The pre-paid market: Where a $199 iPhone 3G sells for $778
Selling iPhones in the U.S. is pretty simple for Apple. There's only one carrier — AT&T — and it only sells them one way: subsidized, with a 2-year contract.
In the rest of the world, it's not that simple. As many as 70% of all mobile accounts worldwide are pre-paid accounts — in which you buy the phone and pay in advance for a fixed number of minutes. In third world countries, the percentage is even higher; in South Africa, for example, 9 out of 10 mobile customers get their phones pre-paid.
The problem for Apple is that iPhones sold pre-paid are unsubsidized. In Italy, for example, Vodafone and Telecom Italia Mobile have already let it be known that pre-paid iPhones will cost 499 euros ($778) for the 8GB model and 569 euros ($888) for the 16GB. (link, in Italian) The cost of an iPhone 3G in South Africa is expected to be 7,000 rand ($877), which probably puts it out of the price range of most of the population.
In a report to clients on Monday, Piper Jaffray's Gene Munster and his team address concerns on the Street (stemming from a June 10 report by Bernstein's Toni Sacconaghi) that Apple might have trouble making inroads in the countries where pre-paid phones predominate — which is most of the nearly four score countries where Apple has iPhone contracts.
Munster et al. have had to adjust their model to take pre-paid markets into account, but conclude that Apple should still make Piper Jaffray's (aggressive) numbers.
Their assumptions:
- That 53% of Apple's addressable subscribers will be pre-paid, not 70%.
- That carriers will charge pre-paid customers not much more than $600 per iPhone
- That Apple currently has 20% of the U.S. smartphone market and 5% of the world market (according to Gartner)
- That 9 out of 10 iPhones will be bought under contract; 1 out of 10 will be sold pre-paid (see AppleInsider)
- That the smartphone market in 2009 will be 270 million units, or about 20% of the total phone market
- That a 17% share of the world smartphone market is "achievable" for Apple in calendar 2009
- Bottom Line. "Despite lower percentages of contractual subscribers in the global wireless market, the iPhone's international rollout adds confidence to our estimates of 12.9m units in CY08 and 45m units in CY09."
Munster acknowledges that early spot checks show carriers charging considerably more than $600 for pre-paid iPhones. But, he adds, "Our belief is the price will average out to $600 U.S. once there is global availability, and the phone is available at multiple carriers within a region.
"The carriers have huge mark-up on the phones, because they don't want to sell an unlocked phone," he says. "They want to force people into contracts. If we are wrong, and the carriers sell the phone for $800 US, this would be a negative for our prepaid units, with a slight offset as some may buy a contract instead of going prepaid."
In other words, he believes Apple (AAPL) will collect the iPhone sales revenue one way or another.
The price in US dollars does matter because the iphone is supposed to be available everywhere for US$200 in each country's currency. So what this article is saying is that prepaid iphone is $800 or 4x as expensive in Italy as the phone without a contract.
There are a few things that are relevant that many people may not know.
1- In Europe (and I assume elsewhere) the CALLER pays for the telephone charges to a cell phone. This way a poor person (or poor student) can afford to keep a mobile because he can continue to receive calls even when out of funds.
2- The charges are VERY high – especially for pre-paid.
Personally, I don't think the majority of the pre-paids are actually in the smartphone demographic to begin with. But when they want to be – even $800 is less then one would think since their pre-paid fees can easily exceed that in a year. I went on an 8 day trip with my niece in Hungary a few years ago, and we burned up over $30 without any extraordinary call times.
The piece is fundamentally flawed in that it specifies prices in USD as thresholds for determining potential for degree of acceptance of prepaid versus contracts. I quote, "If we are wrong and the carriers sell the phone for 800 US, this would be negative for our prepaid units, with a slight offset as some may buy a contract instead of going prepaid." So investors should take it as a positive sign for prepaid contracts if the EUR:USD exchange rate reverts to equity resulting in a less than 600 USD prepaid contract? I think not. A better reference would be the multiple between the contract phones and prepaid. Of course this approach would require much more in depth analysis and understanding of the local markets in each case than the author is willing to develop. I understand that he is only quoting a report by Munster, but he is at least perpetuating a distortion as opposed to providing clarity.
One further point is the statement "The carriers have huge markups on the phones". Is Apple selling the phones in USD or EUR to the carriers? What is the price? What is pricing structure based on? Who is marking up the phones is highly dependent on knowing that.
Jim
JLA: The Rubicon survey of iPhone users in 3/2008 shows that iPhone users are much more like their international counterparts than like the usual US users. Plus, they are off-the-charts satisfied.
iPhone is the Internet Communicator; in a few more months, we'll really see what that means. The N82 might suit some niche, but it's certainly no Internet Communicator.
The people complaining in forums will always be complaining; they'll always want the next thing that iPhone doesn't have.
"All I ever see in forums are people wanting two things: Choices and unlocked phones. "
Please don't mistake the people posting online in forums with the actual populace. I'm sure "unlocked phones" doesn't even register with most people outside the blogosphere.
“The carriers have huge mark-up on the phones, because they don’t want to sell an unlocked phone,”
Based on who? All I ever see in forums are people wanting two things: Choices and unlocked phones. The 3G iPhone has no choices aside from 8 or 16GB and as far as unlocked goes, Apple doesn't want that to happen.
I have a Nokia N82 and it is WORLDS better than an iPhone even with its smaller screen. Apple needs to wake up and realize that the trends in America do not mirror the rest of the world at all…..
Yes, 'totally irrelevant' in terms of its attractiveness as a product. The price they pay in local currency is what's important in that respect. How many dollars that translates into is subject to constant fluctuation with currency rates.
ex ped: The point of the piece is that a pre-paid iPhone cost almost four times as much as a subsidized iPhone. The example happens to be from Italy. The prices are expressed in dollars because the item is written primarily for an American audience.
(1) Italy has 2 carriers selling the iphone — and both carriers are selling it at the same price ($778 and $888). So there is no evidence that multiple carriers in the region would lead to lower iphone prepaid price.
(2) Gartner's report on smartphone market share in the US is based on US shipment numbers. If it is based on AT&T's activation number — the iphone would have less than 5% of the US smartphone market.
The price of the iPhone in USD in overseas markets is totally irrelevant to its potential to sell there. The potential customers for an iPhone purchase in their own currency based on personal budgets that are not impacted significantly by a weaker dollar. How is it that individuals supposedly knowledgeable about financial analysis can continue to write such meaningless analysis?
Jim
ex ped: "totally irrelevant"?
I know quite a few iPhone owners who have unlocked them to use them with pre-paid SIM cards . The problem they face is that they have no data arrangements with the carriers , so using data on the iPhone ( outside a WIFI hot spot ) can be incredibly expensive .
The reality of the iPhone is that it really is more of an internet device than phone . I use the iPhone ( with contract ) and not having to worry about my data usage is what makes the iPhone a pleasure to use .
I think Apple and AT&T are going to be releasing an 'official' version of the prepaid iPhone later this year. When they do, it could revolutionize the industry– just as the iPhone is a disruptive technology in the device field, I think the power of the iPhone could be just what the prepaid market needs to have it take off as it has in Europe. The only unknown will be if consumers are ready to pay so much for an non-subsidized device… that remains to be seen.
I found a list of reasons why it is smart of AT&T and Apple to release a prepaid iPhone and on the same site there is a list of reasons why consumers are ready for ATT prepaid iPhone. It seems like if they could make it happen, it'd be a huge win-win for everyone.
The market is there– the timing is right. Apple and AT&T just need to make the announcement