Apple won't pursue Circuit City; 250,000 iPhones sold to unlockers

[AppleInsider]

During a conference call marred by technical glitches Monday evening, Apple did manage a handful of interesting revelations, mainly that it will not pursue a relationship with Circuit City for Mac sales and that an estimated 250,000 iPhones were sold to buyers who intended to unlock them.

The focus is Best Buy

Apple, which last year initiated a pilot program to test Mac sales at a handful of Circuit City stores in the eastern U.S., said Monday that it has decided not to continue the program with the electronics retailer at this time.

Instead, the Mac maker said it will focus the majority of its energies towards its growing relationship with Best Buy -- the nation's No. 1 electronics specialty retailer and Circuit City rival.

Apple said it ended the September quarter with store-within-a-store boutiques at 230 Best Buy locations and that it plans to expanded that number to 270 locations by the end of the calendar year.

In recent months, the company has begun fitting some of its higher profile Best Buy locations with radically improved Apple store-within-a-store concepts. These isolated Apple display areas sit ahead of the retailer's computing department and feature mini theaters that pack stereo speakers and an embedded LCD display flanked by two glowing Apple logos.

Apple began its Best Buy pilot about three months ahead of its Circuit City effort in June of last year.

A quarter million unlockers

If you thought Piper Jaffray analyst Gene Munster was overdoing it when he estimated that 10 percent of iPhones sold by Apple retail stores in September were destined to be unlocked, then you may have to pick your jaw off the floor when you hear Apple's own guesstimate.

The company said Monday it believes that 250,000 -- or more than 17 percent -- of the 1.4 million iPhones sold thus far were bought by customers who intended to unlock them. The vast majority of these purchases came following September's massive price cut on the touch-screen handsets, the company added.

Apple's multi-year exclusive agreement with AT&T includes a revenue share agreement on the data and service fees AT&T charges iPhone customers. Obviously, Apple would not receive its portion of the proceeds under this agreement from unlocked versions of the iPhone, as those handsets would not be operating on AT&T's network.

More details from Apple's Q4 conference call have been compiled in a separate report.

[ View this article at AppleInsider.com ]

[SpamSandwich]

The unlock figures merely illustrate the fact that the deal between Apple and at&t, while good for the bottom line, makes no sense for the consumer. Apple needs to speed the day of severance with at&t to get more iPhones in more hands.

OTOH, I agree with their decision on Circuit City... they stink. At least Best Buy stinks a little less.

[bg_nyc]

Originally Posted by SpamSandwich

The unlock figures merely illustrate the fact that the deal between Apple and at&t, while good for the bottom line, makes no sense for the consumer. Apple needs to speed the day of severance with at&t to get more iPhones in more hands.

I thought it illustrated the fact that about 17% of buyers want the iphone, but not an AT&T contract. Doesn't say why, and certainly doesn't mean that the deal makes no sense to customers.

I personally thought this was very interesting about the call:

Apple Japan accounted for 72,000 Mac sales and $255M in revenues. These figures are up 16 percent in units but down 11 percent in revenue year-over-year, and down 11 percent and 1 percent in these respective areas sequentially.

Higher sales and lower revenues? Driven by higher cost of goods sold I assume? Strange that other regions did not have this problem.

[nagromme]

Note that the 250k sold for unlocking includes people who intend to RESELL them. In fact, I'd guess that MOST of them were sold with intent to resell.

And that means the number is not entirely an indicator of how many people want a hacked, unsupported phone--or even how many want a carrier other than AT&T. Instead, it's partly an indication of what resellers of hacked phones EXPECT to be able to sell.

I wonder how many of those will end up being re-sold as unhacked AT&T phones after all?

[Zandros]

Originally Posted by bg_nyc

Higher sales and lower revenues? Driven by higher cost of goods sold I assume? Strange that other regions did not have this problem.

Perhaps also because the often cited space consciousness of the Japanese, and the 20" iMac might be a cutoff line, with people not having space for the 24"?

/Adrian

[mark2005]

Apple is selling a lot more iPods and accessories in Japan than before.

In the operating segment summary, the revenue listed next to number of Mac units is actually all sales revenue, not just Mac sales revenue.

[mark2005]

Originally Posted by nagromme

Note that the 250k sold for unlocking includes people who intend to RESELL them. In fact, I'd guess that MOST of them were sold with intent to resell.

And that means the number is not entirely an indicator of how many people want a hacked, unsupported phone--or even how many want a carrier other than AT&T. Instead, it's partly an indication of what resellers of hacked phones EXPECT to be able to sell.

I wonder how many of those will end up being re-sold as unhacked AT&T phones after all?

As confirmation for your thought, I think Carl Howe at Blackfriarsinc.com/blog was reporting that the NY store (and California stores) was busy selling multiple (like 10) iPhones per customer after the price cut, and that both Apple and analysts suspected that these iPhones were being transported into Europe and Asia.

I think this occurred before the 1.1.1. update aka the brick episode. Don't know whether this sales pattern continued after.

[eatapc]

Originally Posted by SpamSandwich

OTOH, I agree with their decision on Circuit City... they stink. At least Best Buy stinks a little less.

In my area (NY/NJ) the Best Buy stores are crowded, messy, dirty and jumbled. The staff seems almost non-existent -- which is a blessing, given the level of knowledge and experience. The Circuit City stores seem almost quiet and civilized by comparison. However, (from personal experience) when you get up to the checkout/customer service desk, Best Buy is like a well-oiled machine, while at Circuit City four people always seem to be standing around ignoring everyone waiting to pay for something or pick up their orders.

[extremeskater]

Originally Posted by SpamSandwich

The unlock figures merely illustrate the fact that the deal between Apple and at&t, while good for the bottom line, makes no sense for the consumer. Apple needs to speed the day of severance with at&t to get more iPhones in more hands.

OTOH, I agree with their decision on Circuit City... they stink. At least Best Buy stinks a little less.

I can't speak for anywhere else but here in GA the Best Buy stores do a pretty good job of marketing Apple products. The ones in my area have a full Mac setup and have two field employees all the time, not Best Buy employees. Not sure how long that will last.

Selection of software is pretty weak but they carry all the hardware.

[daratbastid]

Have to agree with Apples decision here to go with BB instead of CC....I find the customer service in CC not up to par with bestbuy, and there stores look ....run down compared to best buy. I have seen these Apple areas set up in the store and there is always a lot of people passing through. Its funny to see these machines side by side with ordinary PC's...you almost have to go with a mac. ....kind of like putting a Ferrari right there next to a Hummer.

[anantksundaram]

Originally Posted by bg_nyc

(Referring to Japan) Higher sales and lower revenues? Driven by higher cost of goods sold I assume? Strange that other regions did not have this problem.

Competition and price pressure from Taiwanese/Chinese subnotebook PCs that the Japanese seem to be very happy with.

IMHO, Apple Japan is gone-zo. And, that's just as well. Apple should just let go.

[davebarnes]

My local Worst Buy is literally across the parking lot from CompUSA.
Two months ago, Apple pulled the Apple rep from the CompUSA and put him in the Best Buy.
While I hate Worst Buy, the Apple setup is amazingly better.
CompUSA shoved the Apple store into a back corner and was constantly "reorganizing" it to look worse than ever. And, the CompUSA store just seemed dirty. My wife hated to walk into the store. I don't understand Carlos Slim's approach with CompUSA.
Mac sales are up in the new location.
Good decision on Apple's part.

[ecking]

Apple think of how many more it would be if it was sold unlocked goddamnit.

[iPeon]

Originally Posted by SpamSandwich

The unlock figures merely illustrate the fact that the deal between Apple and at&t, while good for the bottom line, makes no sense for the consumer. Apple needs to speed the day of severance with at&t to get more iPhones in more hands.

How would Apple have been able to launch the iPhone unless it had a contract with a provider who was whiling to modify their network so as to accommodate the iPhone's voice mail, etc. I'm sure Apple would rather have made the iPhone available to everyone on any network without sacrificing the iPhone's functionality. Think about it.

[solsun]

Originally Posted by anantksundaram

Competition and price pressure from Taiwanese/Chinese subnotebook PCs that the Japanese seem to be very happy with.

IMHO, Apple Japan is gone-zo. And, that's just as well. Apple should just let go.

Apple was in a similar position in the US just 6-7 years ago, and now look where they are at.. They just need to keep chipping away.. Japan will come round.

[solsun]

Originally Posted by SpamSandwich

The unlock figures merely illustrate the fact that the deal between Apple and at&t, while good for the bottom line, makes no sense for the consumer. Apple needs to speed the day of severance with at&t to get more iPhones in more hands.

If not for the exclusive contract with AT&T, the iPhone's feature set would be severely handicapped.

From WSJ, Walt Mossberg today:

"To my knowledge, only one phone maker, Apple Inc., has been permitted to introduce a cellphone with the cooperation of a U.S. carrier without that carrier having any say in the hardware and software design of the product. And that one example, the iPhone, was a special case, because Apple is currently the hottest digital brand on earth, with its own multibillion-dollar online and physical retail network," Mossberg writes.

"Even so, Apple had to make a deal with the devil to gain the freedom to offer an unimpaired product directly to users. It gave AT&T exclusive rights to be the iPhone's U.S. network for an undisclosed period of years.

[TenoBell]

Apple would have had little control over the iPhone had it been open to all mobile carriers. AT&t, Sprint, Verizon would have all dictated different functionality and cost.

With only one carrier Apple has only one negotiation to make and has more control.

[SpamSandwich]

Originally Posted by TenoBell

Apple would have had little control over the iPhone had it been open to all mobile carriers. AT&t, Sprint, Verizon would have all dictated different functionality and cost.

I daresay none of us will ever be privy to the substance of the negotiations that preceded Steve's final decision. Just as well.

[solsun]

Originally Posted by SpamSandwich

I daresay none of us will ever be privy to the substance of the negotiations that preceded Steve's final decision. Just as well.

No we won't. But we do know that Apple "talked" with several different carriers and Verizon (if not all carriers) would not agree to Apple's terms. Whether that was because of Apple wanting full control over development and network features or because Verizon was not willing to pay the unprecedented monthly fee's that Apple demanded, we will never know. But there are many reasons why an unlocked iPhone in the US market could never be what the iPhone is under exclusive contract with AT&T.

[wraithofwonder]

Originally Posted by eatapc

In my area (NY/NJ) the Best Buy stores are crowded, messy, dirty and jumbled. The staff seems almost non-existent -- which is a blessing, given the level of knowledge and experience. The Circuit City stores seem almost quiet and civilized by comparison. However, (from personal experience) when you get up to the checkout/customer service desk, Best Buy is like a well-oiled machine, while at Circuit City four people always seem to be standing around ignoring everyone waiting to pay for something or pick up their orders.

So insanely true.

* And I'm in Bellevue, Washington!

[bg_nyc]

Originally Posted by eatapc

In my area (NY/NJ) the Best Buy stores are crowded, messy, dirty and jumbled. The staff seems almost non-existent -- which is a blessing, given the level of knowledge and experience. The Circuit City stores seem almost quiet and civilized by comparison. However, (from personal experience) when you get up to the checkout/customer service desk, Best Buy is like a well-oiled machine, while at Circuit City four people always seem to be standing around ignoring everyone waiting to pay for something or pick up their orders.

Right... Best Buy reminds me of Walmart. Its a mess. Disorganized, busy, discarded weekend circulars on the floor, children with sticky fingers playing Guitar Hero.

Circuit city in contrast looks like it could go out of business any day now. There's never anyone at the store near me, except on holidays when there are sales going on.

I think Apple will probably place very high standards on Best Buy's "Apple shop", but its inevitable that things will fall apart (broken mice, keyboards with missing keys) because nobody will give a crap about quality and presentation. Any chance this could degrade the Apple brand slightly? Maybe, but could be outweighed by the additional brand awareness. I guess any awareness is good awareness!

[Taskiss]

Originally Posted by SpamSandwich

The unlock figures merely illustrate the fact that the deal between Apple and at&t, while good for the bottom line, makes no sense for the consumer. Apple needs to speed the day of severance with at&t to get more iPhones in more hands.

The only thing the 250,000 phones that weren't registered on AT&T's network means is that there's 250,000 iPhones that aren't on AT&T's network.

It's equally possible the phones are in locations where the iPhone hasn't been released yet, bought by folks trying to fill the void and make a quick buck by reselling them. When Apple sells the iPhone in the EU and the Asian-Pacific countries where it's not presently available, THEN those numbers begin to mean what you claim, but not before.

No information means no information, not whatever you want it to mean.

[pt123]

Wow, that many iphones unlocked! No wonder Apple killed those phones with the update. That is a lotta unrealized revenue for Apple to collect (from AT&T).

[bg_nyc]

Originally Posted by pt123

Wow, that many iphones unlocked! No wonder Apple killed those phones with the update. That is a lotta unrealized revenue for Apple to collect (from AT&T).

Funny you should say 'unrealized revenue'. Accounting defines that as Revenue earned in the current accounting period, but which will be collected in a subsequent period. I wouldnt say Apple earned or recognized any revenue other than the actual iphone upon ending the business transaction.

In fact, if Apple did recognize the AT&T contract revenue at the time of the iphone sale, their revenue figures would be way off and they would potentially accused of 'cooking the books'.

When AT&T or Comcast New York Times gets a subscriber, they do not recognize revenue. I think they would instead recognize a short-term revenue-generating asset and an offsetting liability. Lets call that asset 'subscribers', and the liability 'newspaper deliveries'. Subscribers would, on a monthly basis, pay their subscription. At that time, the revenue is recorded (subscriber payment). An expense is recorded later as newspapers are constructed and delivered) and the short term asset and liability reduce accordingly.

Apple's accounting treatment for this is probably very different! I imagine they set up a joint venture agreement with AT&T, and the revenues come in as affiliate or equity income - a very clean setup from an accounting point of view, and very safe from an auditing point of view. No need to recognize any revenue, assets or liabilities until it actually hits the books. Otherwise, they are just getting a monthly check through a revenue-sharing agreement - also very safe, but not as clean because it creates some tax issues. Sorry to put you all to sleep!

[TenoBell]

That is a lotta unrealized revenue for Apple to collect (from AT&T).

I doubt most of those phones stayed in the US. Its more likely the majority of those phones were unlocked and sold over seas in places where the iPhone was not available. So that revenue was never available to ATT or Apple.

[MacFan]

Being from the Phoenix area I can only comment on the local going ons.

I agree Circuit City seems to be going out of business as anytime I go into one they are extremely slow with more employees than customers. Have yet to speak to any employees that seem happy to be there.

Apple stores when they first opened were a great place to hang as they had a steady flow of customers and plenty of employees to help out. Now they seem to be even busier which is great for Apple but the employees seem harried and overwhelmed at times. They just don't seem to have the time to talk to customers as much.

I am most familiar with Best Buy as I have worked with them for some time. The Apple displays are welcome in most cases although direction from Apple has been nearly non existent. We have a great Apple website to learn more but no one to call if we have questions etc. With Leopard coming out Friday I have no idea how this upgrade will work thru our stores. We sell plenty of them as customers come in daily looking for them and each day someone says that they did not know that Best Buy carried them.

[klime]

The market has spoken, it want the iPhone bad and wants it on more networks. Apple needs to listen up here, if 17% are going to other networks, Apple better figure out how to play. 17% is a HUGE HUGE number if you think about it.

-
klime
iPhone / MacBook / Shuffle (2nd gen)