About that $1 billion...
Hey, kids! Do you like math?! Sure you do!
Well, how'd you like to be an analyst at a Wall Street research firm?!
Seriously! It's apparently not as hard as it sounds! Let's have a look!
Just after the Macalope sent off some emails to the writers of the pieces Todd Sullivan linked to to ask who the heck these "analysts" were, he noticed this piece at MarketWatch.
This may not be the same estimate referred to in those pieces, but the number's around $1 billion, so let's take a look at what horrid alchemy went into creating it.
Much of the iPhone's profitability comes from revenue-sharing agreements that Apple has in place with AT&T Inc., as well as its three European wireless partners.
Right you are.
Apple doesn't disclose how much revenue it gets from AT&T or its European partners, O2 in the U.K., T-Mobile in Germany and Orange in France. Those carriers each give Apple a payment every month for each customer that activates an iPhone on their its network.
Well, sure. Of course they do! It's only fair!
But the issue of users buying an iPhone only to "unlock" it from those carriers rose following Apple's last quarterly earnings report. Analysts noted a discrepancy between sales figures provided by Apple and those from AT&T, and some concluded that as many as 1 million devices had been unlocked.
Indeed. It was kind of surprisingly large to everyone, including the Macalope.
[Bernstein Research analyst Toni] Sacconaghi estimated that between 25% and 30% of the more than 4 million iPhone units already sold have been unlocked to work on other wireless networks...
Could be. No one knows for sure, but that's possible.
... and that each unlocked iPhone results in Apple's missing out on $370 in earnings over the phone's two-year contract period.
Splort - chortle - hack - cough.
The hell?!
$370? Each?!
Oh, no, you dih-unt, girlfriend.
$370 over two years implies a $15.42/month revenue share per phone. There's a lot of debate as to what the actual amount is Apple gets from AT&T -- Scott Bourne of the Apple Phone Show thinks it's around $9/month and Gene Munster of Piper Jaffray has estimated it as high as $18/month. So, $15.42 isn't outrageous, but it's a little on the high side. But the key thing to remember is that number is what it is because the contract is exclusive.
Which is why -- and, jeez, how many times does the Macalope have to say this? -- it makes absolutely no sense to say that Apple is losing this money.
Thanks to this report we can see Sacconaghi's math and, hey, the Macalope's 9th grade chemistry teacher (and the Macalope) was right! In a nutshell, Sacconaghi estimated that if Apple hit its target of selling 10 million iPhones by the end of 2008, that would mean that something like 3 million of them would be unlocked. 3 million times $370 is 1.11 billion!
With jelly on it!
Banana pony lollipop!
Arrrrgh.
Let's try this one more time.
That. Makes. No. Sense.
If these phones are in countries where Apple has no contract, the only thing you can say is that Apple should get an exclusive contract there faster (easier said than done). If they're being used by people who just don't like the exclusive provider Apple's signed with, then these are people they'll never get anyway.
If you want to play the "but they could have contracts with multiple companies!" game, then you can't use the $15.42 multiplier. And not only for the incremental phones they'd gain, you can't use it for phones they've already sold under contract. Why? Because you just threw exclusivity out the window.
See? It's an inverse relationship. For every X number of phones you can put on a revenue sharing contract by adding another cellular provider, you must reduce the monthly rate for all phones, and by a lot.
Again, please see the definition of opportunity cost and how it actually has to have a realistic opportunity, not a fantasy bozo lala gum drops opportunity.
So, hey, let's do some more math! Since it's just multiplication of a bunch of numbers we read on the Intramets somewhere like Sacconaghi did! Remember, being an analyst is something you can try at home, kids!
If there are 400,000 unlocked iPhones in China -- where Apple has no contract and may or may not be able to even get one -- that's 10% of all iPhones sold to date. So if Apple hits its target of 10 million phones, 1 million of them will be in China, unlocked.
Poof. There goes 1/3 of that $1 billion.
This. Is. Not. Lost. Revenue.
Good god.
if you'll excuse the Macalope, he's going to go lie down and apply a cold compress right between the antlers.
Mythical beast and rumormonger extraordinaire, the Macalope writes about all things Apple for the CNET Blog Network. Read more at The Macalope: An Apple blog. He is not an employee of CNET. Disclosure.
If you are going to question people's ability to use math, you ought to be more careful yourself. Selling one million phones (10%) which end up in china on cancelled plans means that apple will not be making the expected profit on 10% of their phones. Just because they would not have been able to sell those phones otherwise (if we assume that to be true, and it is a reasonable assumption) does not mean that they somehow are not losing the money on them -- the point is that apple claimed that 10 million phones would be sold, and investors rely on these numbers (if they believe them). if the investor believes that translates to a given profit, the fact that the phones are unlocked indeed effectively makes apple "lose" that money...
nice try on the math. check yourself before you post.
Apple sold the phones, presumably at a profit. That would be the difference between the retail price of the phone and the cost of getting a finished product to market. I don't have the figures for that, but Apple doesn't sell hardware at a loss.
The dollar amount that the carriers give Apple for exclusivity has never been announced. The "analysts" don't know the number. The number doesn't exist in the shared knowledge pool. Ergo, it is entirely speculation.
If the investor uses specious numbers for buying decisions, the investor is a dipwad (from the latin "dip," meaning "moron," and "wad," meaning "about to lose his shirt on a bad transaction"). That does not, however, have any bearing on the fact that Apple isn't losing any cake. All they're losing is some nice icing on that cake.
In exchange, the smuggled phones indicate demand and ? by their very presence in countries without exclusive contracts ? provide impetus to that very demand. As that demand grows, carriers in those countries will see that dealing with Apple is the only way to make money on that demand. In short, those smuggled phones are cheap marketing tools.
In July, 2007, the population of China was about 1,321,800,000 ? a bit more than triple the U.S. of A. Market penetration and inciting demand, even with smuggled goods, has to be worth something in that kind of population.
Calculated in raw dollars, maybe Apple isn't making money they expected to make. Value for value ? well... let's just say I hope the current mood holds for a couple more weeks. I have a ten-year old 401(k) to roll over, and I'm in a bargain shopping mood. I'm hoping a whole bunch of dipwads sell Apple based on the idiotic analysis that Apple is losing money.
Sell.
All I am saying is that the article does not say anywhere that Apple is losing money, only that it isn't making as much as it predicted (or people were predicting it would, depending). And those are two very different things.
Todd Sullivan made the claim, if you read more frequently, you would know this is like a part 3 post. Again, you can't claim it's lost revenue if there is no way the revenue could have actually existed in the first place. People's magical pony with faerie wing predictions on probability of actual capitalization does not count.
Actually, if the supply of iPhones were constrained in the official markets due to phones leaving the country for gray-market sales elsewhere, this would constitute a loss for Apple. No sign of this yet, however.
I do question why AT&T is not advertising the iPhone. I see plenty of their "more bars" ads on TV, but I have yet to see any AT&T advertising proclaiming "We're the exclusive carrier for the world's coolest cell phone!" Makes you wonder.
Same deal: Music piracy isn't costing the RIAA money. LAWYERS are costing the RIAA money. Thieves are going to steal. Honest people are going to pay ? if you give them a way to buy what they want honestly. If you don't, well, I want my Trini Lopez albums digitally, and dammit I'll have them. It only costs the record companies money if they would have been willing to sell it to me in the form I want it. (The fact that they think they get to decide what I can have is what's killing them. Quickly, too. Darn it.)
@veritas72: the claim was made in other articles.
We're not talking about money that was hit at point of sale (Apple guy hands over an iPhone to a cute little kitsune who immediately hops on a plane to China). We're talking about money both AT&T and Apple would have lost had that kitsune actually stayed in the States and used the phone, right?
One billion on a guestimate?
Tell me again why we're talking about this, when we should be talking about more important things like why did Steve think the MacBook Air would be a hit or if the Great Firewall of China is the problem with getting a good deal on iPhone service in China.
Not only that, but why is the MacBook Air Jordan so dang little? How does Apple get away with using the name "AirPort?" Hasn't that already been taken? I think Boeing and Qantas already own that monicker. Why is the Bluetooth icon so danged UGLY? I mean it sits in my menu bar taunting me with that angular, unaesthetic squiggle. Furthermore, why isn't there an ACTUAL Apple TV -- 61" backlit LED iMac? Oooh, baby. Also, Sprach Zarathustra.
What if we took the average price for an unlocked iPhone in the US, China, and Europe (based on ebay or other related sites), subtracted that from the current selling price, and assumed that to be the minimum margin that apple was losing out on?
The we can multiple the 1 million unlocked phones by that margin which we know people are ready to pay, if only apple would provide these phones to them.
"disclaimer" i'm studied English and not economics in college, so go easy on me when making corrections!
I firmly believe then that 1 of the 2 pieces of news has been 'discounted' from the share price multiple times. Either, I-Pod 'slowing growth' has been discounted twice or the unlocked I-Phone news has been discounted twice. Analysts & Investment houses immediately discounted the I-Phone story during the Conference Call. The author of the original C-Net story concerning About that $1 billion...Posted by The Macalope is trying to re-issue what is now clearly information that has been priced into the stock. I respectfully then wish to say that someone reading this article should realize that this article is "Old News". Best of Luck
Posted By emario18
There's clearly demand for the product, and Apple has stated plans to enter Asia with the iPhone in 2008. If Apple really could prevent unlocked iPhones from surfacing in China, wouldn't there be all this pent-up demand waiting to be unleashed once the company negotiated a revenue-sharing deal with China Mobile or whoever and formally released it later this year?
I'm sure there are some people in China who would turn up their noses at a locked phone, any locked phone. So count them out. But surely there are some people who just want the damn iPhone. Half the 400,000 reported to be running unlocked iPhones? A third?
We don't know the exact numbers on the carrier revenue sharing agreements, but I think we can all agree that Apple makes more profit on the sale of a locked phone than they do on an unlocked phone.
So, thinking purely about profit, couldn't it be possible that Apple would happier only selling 200,000 iPhones in China once a formal agreement was in place, but making two to three times as much profit on the sale of each of those locked iPhones?
The current situation represents a profit opportunity lost. Yes, Apple is still making money on the sale of unlocked iPhones, but not as much as they would if they had locked phones. And while some people won't buy it if it's locked, is it right to assume that Apple wouldn't have made a dime in China in 2008 if not for the unlocking? I'm not sure that makes sense.
And now, they'll never get a revenue sharing agreement in China with the proliferation of unlocked phones, and the other carriers around the world will start to wonder why they're giving Apple so much money. The financial analysts made their profit models, and stock targets, based on locked phones and the assumption of long-term revenue sharing deals. Stupidly, perhaps, but that's why they are disappointed, and worried about, the pace of unlocking.
"So, thinking purely about profit, couldn't it be possible that Apple would happier only selling 200,000 iPhones in China once a formal agreement was in place, but making two to three times as much profit on the sale of each of those locked iPhones?"
Sure. That's exactly what they have in the U.S. But the timing issues make it a challenge. Apple couldn't hit the ground running globally -- it had to do a phased roll out or delay reaching the market by a year or more. Third parties shipping iPhones to other markets was inevitable.
The Macalope's not saying there isn't an actual opportunity cost here. He's saying it's nowhere near $1 billion. If someone invested in Apple under a bad assumption based on simplistic math, of course it makes sense for them to reduce their stake. But that's not the same as shouting "****, APPLE LOSING $1 BILLION!!!!1!1!!!"
Even if it's not exactly $1B, it has to be in the neighborhood though, even based on the conservative estimates for the revenue-sharing agreements. I agree the $1B number was picked out of thin air largely for its roundness and Dr. Evil-like qualities. But $500M/$600M in lost profit is just as bad, that's enough to kick the EPS numbers a penny or two the wrong way if they were based on expectations of locked phones/fixed revenue streams.
And I disagree that third-party shipments to other markets were inevitable: they were only inevitable because Apple can't control unlocking. If they could prevent it, it would be a moot point, an iPhone in China would be useless.
Lest we forget, the economy is slowing down and Apple most recently posted its best quarter ever. Somehow, because they can't beat THAT, this means stock prices become devalued. They take a common-sense approach and predict their own business softening due to economic indicators, and some analyst says "oh (blank)" and tells their clients to jump ship. If they DID realize all that latent revenue from unlocked phones, there would be some other b.s. about market saturation. Or if they continued to post record-breaking profits, someone would say "well, they can't grow like this forever" and tell their clients to jump ship.
Such ridiculousness.
- by ripragged February 27, 2008 8:29 PM PST
- Well, yeah, everything beyond the liquidation value of the company's assets divided by the number of outstanding shares is over-valuation. Based on strictly cash value, Apple's stock is still over-valued.
- Like this Reply to this comment
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(21 Comments)My arithmetic, which lacks all the necessary data about hard assets and is based on some guessing, puts the share value in the range of $40 to $60. Everything beyond that is based on history, promises, and projections. Apple's stock didn't magically become worth less, it just went down in market valuation. Its real worth is calculable, and utterly distinct from its market valuation.
Market valuation is entirely based on things other than hard numbers. Models, growth, technical trading trends, buzz vs. news, and a lot of other assumptions and pseudo-science. Apple's stock was never intrinsically worth $200.
Which isn't to say I'm not incredibly bullish on Apple. I have a few shares and I'm planning to buy more. But that's based on my personal certainty that the real value of the stock will grow beyond my purchase price in the near future. Apple's growth hasn't even started. I'm planning to take that to the bank.