Analyst weighs in on Apple's rev-share arrangement with AT&T
Due to the unique terms of iPhone sales and pricing, analysts for Piper Jaffray said Thursday they believe AT&T has agreed to a revenue sharing plan with Apple where the iPhone maker would receive a small portion of each subscriber's monthly service fees.
"While we do not know the exact details of the agreement, we conservatively estimate that AT&T gives Apple $3 per month (over the life of the 24 month contract) for every iPhone customer already with AT&T and $11 per month for every new subscriber," lead analyst Gene Munster wrote in a note to clients.
Specifically, the analyst believes the monthly revenue sharing involves $3 per month for service and data fees related to all iPhone users, and AT&T gives Apple an additional $8 per month for iPhone customers who transfer service to AT&T in order to use the iPhone. Such an arrangement, he said, could add 2 cents to his per-share earnings estimates for Apple in 2007, 15 cents in 2008, and as much as 58 cents in 2009.
Clearly, Munster explained, Apple's average revenue share per iPhone user depends significantly on the mix of current versus new subscribers. He cited an in-house June 29 survey of 253 iPhone users, which found that 52 percent were switching from a carrier other than AT&T.
"Our survey, however, consisted mostly of early adopters who would be more willing to cancel non-AT&T contracts than the general customer base," he wrote. "For that reason, we estimate for the mix of iPhone users that are new to AT&T will drop from 52 percent in June to 44 percent in the September '07 quarter and continue to drop over time as AT&T gains an iPhone user base."
Munster is modeling for Apple to sell 3.2 million phones in 2007, 12.4 million in 2008, and 45.0 million in 2009.
"These estimates may seem bold, but we believe Apple can garner 7.0 percent of the handset market share in North America and 2.8 percent share in the rest of the world by 2009," he told clients. "We assume Street pricing on the iPhone will have dropped to $338 by 2009 from $542 in 2007. Additionally, it is critical to keep in mind that the iPhone combines iPod and mobile handset, which should attract more than just a mobile phone customer."
As part of his model, the Piper Jaffray analyst has factored in cannibalization of the iPod from the iPhone by lowering iPod growth rates from 35+ percent yearly growth in fiscal 2007 (and prior years) to 10 - 15 percent in fiscal 2008 and 2009.
Munster made no changes to his Outperform rating and $160 price target on shares of the Cupertino-based electronics maker.
"While we do not know the exact details of the agreement, we conservatively estimate that AT&T gives Apple $3 per month (over the life of the 24 month contract) for every iPhone customer already with AT&T and $11 per month for every new subscriber," lead analyst Gene Munster wrote in a note to clients.
Specifically, the analyst believes the monthly revenue sharing involves $3 per month for service and data fees related to all iPhone users, and AT&T gives Apple an additional $8 per month for iPhone customers who transfer service to AT&T in order to use the iPhone. Such an arrangement, he said, could add 2 cents to his per-share earnings estimates for Apple in 2007, 15 cents in 2008, and as much as 58 cents in 2009.
Clearly, Munster explained, Apple's average revenue share per iPhone user depends significantly on the mix of current versus new subscribers. He cited an in-house June 29 survey of 253 iPhone users, which found that 52 percent were switching from a carrier other than AT&T.
"Our survey, however, consisted mostly of early adopters who would be more willing to cancel non-AT&T contracts than the general customer base," he wrote. "For that reason, we estimate for the mix of iPhone users that are new to AT&T will drop from 52 percent in June to 44 percent in the September '07 quarter and continue to drop over time as AT&T gains an iPhone user base."
Munster is modeling for Apple to sell 3.2 million phones in 2007, 12.4 million in 2008, and 45.0 million in 2009.
"These estimates may seem bold, but we believe Apple can garner 7.0 percent of the handset market share in North America and 2.8 percent share in the rest of the world by 2009," he told clients. "We assume Street pricing on the iPhone will have dropped to $338 by 2009 from $542 in 2007. Additionally, it is critical to keep in mind that the iPhone combines iPod and mobile handset, which should attract more than just a mobile phone customer."
As part of his model, the Piper Jaffray analyst has factored in cannibalization of the iPod from the iPhone by lowering iPod growth rates from 35+ percent yearly growth in fiscal 2007 (and prior years) to 10 - 15 percent in fiscal 2008 and 2009.
Munster made no changes to his Outperform rating and $160 price target on shares of the Cupertino-based electronics maker.
Comments
Do any other handset manufacturers have revenue/profit sharing agreements with mobile carriers?
As far as we know, nope. The typical subsidy has the carrier paying the manufacturer for each sale and that is where it ends. This new paradigm of Apple having a vested interest in the longevity and usefulness of the iPhone means that we can expect more updates and changes to both the handset and the network. Apple's new 24-month accounting system for the iPhone also points to this.
I wonder if anyone else will be able to make such a deal.
Yes, I have an iPhone in Canada and am just whining because I can't get it working on Fido.
I was guess on the low end at $3/month. Maybe a mere $3/month would not have dissuaded Verizon from the deal. Although $11/month sounds too high. Anything close to there is still a HUGE win for Apple.
And guess what people REALLY like these iPhones! And they are continuing to sell well. Go figure
Maybe on Wednesday the 25th with Apple's earnings report and conference call we will finally find out how much the revenue sharing is. $11/month for new customers would be HUGE for Apple.
Apple certainly would not give out that level of detail.
As far as we know, nope. The typical subsidy has the carrier paying the manufacturer for each sale and that is where it ends. This new paradigm of Apple having a vested interest in the longevity and usefulness of the iPhone means that we can expect more updates and changes to both the handset and the network. Apple's new 24-month accounting system for the iPhone also points to this.
What about RIM? I think they do provide a bit of service to actually justify it though.
"Our survey, however, consisted mostly of early adopters who would be more willing to cancel non-AT&T contracts than the general customer base," he wrote. "For that reason, we estimate for the mix of iPhone users that are new to AT&T will drop from 52 percent in June to 44 percent in the September '07 quarter and continue to drop over time as AT&T gains an iPhone user base."
This analyst is placing too much weight on early adopters who terminated their contracts, and then switched to AT&T, as a basis to claim that future iPhone purchasers that are "new to AT&T" will decline, and that the sales numbers will come from AT&T customers upgrading later on.
He is totally ignoring the fact that there may be a huge pent up demand from people with less than six months left on their current contract and that they are waiting to switch to AT&T once their contract with their current provider is finished.
I would not be surprised to see the "mix" of customers new to AT&T climb over the next few months, and not the substantial decline he proposes.
Reading this makes me believe we are going to be stuck with the iPhone as AT&T only in the US for quite a while.
Without debating the exact mix of switchers off other services vs. existing AT&T customers, assume an average cut for Apple of $7.50/month. If you have 15 million subs throwing off $7.50/month * 12 months = $1.35 BILLION in profit to Apple per year. With approx. 880 million shares outstanding, that's around $1.50/share, not 15 cents! MAJOR DIFFERENCE!
If you are not already a shareholder, you should seriously considering doing so. If this news is confirmed by Apple (the revenue share arrangement) next week at earnings announcement, this would kick in around $45/share in price over the current estimates driving the stock price...the market is giving Apple 30 x forward earnings per share. 30 x $1.50 = $45/share added to current picture. Obviously, some people are anticipating this news and running up the share price, but when the lead guy on Apple at Piper Jaffray can't even do simple math, it tells you that there are a lot of upside surprises in store for the stock.
This is huge, indeed, if true. What's not huge is Munster's math abilities. This would mean a lot more than 15c next year--he's off by 10x! Here's the real math:
Without debating the exact mix of switchers off other services vs. existing AT&T customers, assume an average cut for Apple of $7.50/month. If you have 15 million subs throwing off $7.50/month * 12 months = $1.35 BILLION in profit to Apple per year. With approx. 880 million shares outstanding, that's around $1.50/share, not 15 cents! MAJOR DIFFERENCE!
If you are not already a shareholder, you should seriously considering doing so. If this news is confirmed by Apple (the revenue share arrangement) next week at earnings announcement, this would kick in around $45/share in price over the current estimates driving the stock price...the market is giving Apple 30 x forward earnings per share. 30 x $1.50 = $45/share added to current picture. Obviously, some people are anticipating this news and running up the share price, but when the lead guy on Apple at Piper Jaffray can't even do simple math, it tells you that there are a lot of upside surprises in store for the stock.
Heh heh.
Nice post! (Sure, there could be some costs involved, but they are likely to be fairly minor; also you have to take out income taxes, since the $1.35 billion is being added to the pre-tax bottom line, but your larger point, that he is probably off by a significant amount, is right).
This is huge, indeed, if true. What's not huge is Munster's math abilities. This would mean a lot more than 15c next year--he's off by 10x! Here's the real math:
Without debating the exact mix of switchers off other services vs. existing AT&T customers, assume an average cut for Apple of $7.50/month. If you have 15 million subs throwing off $7.50/month * 12 months = $1.35 BILLION in profit to Apple per year. With approx. 880 million shares outstanding, that's around $1.50/share, not 15 cents! MAJOR DIFFERENCE!
If you are not already a shareholder, you should seriously considering doing so. If this news is confirmed by Apple (the revenue share arrangement) next week at earnings announcement, this would kick in around $45/share in price over the current estimates driving the stock price...the market is giving Apple 30 x forward earnings per share. 30 x $1.50 = $45/share added to current picture. Obviously, some people are anticipating this news and running up the share price, but when the lead guy on Apple at Piper Jaffray can't even do simple math, it tells you that there are a lot of upside surprises in store for the stock.
You also have to figure the loss of sales and profits from iPods, as he does, which you aren't.
As part of his model, the Piper Jaffray analyst has factored in cannibalization of the iPod from the iPhone by lowering iPod growth rates from 35+ percent yearly growth in fiscal 2007 (and prior years) to 10 - 15 percent in fiscal 2008 and 2009.
That could easily subtract two thirds, or more, from your enthusiastic numbers.
Jobs expects cannibalization, we should as well.
Without debating the exact mix of switchers off other services vs. existing AT&T customers, assume an average cut for Apple of $7.50/month. If you have 15 million subs throwing off $7.50/month * 12 months = $1.35 BILLION in profit to Apple per year. With approx. 880 million shares outstanding, that's around $1.50/share, not 15 cents!
No matter how you name it, slice it or dice it ... some/much of this money is subsidizing the cost of the phone, just like it does for other phone manufacturers. It is not all profit.
He is totally ignoring the fact that there may be a huge pent up demand from people with less than six months left on their current contract and that they are waiting to switch to AT&T once their contract with their current provider is finished.
I would not be surprised to see the "mix" of customers new to AT&T climb over the next few months, and not the substantial decline he proposes.
I think this is a valid point. I expect many more switchers over time as contracts with other cariers expire.
If AT&T uses the increased revenue to boost service availability in areas where they are lacking I suspect even more switchers!
No matter how you name it, slice it or dice it ... some/much of this money is subsidizing the cost of the phone, just like it does for other phone manufacturers. It is not all profit.
Somehow I don't believe Apple is selling the iPhone at a loss. I don't believe they've ever sold the hardware itself at a loss. I would however expect an expense for continuing iPhone software development to offset the recurring income from ATT.
Apple stocks will plunge as surely as every other company has experienced. They are way over-extended for overhead, and any ripple in the economy will be devastating. A report that the New York store represents 13% of their revenues means that all the others store are not doing much. Like Gateway, they will choke on their own ambition to sell the machines direct. While they take the extra-profit from resellers for themselves, they have also assumed all the overhead of these businesses, too. If they are doing a better job staffing, have deeper inventory, etc., then there overhead is higher too. And that is separate from the issue of high-rent. The people who are benefiting most from Apple's expansion are the landlords.
The iPhone shifts their overhead to other stores (AT&T,) and if they get a kick-back on the service fees that is easy money, but now they are dependent on others for their income. That too won't last forever and makes them weaker in the long term. The same is true for what goes on in the iTunes store, where they are relying on their ability to broker other people's services to be profitable, rather than actually creating their own goods.
The outstanding shares will bleed whatever profit Apple makes to shareholders. That money will not be available for a "rainy day." All combined, the worst thing you can do, if you love Apple, is to buy its stocks. Not only will you be harming them, you will also be harming yourself. And the final result will be that their products will cost more, not less.
If you have spare funds to invest, it would be better spent paying down your own loans. If you don?t have loans, then give the money to somebody poor.
Remember the old saying, ?a fool and his money are quickly parted.? That is what giving money to a stock broker accomplishes. Life insurance is the same thing. In that case you are playing the stock market by proxy. By acting on your greed you become a victim.
The secret of the stock market is to buy low and sell high.
What? I don't buy that. Do you have any proof to back that statement up?
Seriously though, I feel the "secret" is to not look at the current stock value as how much you've made/lost until you actually sell your stock. Doing so leads to poor decisions.
What? I don't buy that. Do you have any proof to back that statement up?
Seriously though, I feel the "secret" is to not look at the current stock value as how much you've made/lost until you actually sell your stock. Doing so leads to poor decisions.
It really doesn't pay to reply to his post. I was going to, but then decided against it.
It really doesn't pay to reply to his post. I was going to, but then decided against it.
Just keep in mind that all "profits" mean higher prices. This is not a game that anybody can win, since if the profit is high, then you need to earn more money to buy the goods. One man's profit is another person's overhead expense.
For example, when I sell a product to my customer, when I go into the store to buy his products, his selling price includes the profit I made selling to him. It is a vicious inflationary cycle.
The best way to "win" is to encourage lower prices, then everyone can afford everything.
If you can profit without laboring (which is what stocks represent,) then somewhere there is somebody who is laboring without getting paid. (probably you as well) In an odd way, it is a slave-system by proxy, but people are actually slaves of themselves.
When the AFL-CIO lost billions of dollars in the Enron collapse, for example, what they lost was their own fault. The desire to pump up stock prices means they can deflate just as easily, but in the meantime the cost of electricity soared. Inflation becomes a permanent burden, while the bubbles and busts of the stock market are transitory. Now the retirees have no money and their electricity bills are higher. It's a lose-lose-lose game. You get screwed when you labor, you get screwed when you invest, and you get screwed when you purchase, all because of the "artificial" values that stocks create.
The misfits. The rebels.
The troublemakers.
The round pegs in the square holes.
The ones who see things differently.
They're not fond of rules.
And they have no respect for the status quo.