The Macalope: An Apple blog

UPDATE: This requirement is only for those who purchased after 5/27/2008 and are turning their old iPhones in to get a new "free" (now with more expensive data!) iPhone 3G. AT&T employees may now uncross their legs.

Um, fellas?

This better not be true.

I just finished an e-mail exchange with an AT&T spokesperson who told me that if you upgrade from your current iPhone to iPhone 3G at an AT&T store, you need to turn in your first iPhone to qualify.

It seems wrong, so the Macalope advises a wait-and-see approach. Please wait to knee your local AT&T representative in the groin until after this is confirmed.

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.

Seeking Alpha's Todd Sullivan really doesn't like Apple's exclusive agreement with AT&T (tip o' the antlers to John Gruber). His dislike of it is so intense, as a matter of fact, that his "analysis" of the deal has burst free of the restraining coil of our so-called "Earth logic" and taken flight to a wondrous world of imagination. [Note for editor: is there a Doug Henning tag?]

The latest estimates have "unlocked" iPhones costing Apple over $1 billion in lost revenue the next 3 years.

Wow! $1 billion sounds like a lot. How did you come up with that number, Todd?

Apple's (AAPL) AT&T (T) tie-up in the US is for another 4 years, meaning the company will continue to not realize monthly revenue, estimated at $120 annually per subscriber from phones "unlocked" for use on other carriers.

OK, so Todd won't tell us where, exactly, he got that number -- you stupid Earth logicians would ask such a question! -- but doing the math he's apparently figuring that there are about 2.1 million unlocked iPhones "in the wild". That's a lot more than other estimates, but the number of iPhones and the grand total are pretty irrelevant once you see how inherently flawed the premise is.

Because this $1 billion is magical fairy money that you can only see when it's reflected in the shiny dew on the Blingo-tree leaves in the virgin wood of the elven kingdom of Willywindle, across the Chocolate River. And then only during the month of Februtuesrarey, which comes once in a 1,000 years, when the snow falls from clear skies and the IRS agents give fabulous deductions for non-asset transactions conducted in previous fiscal quarters. [Note for editor: this could probably use some tightening up.]

Well, anyway, the point is that opportunity cost is only relevant if there is, in fact, an actual opportunity, not some imaginary scenario you just pulled out of your butt. For Apple to be "foregoing" this huge chunk of change, you'd have to buy into the jacktastic assumption that it could negotiate the same $120/year revenue sharing with every other cellular provider in the world.

Not only that, Sullivan glosses over the fact that his "math" assumes a situation where AT&T exclusivity is in effect globally. However, here on Earth, 300 light years from planet Jackass, many if not most of the unlocked iPhones are being used in other countries, particularly countries where Apple doesn't currently have a deal with a cellular provider. Just the other day the lovely and talented Tom Krazit pointed to a report indicating there are 400,000 unlocked iPhones in China alone.

Why does Apple not have a deal in China? Because it's trying to do something craaaazy like negotiate one of them sweet revenue sharing schemes, that's why.

Todd, maybe you should be taking some notes or...

Well, whatever. That's fine.

Apple has stood by its "10 million phones sold by the end of 2008" goal, but recent news that they have dramatically cut back on component orders can only mean sales growth has slowed.

If you click through to the link, it's really not clear exactly what that component cut report was all about. First of all, Apple already said in its quarterly conference call that it expected the first quarter to be slower than normal. Go one link further and you'll see CNBC's Jim Goldman calling the report much ado about nothing.

At any rate, Apple's already sold more than 3.7 million iPhones. With the release of a 16GB version last week, more international rollouts coming and a 3G version sometime later in the year, does anyone really think they aren't going to make 10 million by the end of the year?

Anyone who doesn't cry out for the creation of a Doug Henning tag, that is?

I did a post in May of last year that said AT&T would be the big winner of the iPhone deal and to date they have been.

Yes. Surely, with iPhone sales perfectly aligned with expectations, Apple has taken it in the shorts.

Huh? And since when did this relationship become a zero sum game?

What's so interesting about that link is that it's to a post where Sullivan just references an unlinked-to previous post about the iPhone and then pulls a big long quote from another blog. Why would that be? Possibly because his opinions about the iPhone have been so fantastically wrong?

Like this one where he seems oblivious to the presence of the rest of the world:

This also means that the 10 million units Apple plans to have sold by the end of 2008 will be done to 47 million AT&T subscribers meaning 1 in 5 will have one? Doubt it.

Well, you were right to doubt it! Because you were wrong!

Or this one which the Macalope dispatched with his characteristic aplomb here.

Todd, honey, after all this time maybe you should just drop this particular subject. Because you still don't seem to be getting it.

Back to the current piece:

When you also consider we have not seen what Research in Motion (RIMM), the Blackberry maker and clear "smart phone" leader has planned, Apple may face even more headwinds.

How, exactly, is one to consider what one has not seen? And doesn't this idiotic game work both ways? Shouldn't we also consider what we haven't seen from Apple? Or from Nokia? Or from space aliens?

None of this even takes into account the specter of Google's (GOOG) gPhone expected later this year.

Again, we have current Apple products forced to compete against future products from someone else. Why does Steve Jobs even get up in the morning?! And when did the linearity of time get revoked without the Macalope noticing it?

But let's look at some actual market share analysis for a minute.

"When you consider that it launched part way through the year, with limited operator and country coverage, and essentially just one product, Apple has shown very clearly that it can make a difference and has sent a wakeup call to the market leaders," said Pete Cunningham, Canalys senior analyst.

Phew. After reading Sullivan, that voice of sanity is like a soothing liniment applied to a festering rash, isn't it?

Not that the Macalope would know what that's like.

The horny one is a little confused at Sullivan's definition of the term "leader", though, as Nokia is #1 in market share, not RIM. And Apple, while at #3, clearly has the buzz, as manufacturers are scrambling to come up with an "iPhone killer".

But actual figures and logic be damned! Right, Todd? [Note to editor: can you write the Macalope a prescription for a pain killer?]

Instead of having a product that all carriers were glad to carry and sell, he created an atmosphere in which they embarked on a quest to compete directly with him and his product.

Todd, the Macalope just doesn't know how many other ways to say this but that is simply one busted-ass 2007 Nissan Premise you're driving there. Exclusivity is a condition for the revenue sharing agreement. That's how Apple gets the revenue sharing. You can't say Apple's somehow foregoing $1 billion in revenue sharing that it could never possibly get.

I think Apple devotees may find themselves in the future wondering "what could have been" if only Jobs had not started out this process so adversarially.

Yeah, well, the Macalope thinks you will find yourself in the future ignoring the uncomfortable fact that you ever wrote this piece in the first place.

Guess who's coming to dinner at IT's place?! Well, not the iPhone if Forrester Research has anything to say about it!

According to Forrester (tip o' the antlers to Blackfriars' Marketing), the iPhone isn't ready for enterprise use.

Well! That must bet the final word on that! Because it's not like Forrester's ever written something so completely bass-ackwards that it made you think about hanging up a shingle and becoming a high-priced technology consulting firm because, holy hell, if they're giving out advice like that, how hard could it be?

ZDNet's Larry Dignan has rundown of Forrester's Top Ten Reasons Why The iPhone Is Teh Suxx0r. That's right, Forrester's report is in the same format as a late-night comedy routine.

Even Dignan takes some of these items to task, but not as much to task as Mark Goble, who actually deployed iPhones in an enterprise and was interviewed about it by the Wall Street Journal.

Doesn't that guy know that Rob Enderle said the iPhone was really just for teenagers?

Hmm. Maybe his account managers are all teenagers. Well, whatever. Let's go to the list.

1. The iPhone doesn't natively support push business email and only checks for mail every 15 minutes compared to 1 minute on other devices.

The connectivity with business email looks to be on Apple's radar as AppleInsider noticed an interesting job posting (tip o' the antlers this time to Daring Fireball).

As for the time interval, if one minute is a feature, it's a broken feature. The Macalope can't tell you how many meetings he's been in with Crackberry addicts who are not paying attention to the discussion but instead are emailing their buddy in accounting to ask "Hey, did you get that thing I sent you?!" Obviously, if you're a heart surgeon or nuclear engineer or Jack Bauer, you're going to want to get that critical email before you hear "CODE BLUE" or "CORE BREACH" or "Deet-doo... Deet-doo... Deet-doo..."

But -- and the Macalope really hates to be the one to break it to you -- the odds are your job isn't so important that you can't wait another 14 minutes for an email.

Doesn't anyone call anymore? It is a phone after all.

2. The iPhone doesn't have third-party apps.

Dignan seems to think the SDK coming early next year "may alleviate the situation". The Macalope will go not very far out on a limb and say that not too long after the SDK's release, the iPhone will have better third-party applications than any other cell phone platform (unless Apple supplies some kind of broken authentication model).

3. You can't encrypt data on an iPhone.

As Goble notes, other "enterprise phones" don't encrypt data either. Also, it's a really good thing that enterprises make sure every laptop and cell phone they currently hand out is encrypted.

That's a joke. They don't, of course, which is why you hear so many stories about social security numbers and medical records and human genomes being lifted from stolen laptops. Many enterprises do encrypt for users who have really sensitive data, but not all phones need to be encrypted.

4. The iPhone can't be erased remotely if it's stolen.

No, but Goble believes for his business the ability to delete the user account is good enough. Dignan says Sarbanes-Oxley "will put the kibosh on iPhone adoption in some companies". Probably. But Sarbanes-Oxley doesn't say anywhere that companies must be able to remotely erase cell phones. It's about mitigating risk and documenting control points. Again, for some companies the iPhone isn't a fit, but for many it is.

5. The iPhone's software keyboard leads to input errors.

Dignan smacks this down perfectly:

This complaint is a red herring. I don't see it being an enterprise issue. Cubicle jockeys with a hard keypad still send mobile emails that don't make a lot of sense.

6. The iPhone is tied to AT&T.

AT&T needs to open the iPhone to business accounts. But this has little to do with one of the key concerns of Forrester's piece -- how to answer users who ask IT to support their iPhones. Also, while AT&T's lack of support for businesses is a "headache", Goble manages to deal with it creatively by using several family accounts.

7. The iPhone is too expensive.

Hey, know what's more expensive? Deploying difficult-to-use phones to average users and then having them avoid using them because they can't figure them out. The Macalope has seen it happen again and again. IT loves deploying Treos and Blackberries with dozens of tiny little keys that can do anything! Yay, technology!

And then the executive leaves it in her drawer.

8. The iPhone is still in its first generation.

So what? What if -- as it is -- it presents a compelling business case based on ease-of-use, feature set and the fact that users are more likely to use it?

Dignan says that European companies will want to wait for a 3G version. Fine. But again, just because the iPhone isn't appropriate for some companies does not mean it's not appropriate for all companies.

9. No removable battery.

Dignan:

What company is going to be trapped into a loop of buying iPhones repeatedly?

Goble:

This never crossed Goble's mind. When pressed, he asked us how many spare batteries we carried around for our BlackBerry.

Indeed. What is Dignan saying, that iPhone batteries are known to repeatedly fail and that such failure is out of warranty? That's ludicrous. IT departments are going to get AppleCare and they're going to swap out the phone before the battery life becomes an issue anyway.

10. There aren't any examples of companies deploying the iPhone.

Except for Goble's company. Hey, you know who writes those white papers on how to successfully deploy technologies? Companies like Forrester. They could have written one o' them fancy papers, but they're more interested in providing cover for knee-jerk IT department reactions to anything with an Apple logo on it. Remember when "IT professionals" were warning companies about how dangerous iPods were? Flash drives were fine as long as they didn't have an Apple logo on them.

This is not a list of reasons. It's a list of excuses. In Forrester's defense, giving IT excuses not to deploy Apple technology probably sells more reports.

There are definitely going to be situations where the iPhone is not appropriate. But there are also situations where deploying the iPhone would present a compelling business case.

It's not so much that the iPhone isn't ready for the enterprise, it's that the enterprise isn't ready for the iPhone.

AT&T informs the horned one on his iPhone that it is "removing itemized detail" from its bills to iPhone customers. That only took two months too long.

For customers who may be servants of the Lidless Eye, you can still get a full paper bill.

Seriously, who other than someone submitting an expense report to Mordor needs a bill with 10,000 $0.00 line items?

No, it's not surprising. It's AT&T.

Apple probably should have handled the billing, too.

And the phone service.

And certainly all the public speaking.

And...

Oh, heck, Apple, why didn't you just do the whole darn thing?!