Apple's AT&T Deal Is Costly

The latest estimates have "unlocked" iPhones costing Apple over $1 billion in lost revenue the next 3 years. Apple's (AAPL) AT&T (T) tie-up in the US is for another 4 years, meaning the company will continue to not realize monthly revenue, estimated at $120 annually per subscriber from phones "unlocked" for use on other carriers.

Aside from the lost revenue aspect, one can only guess at the numbers of phone that have not been sold to people not willing to switch cell phone carriers to AT&T. Apple has stood by its "10 million phones sold by the end of 2008" goal, but recent news that they have dramatically cut back on component orders can only mean sales growth has slowed.

I did a post in May of last year that said AT&T would be the big winner of the iPhone deal and to date they have been. What Apple did was delay sales of its product and allow other handset makers and carriers to come out with competing products. Now, Apple fans will say the offering from Verizon (VZ) and sprint (S) are nowhere near the quality of Apple's and that may be true.

What is true is that they have given their consumers an option to stem the urge to switch. When you also consider we have not seen what Research in Motion (RIMM), the Blackberry maker and clear "smart phone" leader has planned, Apple may face even more headwinds. When you can buy a Blackberry from every cell phone provider in existence, sales of the products ought to continue to outpace the iPhone.

None of this even takes into account the specter of Google's (GOOG) gPhone expected later this year. Apple had a chance to "bum rush" the industry with its product and could have caught all the other handset makers and carriers by surprise. Whether it was greed, control issues or hubris, Jobs backhanded the industry instead, with his rhetoric and attitude towards it.

Instead of having a product that all carriers were glad to carry and sell, he created an atmosphere in which they embarked on a quest to compete directly with him and his product. The handset game is hard enough without intentionally making enemies of its participants, and Jobs has done this. I think Apple devotees may find themselves in the future wondering "what could have been" if only Jobs had not started out this process so adversarially.

Disclosure: Sold Apple July $280 calls when stock was at $165 in January.

Comments

[makingSense]

Now, instead of loosing the annual busines of $120 each user anyways, how about Apple go all out with all other carriers which more susbsidy price ..lets say $40/user account of even nothing. Once you open up the market, there wont be no smuggling of the phones and any damage to the stock due to loss of unlocked phone!!

R you kidding me, how long are they planning to hold monopoly on the phones and carrier.

Steve Jobs, time to take another look at this business model!!

[Yousaidwhat]

Come on now! Does anyone really believe that Apple will just stand back and watch the present "unlocked" iPhones situation (which only recently became apparent) continue for years? Furthermore, how can any analyst forecast slowing sales based on vendor builds when they don't have a clue as to what new product introductions are in the pipeline? It's common knowledge that Apple demands that such information be kept highly confidential by all of their vendors.

[citetez]

I think that one of the reasons for the exclusive relationship were the critical changes jobs was able to force in ATT's offering approach and its relationsip w/the handset maker. Appl was the first co to force the telecoms to offer a fresh approach to the consumer. An offering to all carriers would not have allowed that -- Verizon had already balked. Jobs force a paradigm shift. The loss of revenue from unlocked phones is unfortunate, but there are many more innings to this game.

[digivision]

this thing (finding faults at any cost) reminds me of all the nasty stuff it was said when apple released the first ipod .. the rest is history

[JS-DC]

This is hilarious: Apple comes out of nowhere to best the phone manufacturers at their own game, making a huge profit, with heaven knows what else up their sleeve, and this writer thinks it's a problem.

As a happy Apple stockholder, Mac user, iPhone owner, all I can say is: if this is a problem, I could use more problems like it! :-)

[David Lentz]

Nice trade on the calls -- why did you not buy July 200 puts instead? Seems like they would have been the preferred vehicle if one was sure the stock was headed for a fall.

[Jax3]

And about those unlocked phones. 400.000 in China. These are not losses for Apple. These are phones that could only be purchased if unlocked so net positive and shows level of demand.

The real plus for apple is that it designs, promotes, executes almost flawlessly and doesn't tip its hand. Top strategic firm in the business.

Tom

[brewer]

You think it MAY be true that the envy, etc... aren't as good as the iPhone? LOL!!! What gives you that clue when you missed out on all the others?

Apple owns this market. The 'unlocked' phones are not hurting Apple, they are making it ludicrously profitable to open business in these as yet virtually untapped markets.

Finally, Apple has far more going for it than the iPhone, or didn't you consider that when you lost all that money on your calls?

[wayne thompson]

Maybe they have cut parts ordering because they will be introducing newer version of the iphone and have increase other order to manufacture a upgraded iphone.

[top_tier]

My bet is watch as Apple releases their SDK, the only way to get the apps will be mostly through contracted carrier channels, making unlocked phones poor step children. I think you underestimate the walled garden mentality of carriers. If the before holds true then the value added functionality of the iPhone apps will gradually wear away the appeal of unlocked iphones.

[Proud Canadian]

I "hold" my AAPL's shares, BUT I buy more RIMM.

[FreeRange]

Get real naysayers. Apple has done the intelligent thing - controlling its own destiny, and not letting the service providers turn the iphone into a commodity. So how much does a cell phone cost? Free with a 2 year contract, even 2 free, or $99 for one of those other "smart phones". The industry has used subsidies to drive phones into a commodity position devaluing the phone makers' brands. Its time for the handset makers to take back control, and for the service providers to re-price (discount) their services to take their phone discounts out of the price consumers are really paying. By the way, when will the industry, and non-adopters, realize the the iphone is not really a phone, but a sophisticated hand held wireless computer that happens to have cell phone capabilities, and whose superior features, functions and integration provide superior value to the consumer.

[Oh Blah Dee Blah Dah]

You overlooked the importance of signing exclusively with AT&T and the official European networks: Apple required these companies to make unlimited data available at a new, low price. THIS is a revolutionary price approach for consumers to access large amount of network DATA as opposed to just voice minute plans.

Also, you were very late sell Apple calls. On Dec 28, 2007, the July 280 calls closed at 6.6 bid.

Also, if you REALLY believed Apple was overpriced at $165 in January, you should have sold the 170 Apple calls at a closing bid of $21.25 on Wednesday, Jan 16, 2008, instead of receiving ONLY $1.89 for the 280 calls. You would have earned 10 times more!

[Richard Alvarado]

You know if you do all the math with the numbers you gave, Apple will outsell RIMM by a large number less then 3 years.

[Proud Canadian]

I definitely prefer the RIMM's business model to the AAPL's one !

[top_tier]

RIMM has done well with itself but has reached the beginning of its end as a leader. It's vulnerable to the more potent OS of Apple that is in nascent stages of its capability. The power players behind its stock know this but will sponge that issue for all its worth.

The applications that will result from the release of Apples SDK will vault it decisively as the powerful OS it is as it gets fully exploited. This will be further strengthened through the release of 3G iPhones which will likely also contain a GPS chip.

[User 153409]

I am not sure where everyone gets off saying that the unlocked phones are lost revenue. Most of them are used in places where the iPhone is not available yet, so they are in fact incremental revenue that Apple would not have received from the sale of the phone if they had not been unlocked.

Further, if they did not have an exclusive agreement with AT&T, they would not be receiving the estimated $120 per year in carrier revenues.

Yes, they would have sold more phones without an exclusive agreement, but would not have had the additional yearly carrier revenue. Who knows how this will play out in the long run, but it is hard to bet against Apple.

To say that selling phones that are unlocked is lost revenue is just simple misinformation.

[Proud Canadian]

I also prefer RIMM'S Balsillie to AAPL's Jobs to react at the right time !

[ianp]

Strange article - very much glass is half empty.
Try it the other way:
- most of the unlocked iPhones are going to markets Apple can't reach yet, either by geography or carrier. Its actually quite smart to get that buzz going. Its possibly the most leaked product in this industry ever.
- when Apple enters those geographies, some of them will come back online with local carrier contracts - giving Apple some revenue. Or those users will buy official new phones.
- all of those leaked phones are evangelical - getting people interested where Apple haven't got to it yet.
- Some of the cost estimates show that on a parts basis at least, Apple is making money per phone. Carrier revenue is icing on the cake - thick icing too.

Don't berate the loss here - look at the gain later.

[Tom B]

"Its actually quite smart to get that buzz going."

In the US, the iPhone is an elegant, utilitarian device; in China, one imagines it's a status symbol, since you can't get them through official channels yet.

[jbelkin]

For a guy who claims to be a numbers guy, you don't do much calculating yourself.

Apple is selling an EXTRA 400,000 or 1+ million phones where other cell phone manufacturers might sell a few thousand more ... that's right - not on the network but still buying ...

This would be a problem if Apple was subsidizing each phone sale but it's NOT- every one at FULL PRICE 100% of the time.

As for people who can't/won't switch to AT&T ... how much does AT&T make for this customer? That's right - ZERO.

How much does Apple make? That's right $400 to $500 DOLLARS!

Versus ZERO.

It's ALL found money. Even better, Apple has to provider ZERO tech support - how much savings is that?

And with everyone that goes overseas that's not "legal," that just adds to the cachet of the product. How many products are considered FREE ADVERTISING & MARKETING for a company yet they made $450 TODAY?! Not to mention every Iphone sale is potential iTunes sales (even overseas ones either have stores or if they have a US credit card can buy tracks & movies) ...

By your math, since everyone on this planet doesn't have an iPhone, that's a trillion loss?

So you prefer possible future monthly revenue versus a $450 sale today? The future monthly stream is never guaranteed even if you sign up a carrier - people drop out, people don't pay ... but you don;'t factor that in because it's too hard?

The real world is more complex than just A+B-C ... or perhaps you should stick to analysing industries that aren't so complex.

[todd su]

belkin,

you miss the point...

it is not an "either or". had they not played hard ball, they could have had both..

$120 X 400,000 (and growing) phones equals an additional $48 million a year.

[todd su]

david,

i try to never buy options. to be a consistent winner in them, be a seller. that being said, the trade i made is just about $$ in the bank

[todd su]

oh blah,

i was not going to be a seller before earnings came out. that being said, there are always "other trades" one could have done and lamenting that serves no purpose...

the trade i made was a VERY low risk proposition.

[KenC]

There are NO lost revenues for unlocked phones in countries where Apple has no official carrier. There are some lost revenues for unlocked phones in countries where Apple has an official carrier. For example, if someone unlocks their phone to use on the T-Mobile network; however, even those phones might not be lost revenue, because presumably, those customers are using T-Mobile because they get better wireless coverage than from AT&T.

In addition, Apple is not like other mfrs who need the subsidy from the wireless carrier to turn a profit on a phone. Apple is making a profit on each and every phone it sells, locked or unlocked. In other words, there's no downside to additional phones being sold, except in analysts' and bloggers' minds.

Now, in the very same article, you damn Apple for not collecting revenue on tons of unlocked phones, and also damn Apple for not selling thru every carrier. Logic says, that both issues cannot be true at the same time. If so many phones are being unlocked to use on other carriers, where's the impediment from not selling on every carrier?

As for the gPhone, you do know that Google has constantly stated that no such phone exists or is being planned? And, Google's actions speak louder than bloggers' words. Google has constantly talked about how the iPhone has been an eyeopener for them in terms of mobile websearch. Google's OHA is intended to expand the mobile websearch market, downward, and not necessarily compete with the iPhone in the upper end of the market. Whatever.

You do realize that Apple's approach had little to do with hubris and more to do with their being a new entrant in the market, where carriers dictated terms and features on handsets. In order to break this mindset, Apple had to give AT&T an exclusive, and they got some groundbreaking terms, like a share of the carrier revenue, and visual voicemail, and their portal being the gateway and not AT&T. Honestly, I don't know where you bloggers get your ideas. Perhaps, it's the hubris of trying to pat yourself on the back.

I sold my Apple shares at $197.50 and $201.50, after getting in at $86, last Feb. I guess I should pat myself on the back too!

[KenC]

Okay, so I looked at your May blog post, and noticed how you cherrypicked your good calls, and ignore your bad ones. In your blog, you also clipped out that Motorola would be a sleeper pick. How's that Motorola looking now? Now, I know that was not your call, but you reprinted that, in addition to the comments on AT&T and RIM. One can only assume that you liked that call too; otherwise, why include it?

[Murphy Mac]

This story is pretty naive. Under what circumstances would the industry NOT consider Apple their enemy?

quote:
"The handset game is hard enough without intentionally making enemies of its participants, and Jobs has done this."

[F. J. Taylor]

I am as big an Apple fan and user as exists on the planet - even in the years they were in Coventry, I was a Mac booster. I have sold hundreds of people on them, and watched with pleasure as sales and shares eventually grew.

That said, I am not a Kool-Aid drinking Mac-aholic. Apple and Mr. Jobs have ALWAYS had a snooty attitude, control issues, and hubris that would make a Greek tragic hero blanch.

They are unapproachable as a firm, their attitude is "We know best." (even though nobody has a corner on the marketplace of ideas).

I have waited and asked for a product like the iPhone for 10 years or more, and now that they deliver it, they try to force me to join a network that I'd sooner stick pencils in my eyes than join again. (AT&T in the US, and other equally unacceptable non-choices overseas).

I posted words to this effect on the Apple website users forum, only to have it removed by the Apple equivalent of Big Brother.

I understand the above posters' points, but think the author had a few valid points as well - I am living proof, as I have sat on my hands to resist buying the product I have waited for so long until Apple either opens it up or signs on with a network I choose to do business with. (My choice is Verizon.)

Until then, there will be one iPhone unsold, no matter how many others they sell, locked or unlocked. And no, I refuse to buy a crippled unit that might well become a brick!

I also refuse to buy Leopard till they de-bug it. Even Rush Limbaugh (a long time Mac user, fan, and booster, who I have minus zero else in common with) has stated publicly his dissatisfaction with Leopard - but he will probably get more attention than I will!

I hope the other Apple users who posted here read this and think about what I am saying - I don't think even the long arm of Jobs can reach Alpha and take this post down!

[TA]

All you angry Apple fans need to band together and buy as many iPhones as you can afford to support Jobs and his crusade.

Don't just complain, do something about it!

[todd su]

Ken,

I believe AT&T has done great and I have said countless times i thought they would be (and are) the real winner here.

I also have said rimm benefits huge because they sell $99 smart phones..

as for motorola, i have never had a comment on them (or nokia or Lg or any other handset maker other than apple and rimm.)

[peter02l]

jbelkin,

I share your sentiments.

It's difficult for me to understand comments like these here by Mr. Sullivan.
AT&T had to make some concessions speed up their Edge network and implement certain features such as visual voicemail. The agreement has helped both companies.

As jbelkin says, the purchase of phones by people who unlock them and use them in countries where Apple has signed no deals or with unsanctioned carriers speaks volumes about the desirability of the iPhone.

Reports are about 25% of sales are outside the supported networks! That is a million potential customers lost to competing phone manufacturers. And Apple still makes money on every single one of them. And again as jbelkin mentions, for these "customers" Apple is not required to spend a penny on warranty and technical support! Instead Apple enjoys the visibility and awareness for the iPhone provided by these unauthorized users in as yet untapped markets. In addition it cuts into market share of its competitors there.

Consider again what people in China are giving up when they purchase an iPhone: future upgrades, missing feature, no support, etc. Hundreds of thousands of people are willing to buy the Apple iPhone over competing products. Isn't this good news for Apple and bad news for Motorola, Nokia, Samsung, and others as well as Symbian and Microsoft?

Just imagine what will happen to Symbian and Microsoft with Google jumps in. And how carriers will be scrambling to provide and/or control features available on their networks.

[moofer]

What a load of bull. Apple makes revenue hand-over-fist on every phone sold, regardless of the service associated with it. They didn't lose any money. They gained money, albeit less than they would have if an AT&T retained the customer.

[VSD]

iPhone is a mobile platform. It comes with an SDK which you can use to develop an application and sell on that platform. RIMM is a email device and the rest are just phones. The industry has not matured enough to figure out the difference between the three, but apple knows what it owns and is protecting its turf.

[Proud Canadian]

I repeat: I prefer RIMM's Balsillie to AAPL's Jobs to react at the right time...:)

[BartLee]

An excellent response to this flawed post can be found here:

blogs.cnet.com/8301-13...

[todd su]

valueplays.blogspot.co...

[eldernorm]

Cheeeze, I have to wonder how many Billions of dollars Apple will have lost by them not selling that new anti-matter thingie. Now since it does not exist, they cannot sell it, but think of the untold billions that they will lose.........

OH wait, if it does not exist, they cannot lose money over it, and so what does this whole article try to talk about???? Is it just an anti-Apple FUD piece or what.??

en

[HD Boy]

The cheap knockoffs being planned by Sprint and Verizon are just that. They are not the real deal and they will not have the functionality, ease-of-use or well-designed software options of an Apple iPhone. Our Sprint contract expired in January. We're just waiting for the 3g iPhone and in June, we'll finally dump Sprint, where we've been customers since 2000.

We'll never look back.

In that eight-year period, we've endured terrible phone options that came in the form of other cheap knock-offs that didn't work very well. Remember the knock-off of the Motorola Razr (the Samsung A900, aka "Blade", which also was supposed to be a music phone)? The audio quality was very, very bad, the music player never worked worth a darn and it had no working software to sync Address Book Contacts and Music between our Macs (or a PC for that matter) and the phone. And the problems were never fixed. As with other Samsung phones, the A900 was pretty to look at, but it was a complete turkey.

[pats]

Todd
Where do you get the estimates? 1 B in lost revenue? You assume that ATT would sell every Iphone Apple could make, which may or may not be the case. The revenue is for 2 yrs not 4. You have no idea what the future holds and based on all the new carriers for Iphone 2. I think you are grossly exaggerating the financial impact of the ATT contract. ATT has an exclusive for the US and no where else. The contract is good for both companies. It allowed Apple to get started in a new business and ATT to capture new high end customers. Verizon had a chance to sell the iphone