Friday, September 07, 2007

iPhone debriefing

Apple CEO Steve Jobs wrote an open letter to iPhone early-adopters today adamantly defending his company's decision to drop the price on iPhone by a third, or $200, after just two months. Although he believed the price drop was the correct thing to do, Jobs recognized that Apple underestimated the effect it had in jeopardizing the trust of its first million iPhone customers. To reassure them, he will be issuing a $100 store credit, single-handedly creating 100 million in consumer surplus.


By yesterday morning, I had already come to terms with my very late early adoption. While I originally got the iPhone on launch day, I returned it two week later, only to buy it back once a screenshot of Vim running on the iPhone was posted. As a huge Apple fan, I'll admit I was willing to pay even more for the iPhone and wished to be mature and take responsibility for my actions. Luckily and despite my previous misgivings, iPhone has not ceased to delight me. You may think that it's all cognitive dissonance and I will not defend against that accusation. I do, however, feel like the signs of the price drop were all there by the time Steve Jobs made the announcement on Wednesday.

I knew it! (not really)

First of all, after all the pent up demand, Apple's first full month of sales only exceeded their 2008 target of 1% mobile phone market share by 80%. They would have a really hard time sustaining that $600 demand for 18 months. Second, Apple has decided to implement subscription accounting (is that what they called it) for the iPhone since they're receiving monthly payments from AT&T in return for the exclusivity in the US market. That means they'll be recognizing the revenue of iPhone over the two-year service contract.

If Apple intends to sell 10 million iPhones in 2008, that'd be an average of 833[,333] a month. Even if they receive a generous 10% of AT&T revenues of $60 per line month, it comes out to be an average of $60,000* each month for two years. It'd be a stretch to also recognize the hardware revenue monthly at $500,000, or [up to ] three times the [profits from ]subscription revenue. Finally, we're all used to subsidies by mobile phone service providers with 2-year service contracts. Prices fall sharply and may not reflect the actual cost of the hardware and volumes matter a lot. Apple fans quoted Motorola's RAZR's similarly high intial selling price to justify our purchases but forgot about how fast it became virtually free with service contract. Yes, hind sight is 20/20, but I hope this was an interesting exercise.

Wait at your own risk

One thing that's nice to keep is your conviction in times of difficulty. One rule I've preached is to buy Apple hardware day one to maximize your value against obsoletion. I practiced what I preached, but to my detriment broke the rule eight weeks later on the trust that Apple wouldn't screw their customers that badly (i.e. within a quarter). This was the same belief I held when I thought they couldn't possibly release another iPhone within a year of the first generation possibly sporting a broadband wireless modem (UMTS/WiMAX?). That's the very trust that Mr. Jobs rightly seeks to maintain.

As a brief summary of what currently delights me about the iPhone asides from its fantastic exposition of functionality, check out (if you haven't already) or iBrickr. They are a testament to the current state of native application development for OS X on iPod (iPhone and iPod touch).

SOURCES: iPhone margins, iPhone July sales, Apple Q3 Earnings Conference Call (6:11")

*(10,000,000 units / year or 12 months x 10% share x $60 service charge) x average monthly revenue taken over lifetime of 24-month contract (1 + 2 + ... + 24) / 24 months = $60,000

UPDATED (9/19/2007 00:44 EDT):

I was off by a factor of 1000. Instead of average monthly payment from AT&T being generously estimated at 60,000, it should be over 60,000,000. Thankfully, nobody actually read this (yet)! I'll try to fix it.

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