How Apple could sell 77 million iPhones in 2013
Two very different iPhone reports — with very different perspectives — were published this week.
One, from Citigroup's Richard Gardner, focused on the short-term. He looked at inventory levels in Apple's supplier channels, saw levels coming down, concluded that iPhone sales over the holidays were soft, and lowered his Apple (AAPL) price targets for the next three years.
The other, from Generator Research's Andrew Sheehy, took the long view. He reviewed Apple's performance over the last eight years, saw what it had done to the music industry with the iPod and iTunes, compared the services offered by the iPhone/App Store with those offered by traditional cellphone manufacturers, and concluded that Apple could dominate the smartphone market within four years with a 40% share, shipping as many as 77 million units a year.
Sheehy's report is more ambitious — and a lot more interesting — than Gardner's, so we take closer look at it below the fold:Â
Sheehy's premise is that the mobile services industry boils down to three ingredients — devices, networks and services. After 20 years and billions of dollars, the industry has done a good job delivering the first two, devices and networks, and a terrible job delivering the third ingredient: the services themselves. That, he says, is better done by companies with experience in computers, software and the Internet. Companies, he writes, like Apple:
From a starting position as a rank outsider, Apple is already beginning to have a transformational impact on the mobile industry. Even taking into account the highly uncertain economic outlook, the company is on a roll and with cash reserves of $25 billion, 33% gross margins, no debt and a strong product portfolio.
He sees three reasons Apple is particularly well positioned to dominate the smartphone business:
- In the future it won't be good enough to deliver devices with more and more features, which has been the industry's playbook so far. "Instead, would-be market leaders will either have to offer or enable a total service experience that encompasses the device, device software, network software and the associated services, most of which will be delivered by third parties. It is this ability to combine hardware and software, in a way that is simple for users, that is Apple’s core competence."
- Apple is the past master of the vertical platform — having proved itself with the combination of the iPod and the iTunes Store. The case for a vertical platform is even stronger in mobile industry, which has become hugely complex and fragmented. "It is Apple," he writes, "that currently has the best platform, even though the service aspect—the App Store—is currently at an early stage."
- Smartphones have the potential to substantially increase Apple’s revenues at a corporate level, which is not the case for a company like Nokia (NOK), currently the market leader. The iPhone and its derivatives, he writes, are Apple's core business and command the majority of attention in the Apple board room."For Nokia, smartphones are one of many important market segments, but the most important of all involves churning out lower-end phones in markets that are still some way from saturation."
For Apple to achieve the kind of growth Sheehy anticipates, however, several things have to happen.
- Apple has to broaden its offerings, selling not just iPhones but a range of devices — tablet PCs, portable book readers, portable movie players and, presumably, low-cost entry-level phones — that all have access to the App Store.
- It must open up the iPhone's application programming interface (API) to allow developers access not just to the device, but to the whole network — vastly expanding the kinds of services available to the user and freeing Apple from its dependence on network providers. The carriers are likely to resist this.
- Finally, it has to find ways to broaden the market, selling not just better smartphones to existing smartphone customers, but services compelling enough to reach critical mass –Â that point "where average users can clearly see that there are enough high-quality services on offer to justify spending $30 per month [for a] mobile broadband subscription."
If all goes according to plan, Sheehy says, the market four years from now could look something like the chart at right.
Of course, Apple is not the only company pursuing a strategy along the lines Sheehy envisions. Google's (GOOG) Android initiative comes immediately to mind. But the current economic downturn, combined with Apple's enviable cash position, could work to its advantage. As Sheehy sees it:
We think that Apple will use the current spending freeze that is currently paralyzing many markets and many companies to get one or two design cycles ahead of the competition. While Apple will not be immune from the effects of the downturn, we think that the company will still be able to afford to keep investing and it will be highly motivated to do so.
When rivals start spending again, they may discover that Apple has built an unassailable lead.
Below, Generator Research's chart of projected unit sales. The full report is available here for £190 ($277).
All of you just forgot Nokia. You think Nokia will sit there and do nothing? No one can really tell what is going to happen in 5 years.
Personally, I like the layout of the Iphone, but I won't purchase one until Apple begins to open up the platform for more 3rd party apps. This is where the Windows Mobile Smartphones still have a large advantage. Our Alnet PC-Based DVR Cards have long allowed access to view home and business security cameras remotely from a Windows Mobile Smartphone or PDA phone successfully. However, despite Alnet's best efforts to produce an Iphone client software, Apple has blocked access to most of the libraries that are required to properly render the video from the system. If other software developers are running into the same hurdles, then it would seem that the platform is going to fail. We have seen 100's of clients get rid of their Iphones and switch back to Windows Mobile PDA phones.
I used the iPhone in Toronto on the Rogers network and the reception was excellent even to the point of receiving signal in underground parking lots. However, the same is not true of AT&T in many cities throughout the US. There appears to be something that does not mesh well between AT&T's network and the iPhone. I say this because I've tried other phones on AT&T's network in Phoenix and they work better than the iPhone.
The best of all worlds would be a GSM iPhone that could also operate on CDMA in the US since Verizon's network is so good here.
I agree, what they need to do is not o nly change price points, but they need to stop justifying a reduced feature set just because it is an apple productwith great design. The sexiness of the device should not justify that it's featureset (very poor camera, no video recording, lack of videophone functionality) is so archaic. Sure people buy it the way it is, but is apple about creating -state of the art- devices, or is it about creating sexy devices with a nice UI but with features that are 5 years old.
It's like Churchill said, to see why democracy is intrinsically flawed, must look at the average voter.
Just because everyone buys the iphone, doesn't mean it's the best phone out there.
"Apple has to broaden its offerings, selling not just iPhones but a range of devices — tablet PCs, portable book readers, portable movie players and, presumably, low-cost entry-level phones — that all have access to the App Store."
That statement alone could only have been written by a Bankster analyst. The iPhone IS ALREADY ALL OF THE ABOVE!! duh!!
I loathe these analysts with their "SELL APPLE, BUY APPLE" screams whenever a minutiae of change happens… Apple is so leading the way that it is already corning RIM and Motorola and others into the corners. Just look at the pathetic BlackBerry model trying to combat (copy!) the iPhone.. desasterous reviews within a week. ROFL.
I've used both Windows NT, 2000, XP and Vista, and then Mac OS X – I will never want to miss this stability and ease of use of Mac OS X – it really just "does work" – fantastically.
To be dominant ,Apple has to open the IPhone OS to other manufacturers so there can be a choice of devices, otherwise within 2 years WinMob will be 85% as good as Apple running on two dozen devices., and begin to dominate the market. It all comes down to if Apple will become more open relative to Microsoft (and others). If not, Apple will repeat the Mac experience, which was an excellent machine, but exclusively made by Apple, causing the far more open and multi-vendor manufactured PC to dominate the world. In essence, Steve and the Apple culture have to give up their possessiveness. The world wants choices, and a more open environment, not just great innovation. Maybe Steve and others at Apple can think about this while he is recovering.
I decided against buying the iphone.
I like being able to record dvd video and the ability to videocall. Also a minimum of 5 mp and 7.2 mbit hspa was a requirement for fast internet. So I got the HTC Touch HD. I have a feeling not many people really know about the full state of mobile technology in 2009. The iphone is so famous, thatpeople perhaps think it's features are state of the art for 2009, when it actually misses a lot of functionality. It looks really nice though. I can't blame Jobs though iphones sell like hotcakes, why give people the latest functionality? They buy the iphone just as it is.
I would've bought an IPhone, but, the AT&T service around here is poor at best. You can't get signal in most buildings, and in the outside world you have to be in the middle of town or on the side of town where the tower is located to get any signal. the local cdma/evdo provider is much better…so I have one of their nice blackberry smartphones instead.
Apple has done a great job with the product, but needs end the exclusivity arrangement with AT&T and broaden it to other carriers if they want to achieve this success.
Personally, I'd LOVE to own an iPhone… but I'm not going to budge until I can get one through another carrier… I've had bad experiences with AT&T and this is a barrier. There are many others out there who feel the same way…
While I like the current avatar of Blodget, I would like to award my Y2KBlodget award to Generator Research's Andrew Sheehy.
This report was written so that people close their eyes to the fact that Apple is incapable of making/supporting 77 Million phones a year, and yet, maintain gross margins.
As a fellow analyst, I am ashamed that someone would write a report like this one. Read my article on why/how AAPL is losing its mojo.
Bapcha Murty
apple will need to subtract being an exclusive to at&t. (no brainer who another profitable carrier is) and become more open to third party apps like blackberry's, or the still in progress Android. Otherwise, this will look like another fad.
Their current handsets are looking more & more pedestrian by the day…..So some changes would be insightfull.
Apple will have 25,000 third party apps by next fall, most of them free or cheap, many of them compelling. They'll run on plan and plan-less devices. What this means for Apple is that they get to focus all their economies of scale on basically a single design and let the consumer customize the device with third party software. Sorry folks, this war is already over. Everyone else is duking it out for second place.
You must be stupid to think that *Motorola* *Palm* *etc* is going to let someone eat their lunch. Ask all the other who have fought and failed.
I respectfully disagree that they will sell that many phones and keep penetrating the market as they have been. My reasoning is due to Android, and the amount of time, effort and money manufacturers are putting into their Dev teams to deploy it. This will be the year we start seeing legitimate iPhone rivals, if not dozens of them running Android, that will collectively be more popular than the iPhone.
http://tinycomb.com/2008/12/19/samsung-adds-30-employees-to-android-task-force/
Dear TVH from Cambridge,
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Who else but Apple sells hardware, software, and music? Who else has their products in nearly every retail outlet? You can buy iPods at Target, Walmart, MicroCenter,
Frys, etc. I have a Macbook and and Iphone and love them both. I'm long on AAPL and will stay that way. The analysts who talk about getting data from vendors about Apple's inventory numbers and current or future orders could be fabricating those numbers. All companies execute non-disclosure agreements with their vendors which prevent the release of any information deemed critical to their business.
Interesting indeed!
That Apple has to broaden its offerings and that all have to access to the App Store is right on the money.
the service aspect—the App Store—is currently at an early stage is important to remember.
And that Apple will use the current spending freeze that is currently paralyzing many markets and many companies to get one or two design cycles ahead of the competition is certain.
What the competition does not seem to be able to do is effectiveley emulate the service aspect seen with itunes and the app store, even if they have had incremental success emulating apple devices and software.
You must be stupid to think that Nokia is going to let someone eat their lunch. Ask all the other who have fought and failed.
ex ped: Stupid is as stupid does.
Yes, broaden the market. A larger yet pocketable iPod Touch can be the next big thing. A MacTROU that we keep with us anywhere, anytime. Just like a wallet. The front jeans pocket is the new back jeans pocket.
… Sell devices and services. Sure. But really it's all about selling solutions.
The MacTROU (for The Rest Of Us?) can be untethered, like the Kindle providing anywhere, anytime web access via EVDO. But a hundred times better than the Kindle, this Mac can connect to ALL our files online at MobileMe.
… Our own content is our most valued content stream.
And the MacTROU it will be cheap. $100? How's that for broadening the market? Why cheap? 'Cuz Apple can also charge for the connectivity and for a subscription to MobileMe. And it can collect for purchases of software, books, audio, video, banking, whatever, which can then reside online, always available to the MacTROU user. All of these revenues can flow directly to Apple.
… Money is the ultimate content stream.
Every argument I've heard that belittles the iPhone and its potential, are the very same arguments I heard regarding the iPod.
Apple changed the way we listen to music.
Apple has changed the handset industry. Just look at the rush to get iPhone copies to market.
The deal is though, that everyone else is copying Apple. Until they change their DNA its all they will be capable of, and that isn't enough.
The winner will be determined by customer satisfaction numbers, and nobody's numbers come close to Apple or the iPhone.
Holy overly ambitious plan, Batman!
This simply isn't going to happen unless carrier committment changes as well as price and even then it's doubtful. It's far more likely Nokia will release competings models at better prices.
Another way Apple could sell a heck of a lot of iPhones would be to make a deal with Verizon when its current contract with ATT is up. I find that the ATT 3G network is abysmal. I live in Cambridge MA one of the worlds hubs of technology development and I can't get a reliable signal in my 3rd floor apartment. Neither can my friend who lives in the heart of SF. I would by an iPhone from Verizon in a minute.
Best analysis of Apple's iPhone future I have ever seen, and I have seen a LOT of them. Also this is the first analyst to address (correctly) the need for developers to actually get in there and force innovation on the carriers. This has been unthinkable until now. Could it be this economic downturn, or Apple's dominant position, could force this important concession?
Bravo to Andrew Sheehy, and to Fortune for bringing this analysis to investors' attention.
Good to see intelligent analysis of Apple for a refreshing change. The critics have lost credibility.
There seems to be a lot of money going into trying to beat Apple down.
PED: It's GARDNER, not Gartner.
I wish I had a nickel…..
ex ped: Thanks. I had it right the first mention, so I guess you only collect 2.5 cents.
The potential is there and they may be the only ones that can execute on this strategy at this point in time.
Good luck Apple,
What about Android? To use one of my favorite words coined by Dubya, don't misunderestimate the boys (and girls) in Mountain View!
So far Apple has gotten away with taking a handful of established smartphone features (unknown to US population before iPhone) and packaging them in a beautiful and user-friendly package. It is easy to predict the features of iPhone 3.0, 4.0 and so on – just look what's available in Nokia N95 or N96 today. In a couple of years Apple will "invent" them and Silicon Valley "experts" will be extatic.
Once again, Apple is a follower, not a pathfinder, but it has not been able to fool the world at large. Just look at the sales figures in Europe and Asia.