PiperJaffray sees strong upsides to iPhone price cut, store credit
While some early adopters and investors have criticized Apple for slashing the iPhone's price so soon after its debut, PiperJaffray has remained confident that a $399 iPhone for this fall will be positive -- even after Apple has had to mend its fences with store credit.
Reassuring his company's investment clients, PiperJaffray senior analyst Gene Munster argued in research notes issued late this week that Apple's new $399 price for the iPhone and the subsequent Apple Store credit were not signs of desperation on the part of a device maker with cooling sales figures. Instead, these were parts of a longer-term strategy to establish a better foothold in the cellphone market.
By cutting the price this quickly, Apple would quickly overcome many of the initial objections to the phone and gain wider acceptance sooner, Munster said. Although his investment research firm had previously predicted that wide-scale adoption of the iPhone would not occur until the end of 2009, the surprise discount now meant that Apple would reach its stride sooner, albeit at the expense of its historically high profit ratios.
"Apple is investing iPhone profit dollars over the next few quarters in order to be a legitimate player in the phone market. We think this is the right strategy," Munster said, explaining that as many as half of all would-be customers cited the high starting prices as the chief obstacle before this week.
And though many have interpreted the $100 in-store credit largely as a form of damage control in the face of an unanticipated backlash, the researcher believed that Apple has used the opportunity to develop an early loyalty that would normally be impossible in the handset business.
The Cupertino, Calif.-based electronics giant has had a knack for instantly developing loyalty, Munster wrote. By making peace with angry customers, the company could solidify its name in a market climate where users are much more likely to remember their carrier's name than the phones in their pockets.
"We found in our survey of 200 iPhone users that about half of them did not know the manufacturer of their phone prior to getting the iPhone," the expert said. "In other words, there is virtually no brand loyalty in the mobile market. If Apple can build brand loyalty [...] like they have in the music market, the iPhone should emerge as a major driver to Apple's long-term business."
The reports also took care to explain that the seemingly bleak circumstances weren't liable to significantly damage Apple's bottom line. If Apple were to completely wipe out its profit margins on the iPhone, overall margins would still be a healthy 27 percent assuming no improvement in sales after the price drop. These figures would slowly improve as manufacturing costs dropped and more units were sold.
Handing out credit to the earlier iPhone buyers was also unlikely to hurt Apple. Though about 850,000 iPhones were estimated sold as of this week and would amount to $85 million in apparent losses, most of that financial hit should vanish in practice, according to PiperJaffray. Not all customers would necessarily redeem the credit -- and since the offer would be exclusive to the company's own online and retail stores, the company would still collect part of the credit back as profit.
This would mean only a 2 percent dip in profit for Apple during the fall 2007 and winter 2008 quarters, the analyst group reckoned, and the loss could be halved if these customers spent an average of $100 more beyond what their credit would provide.
Munster also drove home a belief that the new iPods accompanying the iPhone price drop were appealing to a wide-enough range of buyers that their introduction would boost Apple's sales numbers for the final quarter of the year, offsetting the iPhone's effect on overall income.
"We believe these products at these price points will be compelling to both first time iPod owners and current iPod users looking for an upgraded device," he said. "As such, these new iPods will likely serve as catalysts."
Reassuring his company's investment clients, PiperJaffray senior analyst Gene Munster argued in research notes issued late this week that Apple's new $399 price for the iPhone and the subsequent Apple Store credit were not signs of desperation on the part of a device maker with cooling sales figures. Instead, these were parts of a longer-term strategy to establish a better foothold in the cellphone market.
By cutting the price this quickly, Apple would quickly overcome many of the initial objections to the phone and gain wider acceptance sooner, Munster said. Although his investment research firm had previously predicted that wide-scale adoption of the iPhone would not occur until the end of 2009, the surprise discount now meant that Apple would reach its stride sooner, albeit at the expense of its historically high profit ratios.
"Apple is investing iPhone profit dollars over the next few quarters in order to be a legitimate player in the phone market. We think this is the right strategy," Munster said, explaining that as many as half of all would-be customers cited the high starting prices as the chief obstacle before this week.
And though many have interpreted the $100 in-store credit largely as a form of damage control in the face of an unanticipated backlash, the researcher believed that Apple has used the opportunity to develop an early loyalty that would normally be impossible in the handset business.
The Cupertino, Calif.-based electronics giant has had a knack for instantly developing loyalty, Munster wrote. By making peace with angry customers, the company could solidify its name in a market climate where users are much more likely to remember their carrier's name than the phones in their pockets.
"We found in our survey of 200 iPhone users that about half of them did not know the manufacturer of their phone prior to getting the iPhone," the expert said. "In other words, there is virtually no brand loyalty in the mobile market. If Apple can build brand loyalty [...] like they have in the music market, the iPhone should emerge as a major driver to Apple's long-term business."
The reports also took care to explain that the seemingly bleak circumstances weren't liable to significantly damage Apple's bottom line. If Apple were to completely wipe out its profit margins on the iPhone, overall margins would still be a healthy 27 percent assuming no improvement in sales after the price drop. These figures would slowly improve as manufacturing costs dropped and more units were sold.
Handing out credit to the earlier iPhone buyers was also unlikely to hurt Apple. Though about 850,000 iPhones were estimated sold as of this week and would amount to $85 million in apparent losses, most of that financial hit should vanish in practice, according to PiperJaffray. Not all customers would necessarily redeem the credit -- and since the offer would be exclusive to the company's own online and retail stores, the company would still collect part of the credit back as profit.
This would mean only a 2 percent dip in profit for Apple during the fall 2007 and winter 2008 quarters, the analyst group reckoned, and the loss could be halved if these customers spent an average of $100 more beyond what their credit would provide.
Munster also drove home a belief that the new iPods accompanying the iPhone price drop were appealing to a wide-enough range of buyers that their introduction would boost Apple's sales numbers for the final quarter of the year, offsetting the iPhone's effect on overall income.
"We believe these products at these price points will be compelling to both first time iPod owners and current iPod users looking for an upgraded device," he said. "As such, these new iPods will likely serve as catalysts."
Comments
$85million in credit coupons is more than made up in the free advertising they are getting out of this. Like the man said, Apple is building brand loyalty, something all these other companies don't give diddly squat about.
The competition is left in disarray after focusing on the iPhone's perceived weakness, it's pricing.
Product planners are already committed to cloning the iPhone feature set and touch interface. Their mistake was to base their next products on undercutting the original iPhone pricing by $100. Now to achieve that they have to reduce the selling price by $300.
Few planned products will survive this new playing field put forth by Apple. The Zune phony might make it to market, but with xbox scale losses if they manage to sell any significant numbers to the Windows fanboys.
I can't wait to see Uncle Fester's reaction to this move by Apple.
I can't wait to see Uncle Fester's reaction to this move by Apple.
It's not Uncle Fester you need to worry about - it's uncle Nokia, who after all holds 35% global market share and a MS > 50% in most european countries. Europe = 450 Mio ppl at the end of the day. Most of them with disposable income
positively panglossian
Which?
It's not Uncle Fester you need to worry about ...
I'm not worried about Balmer, what can he do to the iPhone with the zPhony? This is not within their monopoly control.
I just enjoy his transparent discomfort when prodded by interviewers about the iPhone. I doubt if he's laughing now.
http://www.youtube.com/watch?v=C5oGaZIKYvo
Now Nokia on the other hand...
With this move, Apple will have a well-positioned product line that will appeal to a wide range of users. Also, it puts it in a position to make sure service providers (e.g. content providers and wireless providers) do not individually have too much control. The recent battles (negotiations) between NBC, the phone carriers, and music companies have the same basic theme.....who has control.
Apple is trying to put out devices that make their "platform(s)" the defacto standard or "must-have" platform. This significantly cuts down on the lattitude the service providers have in dictating things like price (and other deals). Just think how NBC must be feeling now that the touch technology will no longer be restricted to just the higher-end phone customers. I for one, while I could easily have afforded it, will not pay and extra $32-35.00 a month just for a (weak) data connection from AT&T. That - and the fact the phone really is a rental not a purchase (i.e. you HAVE to activate the phone service to use it) - kept me from buying one. I don't think I am alone.
Heck, for the original price of the iPhone and 2-year mandatory contract, I could almost buy a 17-inch MacBook Pro.
Instead, I will use my (to be purchased) iPod Touch and keep my crappy phone which costs me $29.95 a month for the service.
Now it would have been smarter for AT&T to have allowed Apple to sell the iPhone without activation just so I would be a potential future customer walking around with a device that would allow me to walk into (just) an AT&T store and activate my service. It would have been smarter yet for AT&T to allow me to active ONLY my calling plan and then - optionally - a data plan. But then we know AT&T really does not have faith in their data service or they would separate them out (it is slow and sporatic - not at all worth $20-30+ per month). We also know AT&T is not thinking about the customer - and never has.
Looking at this just as a phone handset play is really underestimating what is going on.
UBS should be ashamed of itself. That is to say if the concept of SHAME even exists in our society any more.
This store credit will likely cost Apple $25-$30 million. Or to put it in perspective, they could just not run iPod commercials for 1 day and save enough money to cover this cost. Don't forget people, Apple has $13 BILLION in the bank, zero debt and is growing at outrageous rates. And they are only at 6% PC market penetration. Whereas other PC manufacturers only have market share to lose, Apple has LOTS of room to gain market share.
They are selling Laptops like they are going out of style. And the new iMac? It's gorgeous. Now a rumor of online HD movie rentals for $2.99 for a 30 day rental? Have you seen the movie rental market numbers? And don't forget Leopard is less than 6 weeks away. Maybe sooner!
$130 will be a just another dip on the way to $200 for AAPL.
Never doubt Steve Jobs. Hey, the man's a genius.
UBS release a statement (during market hours) saying that the iPhone credit would cost Apple $100 million. Seeing how Apple has yet to sell it's 1 millionth iphone I KNEW this was only an attempt to drive down the stock price so UBS customers could get into AAPL before people realized the truth.
UBS should be ashamed of itself. That is to say if the concept of SHAME even exists in our society any more.
This store credit will likely cost Apple $25-$30 million. Or to put it in perspective, they could just not run iPod commercials for 1 day and save enough money to cover this cost. Don't forget people, Apple has $13 BILLION in the bank, zero debt and is growing at outrageous rates. And they are only at 6% PC market penetration. Whereas other PC manufacturers only have market share to lose, Apple has LOTS of room to gain market share.
They are selling Laptops like they are going out of style. And the new iMac? It's gorgeous. Now a rumor of online HD movie rentals for $2.99 for a 30 day rental? Have you seen the movie rental market numbers? And don't forget Leopard is less than 6 weeks away. Maybe sooner!
$130 will be a just another dip on the way to $200 for AAPL.
Never doubt Steve Jobs. Hey, the man's a genius.
Not to mention Apple was making interest off that money for 6 months. Apple is eating *maybe* 15 million dollars. The amount of positive publicity is worth waaaayyyyyyy more then that.