Tech Untangled – Technology and Business

The iPhone will be launched in the US in June, according to Steve Jobs, and given his bold prediction of selling 10 million iPhones in 2008, its now time to think whether this is achievable.

There’s plenty of opinion on whether Apple will sell 10 million iPhones in 2008. Alex Zaharov-Reutt in Why Apple will sell 10 million iPhones in 2008 thinks so, while Eric Zeman in Can Apple Really Sell 10 Million iPhones?, the Gizmodo article by Matt Buchanan Forbes Analyst: 10 Million iPhones? Good Luck, and Lance Davis in Why Apple won’t sell 10 million iPhones in 2008 doubt it.

The question is, what will it take to sell 10 million iPhones in 2008?

First, let’s look at the likely scenario in the United States, where iPhones will only be sold through AT&T (formerly Cingular). AT&T has a 5-year exclusive agreement with Apple. iPhones will only be sold in Apple stores, on Apple Web site, and through AT&T stores and Web site, thus, excluding all other distribution channels.

AT&T has about 65 million subscribers. Let’s say that on average, customers buy a new phone every 2 years (cellular contracts are usually 1 year or 2 years), so every year AT&T will sell about 32 million phones. According to In-Stat “Future Cell Phones: The Big Trends, 2005 -2010” of March 2005 (a bit dated), only 2.3% were interested in spending more than $400 to purchase the next wireless phone. Even at $300+, only 5.1% are interested. At the current iPhones prices of $499 and $599, if each of the 2.3% willing to spend more than $400 buys an iPhone, that’s still 736,000 iPhones over a 12 month period. Of course, not everyone in this category will buy an iPhone.

Then again, because it is such a hip product, one could expect some upshifting, particularly from those who were looking to purchase an iPod. Let’s say an iPod is $200 (at apple.com iPod is $249 and iPod nano is $149), then the incremental cost of an iPhone is $300. Still the numbers aren’t that high.

We could also expect customers to switch from other cellular carriers just to have the iPhone, but they will develop similar high-end phones to counter. Furthermore, with 2-year agreements Early Termination Fees, and Family Plans, it’s not that easy to switch cellular carriers. While this could be true for Sprint Nextel, T-Mobile, Alltel, and US Cellular, the story for Verizon Wireless (25% market share) may be entirely different. It’s the best network. Remember, the phone isn’t everything. AT&T is still a crappy network, despite all the advertising about call drop rates. Those who switch just to get an iPhone , especially from Verizon Wireless, will be disappointed with the dropped call rate (or with their solution of holding the call in dead silence to reduce dropped call rates).

Other issues that may limit uptake: iPhone is on a new operating system and has yet to form a developer community that can optimize the vast store of games, content and apps for the iPhone. The iPhone’s iTunes software synchs directly with the phone via a USB cable, just like a normal iPod, despite other connectivity features the iPhone sports like Bluetooth, EDGE and Wi-Fi.

In the US, I believe that 2007 iPhone sales will come in less than 0.5 million units (only available in the 2^nd half of the year).

Internationally, it is much more feasible. Alex even says that “Far from hindering Apple’s entry into the market, cell phone networks worldwide are likely clamoring the chance to be Apple’s partner in their country or region’s iPhone sales”. Also, Europe and Asia tend to have more month-to-month customers and better retail channels. The iPhone will likely be available in Europe, Asia and Australia in 2008, but nothing has been announced yet, so reaching the 10 million target in 2008 depends on how successfully Apple can get into these markets.

I have no doubt that iPhone will be a big hit among many customers, but I really doubt that it will have a great impact at $499 and $599.

To sell 10 million iPhones in 2008, Apple had better come up with

• iPhone 2.0 (Cellular Broadband, availability of games, content, and applications)
• More carriers and more distribution channels
• And most importantly, reduced prices.

Your thoughts?