has.
“Apples goal of 10 million units in FY 08 appears predicated on securing widespread global distribution, but more importantly, on convincing consumers to spend dramatically more on an enhanced handheld computing experience,” he wrote. “We do no think this is a slam dunk.”
Sacconaghi walks through some interesting numbers on the current phone market, which I have compiled into a Harper’s Index-style list:
- Number of phones from the four major U.S. wireless carriers which are now priced above $400: none.
- Percentage of phones in 2006 which sold for more than $300 at wholesale: 5%.
- Estimated number of phones Cingular sold last year that cost more than $300 at retail: about 500,000.
- Estimated number of such phones that sold globally last year: “perhaps 10 million units.”
- Number of iPhones Apple thinks it can sell in fiscal 2008: 10 million.
- Estimated number of Blackberry handhelds that Research in Motion sold over the last 12 months: about 5.5 million.
- Likely reaction on the Street if Apple sold 5.5 million iPhones in fiscal 2008: huge disappointment.
- Estimated monthly cost of operating an iPhone, given likely requirement of data plan in addition to a voice plan: $80.
- Total estimated cost of operating an iPhone for the first two years: $2,500.
- Percentage of global cellular users in the U.S.: about 10%.
- Percentage of total handheld sales represented by the U.S.: about 15%.
- Number of Cingular wireless customers:about 60 million.
- Number of handsets Cingular sells a year: about 40 million.
- Cost to buy the LG Chocolate music phone: about $100 through Verizon.
- Cost for the Sony Ericsson w810i music phone: about $79 from Cingular.
Sacconaghi says there is also a risk that the decision to base the phone on EDGE technology, rather than faster 3G networks, could result in a disappointing user experience in terms of connectivity. He also thinks the touch screen could prove frustrating for heavy e-mail users.
Motorola’s (MOT) RAZR was offered at $500 at launch; but as Sacconaghi notes, it only hit mass adoption when it dropped to $100, which took only 10 months. “It is unclear how aggressively Apple can afford to price the phone, and it appears unlikely that carriers will provide the Apple phone with unique subsidies,” he writes. One issue that other phone makers do not have is that a price that drops too low will cause cannibalization issues. “If the iPhone drops below $250, we suspect Apple margins would suffer, and provide little to no incentive for consumers to purchase stand-alone iPods. Carriers appear unlikely to give Apple any special treatment or extra subsidization, given that most will likely resent the iPhone’s wi-fi capability and Apple’s tie to iTunes.”
Sacconaghi also notes that it is highly unlikely that companies are going to buy iPhones for their executives rather than Blackberries - this will be a consumer purchase. “Would you pay $2,500 to use the iPhone for two years? Or would you rather stick with your company-issued Blackberry/PDA/phone and carry a seperate $250 iPod Video?”
Apple today is down 88 cents at $96.12.
