Why the iPhone is now Apple's most important product
When Apple Steve Jobs introduced the iPhone in January 2007, even he might not have realized how soon it would become a huge part of Apple's business.
(Credit: Declan McCullagh/CNET News)The rampant success of the iPhone has forced Apple and its financial watchers to re-evaluate the value of the company.
Saying that Apple's iPhone business "had become too big to ignore," Apple CEO Steve Jobs made a rare appearance on the company's earnings conference call earlier on Tuesday to explain just how much money the iPhone is dumping into Apple's coffers. For the first time, the company used supplemental financial details to give some color on the contribution that the iPhone could be making to Apple's bottom line if iPhone sales were handled like Mac sales, and the numbers are astonishing.
The iPhone now accounts for 39 percent of Apple's business, having generated $4.6 billion in revenue on sales of 6.9 million units during the quarter. (Apple TV revenue is lumped in with that number, but let's be real: iPhone sales account for the vast, vast majority of that figure.) Those numbers, however, are not included as part of Apple's official quarterly results because of the way the company chooses to account for the sale of each iPhone; Apple reported just $806 million in iPhone and Apple TV revenue for its fourth quarter in accordance with GAAP (generally accepted accounting principles).
So what gives? In order to explain, please permit me to wade through some boring-but-necessary Accounting 101 review.
Apple uses a subscription-based accounting method to recognize the revenue from the sale of an iPhone or an Apple TV unit. Remember the outrage in January 2007 over Apple's decision to charge certain MacBook customers $1.99 to unlock the faster Wi-Fi chip hidden inside their notebooks? The company didn't decide to charge people because it was short on cash; Apple had to in order to satisfy accounting rules that require a company to establish a value for future upgrades if a decision was made to recognize all the revenue from the sale of a product at the time it was purchased.
To avoid the same situation with its brand-new iPhone customers, Apple announced shortly after the launch of the product that all iPhone revenue would be recorded over a 24-month period, allowing the company to ship software upgrades to the iPhone for free. Note that for whatever reason, it doesn't apply that treatment to its Mac or iPod product lines, meaning that Apple has to charge iPod Touch owners a fee for the exact same upgrades that iPhone owners receive.
The problem with this accounting treatment is that it pushes most of the revenue associated with the sale of an iPhone out into the future, making it difficult for investors to determine just how much revenue and profit is being generated by the sale of a particular unit until long after that unit has been sold. In addition, Apple has to recognize engineering and marketing costs associated with the sale of those iPhones in the quarter in which they occurred, not over the 24-month period.
Starting Tuesday, however, Apple decided to open the kimono on its iPhone business in a new way.
Apple revealed the numbers it uses internally to measure the performance of the iPhone business for the first time on Tuesday. Imagine Apple treated the iPhone like it did the Mac: it would have recorded an additional $3.8 billion in revenue and an additional $1.3 billion in net income during the company's fourth fiscal quarter.
Total iPhone revenue of $4.6 billion would have represented 39 percent of Apple's overall adjusted revenue of $11.7 billion, and would have ranked it third among all mobile phone vendors as measured by revenue after just 15 months on the market, according to the company. "If this isn't stunning, I don't know what is," Jobs said.
A few words of caution are necessary regarding the use of supplemental results to evaluate a company. Apple posted a lengthy disclosure on the numbers in its press release, warning among other things, "these non-GAAP financial measures may be unique to the Company, as they may be different from non-GAAP financial measure used by other companies. As such, this presentation of non-GAAP financial measures may not enhance the comparability of the Company's results to the results of other companies." (Jobs, of course, did just that in ranking Apple third among all mobile phone vendors as measured by revenue, so there you go).
But we're still talking about real money. Regardless of how Apple decides to account for iPhone revenue, it's still real revenue, and it provides cash for the company to invest in iPhone engineers (such as the former P.A. Semi team, for example), market the iPhone, and work on software enhancements to the product.
It allows us to make imperfect estimates on just how much Apple is receiving in subsidies on each iPhone 3G. $4.6 billion in revenue divided by 6.9 million units equals $666.67 per iPhone. That's a little high, since some portion of that revenue has to be attached to Apple TV sales, but even making the unlikely assumption that Apple sold $500 million worth of a product it calls a "hobby" during the fourth quarter puts the average cost of an iPhone 3G at $594.20.
And it also underscores that Apple has completed its transformation from a computer company into a consumer electronics company, the only computer company of its generation to successfully pull off that transition. They all tried, but no traditional PC company has managed to shift the bulk of its business from low-margin PCs to high-margin consumer electronics: the iPhone now represents 39 percent of Apple's revenue using the supplemental metrics, while the Mac accounts for 30 percent.
The iPhone isn't just the third leg of Apple's business that Jobs promised it would become back in January 2007, when he introduced the iPhone and changed the name of the company from Apple Computer to Apple Inc. It's now the single largest contributor to Apple's bottom line.
Tom Krazit writes about the ever-expanding world of Internet search, including Google, Yahoo, online advertising, and portals, as well as the evolution of mobile computing. He has written about traditional PC companies, chip manufacturers, and mobile computers, spending the last three years covering Apple. E-mail Tom. 
Like Firewire, earbuds not really needed any more. The iPhone and new Touch both have this awesome internal speaker, and lots of people don't use the earbuds anyway. If you hold the iPhone speaker really close to one ear, it sounds almost as loud as the earbuds. After a while, you won't even miss it.
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Yes, that was sarcasm.
;-)
When you look at the AppStore you need to remember that every app there was developed on a Mac. How many of these developers are new to the Mac and will decide to expand their offerings to the Mac itself?
When you look at Apple Stores you learn every quarter that over half of the Macs sold are to customers new to the program.
I believe that Apple has built the "halo effect" to now encompass every new product that they deliver to the consumer. The iPhone is simply a demonstration of this effort.
To be fair, much of Apple's competition has tried rather hard to do the same: Dell got into big-screen TV and portable music player sales (with eventual failure, but honestly, they did try). HP still sells a metric ton of high-end electronics engineering gear (e.g. oscilloscopes that can cost roughly as much as someone's house - even if that someone lives in San Francisco), as well as quasi-computer products (multifunction document centers, etc). OTOH, Apple has managed to do a rather solid business of creating a balanced and successful portfolio so far.
On the software side, the story is the same. Microsoft is still floundering (And in some cases foundering) in markets such as PMP's (Zune), game consoles (xbox - which has seen untold billions of dollars sunk into it, but might see a first-ever profit, 8 years later), ISP services (another money pit - if it weren't for Qwest, MSN would be dead by now), search engines (#3 by a monster distance and failing) and even DVR's (until they stepped on a ton of TiVO's patents, which killed it) and Internet appliances (well, what was left of WebTV anyway). That said, Microsoft only makes money on software (Windows, Office, some server app types, etc) and is facing a growing threat to their income in that department (Thanks to folks like, well... Apple).
This is actually not to bag on MSFT, but Apple's successes underscore MSFT's need to find unique markets with potential and capitalize on them. Mobile devices obviously ain't it (first RIM, then Apple surpassed them handily). Tablets ain't it. The xbox might (if it ever gets out of Nintendo's shadow) do something yet, but it's taken too long to realize returns on it. The Surface initiative holds some promise, but it seems too niche. MSFT would do well to instead find a consumer-level market that isn't already being dominated (by Apple or anyone else), and tackle it.
I did of course neglect to mention that MSFT did do one thing real well - make peripheral hardware that simply works, and actually works well. Sure a lot of it (e.g. mice) are re-branded products made by others, but hey - they do a good job there.
/P
It is yet to prove itself in the market.
Meanwhile iPhone is estimated to sell between 32 to 40 million units in next four quarters ( a year). At $ 549 per phone that Apple makes off of it, that is a whopping $ 17 to 22 billion.
I am yet to see any consumer electronic product that will genrate this revenue in only second to third year of its launch.
OTOH, I can see Android eating what's left of Windows Mobile's lunch...
The fans may know what the I-phone is good at but joe consumer is happy with a shiny toy that surfs the web and doesn't cost too much. That said - I think I-phone sales will continue to grow but slowly - most people who want the I-phone badge are already wearing it.
I thought by far the most important thing about the article was this : Thank God for accountancy - the one thing that makes us IT guys look interesting.
Don't get me wrong, I wish android every success & would love to check it out myself, but the iPhone had the massive iPod base from which it gained its step up - Android has nothing on which to stand.
And nobody has heard of Android but they have heard of Samsung, Motorola, HTC and LG not to mention Nokia. Nobody calls it the OSX phone or the Nokia N92 Symbian so why the Android phone?
I think Android may actually benefit iPhone users and potential buyers by providing enough competition from a wide-open platform, such that Apple may have to drop the our-way-or-the-highway aspect of the App Store and let the iPhone evolve into the spectacular mobile computing platform that it could be. But that's as far as Android will get. Android is more the niche OS, in a world ruled by iPhones, Blackberries and even Symbian phones. It could shake the trees hard enough to make the smartphone world a better place for us all, but I can't see how it could overtake the iPhone.
If you really, really want a new WinPC, but money is tight, then you compromise - either wait a bit longer, or buy a cheaper model, or second hand.
If you really, really want a Mac - same applies.
Regardless of recession, the same decisions affect people buying a new computer & they are still the same type of people - I want a mac, I want a pc, I have a mac & want new one, I have a PC & want a new one.
The recession does not just apply to people buying a Mac, it just has a blanket effect of what people can afford.
With the cheap end of Dell or HP, the computers are almost disposable, and have a shelf life that can almost be measured in months - maybe two years at the most. When it comes to specs that will last awhile, you pay as much (if not more) for a Dell or HP as you would a Mac.
OTOH, with a Mac, you buy it knowing up-front that you're going to keep it for a few years. I still have a perfectly working (and still damned fast) dual G5 that I bought in 2004... and all I did during the interim is buy a 2nd hard disk and some RAM for it - which I bought from Newegg (they're standard PC parts: Crucial and Seagate if you're curious ab't the brand names).
first time computer buyers will most likely choose cheap pcs.
That accreditation belongs to OS X. It sits in and over ALL Apple's products....
And to the poster above who reckons Android is going to eat iPhones lunch.. think about it for a minute. Developers writing software for iPhone have access to EVERY iPhone user from launch on. With Android, they will be making myriad's of versions of software for hundreds and hundreds of hardware configurations. Not an attractive prospect is it? You need to rethink your stance joetesta70!
And SactoGuy018, Vista is now "stable" is it? Don't make me laugh. Vista is dead and let's see what happens to 7 in 2010... And as for touting 64bit - that's a seperate Windows system. Versus OSX which is 32 AND 64bit.
That accreditation belongs to OS X. It sits in and over ALL Apple's products....
And to the poster above who reckons Android is going to eat iPhones lunch.. think about it for a minute. Developers writing software for iPhone have access to EVERY iPhone user from launch on. With Android, they will be making myriad's of versions of software for hundreds and hundreds of hardware configurations. Not an attractive prospect is it? You need to rethink your stance joetesta70!
And SactoGuy018, Vista is now "stable" is it? Don't make me laugh. Vista is dead and let's see what happens to 7 in 2010... And as for touting 64bit - that's a seperate Windows system. Versus OSX which is 32 AND 64bit.
OSX is internally 32 bit, though it can run 64-bit tasks under duress--- there are ZERO 64-bit processes running in Leopard (check the Activity Monitor's Kind column). Takes the machine several seconds to start a 64-bit app as it loads the necessary code. Even though XCode is shipped with a 64-bit binary, Apple makes it default to run the 32-bit version on 64-bit-capable machines. That should tell you something.
Vista is stable, 3rd party drivers were less so to start. Apple will need new drivers in Snow Leopard, similar problems are expected. Perhaps they will try to kludge a fake 32-bit driver environment to avoid it.
I will live with my HTC Diamond and iPod Touch for now...
:-(
Gee, that would be pretty bad if they tried to force a person to switch cell phone carriers--in fact, if anyone tried to force me to switch carriers (or tried to force me to do anything) I'd call the cops.
Fortunately, Apple is not FORCING anyone to do anything. They are inviting you to buy their product, and fully disclosing that doing so will necessitate that you switch carriers. The decision is up to you.
If Apple had simply marketed this to multiple vendors, they could make alot more money and triple sales of iPhones in a minute. As it is, AT&T has one of the worst coverage areas, their customer service is subpar and they weren't even ready to support the iPhone at launch, unlike say, Verizon.
Developers for the iPhone can now easily develop for Mac and vice-versa.
A couple years ago, everyone was saying, "Apple is all about iPods." Meanwhile, Mac computers continue to churn along at a surprising growth rate. Now, although iPod growth won't be spectacular, it will still benefit from iPhone advances. Now, everyone is saying, "Apple is all about IPhones." My guess, is that in a couple years, it will be "all about the app store." 200 MIllion downloads in four months!
But the basic gist is this: most of the time, when you sell a product you recognize all the revenue attached to that product up front, at the time you record the sale in your books. You don't have to recognize all the revenue up front, but most companies do. However, there is this accounting rule that says if you do recognize all the revenue up front, and later you upgrade that product significantly, you have to establish a value for that upgrade. The easiest way to establish a value for something is to charge something for it.
If you recognize some of the revenue up front, and some later, however, you don't have to establish value for "significant upgrades." I don't know how Microsoft accounts for Windows or Xbox 360, but you could argue that service packs aren't significant upgrades but maintenance releases if they recognize the revenue up front. Or maybe they recognize 95 percent up front, but defer the rest over time.
Accounting is much more of an art than people realize; it's definitely not a cut-and-dried science. It's all up to the interpretation of the rules by Apple's accountants and the SEC/IRS, and different people can reach different conclusions on what is required by the GAAP rules.
As for why they lump Apple TV in with those numbers, Apple will tell you that's because Apple TV is the only other product that receives this kind of accounting treatment. But it also masks just how well (or not) Apple TV is selling, which probably doesn't hurt from Apple's perspective.
sold (millions) net (billions) EPS 20 x EPS
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6.9 $1.3 $1.45 $29
10 1.9 2.10 42
20 3.8 4.20 84
30 4.7 6.30 126
40 7.6 8.40 168
- by monsterbassman December 22, 2009 7:33 AM PST
- i am loosing faith in apple i have always been a fan and have always recommended and used apple products , since snow leopard came along it has turned my life upside down and now i cant rely on my mac for anything any more and to add insult to injury i cant have any support for your product that doesnt work properly unless you charge me £35 to fix your apple products in fact i should be charging you , whats this world coming to , we should go back to the days where house holds dont have pcs in the home and leave them to the offices where they can only mess up the businesses that involve our finances our billing ,heating ,electricity, water ,banking and all things that dont enter the four walls of our home ha god help us the computer age is here and it is supposed to make our life better ,all i hear when there is a problem is that there is a computer problem on the other end of the phone , god help the future for us and our children the devil is upon us and he is in the shape of binary code thanks for the 3 year relationship but im dumping you and Microsoft and going back to board games ,cards, books and singing around the piano
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