iPhone could be the next gold mine for Apple

Posted by Wolfgang Gruener

El Segundo (CA) - Apple may be building on yet another cash machine, if the company is able to translate the hype around the iPhone into real world sales. Analysts from iSuppli estimate a 50% margin for the device when it goes on sale - resulting in profits of at least $2.5 billion, if the company reaches its shipment goal.

With a few information bits on hand, the teardown specialists at iSuppli recreated a component list of the recently announced iPhone and found that Apple may be looking into record margins with the device. The market research firm estimates that the 4 GB model, which will retail for $500, will cost Apple about $246 (total expense, bill of materials only: $230) to get the device to the buyer, yielding a 49.3% margin. The 8 GB model ($600 retail) is believed to trump this number: At an expected total cost of $281, the device is estimated to reach a 53% margin.

iSuppli said that it "has a high degree of confidence in its conclusions," but, it considers these figures as preliminary until the firm is able to "perform an actual physical teardown and analysis of the iPhone."

Apple has a history of achieving unusually high margins, with numbers hovering around 45% percent in products including the iMac and iPod nano, according to iSuppli. However, because Apple is facing extensive competition in the music-phone market, the company may need to cut into its margins to reduce pricing in the future, the market research firm believes. "With a 50% gross margin, Apple is setting itself up for aggressive price declines going forward," said Jagdish Rebello, principal analyst with iSuppli.

Apple is in a unique position that it can enter a new market without the need for aggressive pricing. And the firm's target of 1% of the total cellphone market may appear to be conservative, given the company's success in the music player segment. However, on a second look, that 1% is everything else than conservative and actually could translate into a market leadership position for Apple in the smartphone segment.

While the company wants to sell only 10 million phones per year in the one-billion-units-a-year market, Apple competes on the very high end. iSuppli estimates the music player market at 618.1 million units for this year, which bumps Apple's projected market share to more than 1.6%. However, further broken down, the smartphone segment - the market the iPhone will compete in - is estimated by IDC to have reached only 100 million units in all of 2006. Leading this market is Nokia with about 47% share. followed by Motorola with 9% and Research in Motion with about 7%.

Looking at these numbers, Apple could not only be making a $2.5 billion profit with the iPhone in its first year, but also be aiming for a top-3 spot in the 2007 smartphone market.

Apple will offer the Apple iPhone through U.S. mobile-phone operator Cingular Wireless. Cingular is expected to sell the Apple iPhone at full price, without the kind of discount subsidy commonly seen in the mobile-phone business, iSuppli said. "Cingular stands to benefit enormously from this deal," noted Dale Ford, vice president at iSuppli. "Subscribers may switch to Cingular to get the Apple iPhone, so the company is likely to gain a tremendous number of net [additions] in the second half of 2007."