Mix “Before” 8GB “After”Retail Price $594 $399AT&T Payments $120 $120Unit Cost $265 $266Gross Profit $449 $253Gross Margin 76% $63%Source: SAI Analysis, iSuppli, Piper JaffrayWhen Steve Jobs sliced $200 off the iPhone’s price tag, he also sliced $200 per unit off his bottom line. Apple’s logic, which makes sense, is that it can sell a lot more $400 iPhones than $600 iPhones. More is good, especially when you can sell ringtones and wi-fi iTunes downloads to a bigger subscriber base. But there’s no free lunch, and to generate the same profit after the price cut as before it, Apple will have to sell a lot more phones. By our estimates, 78% more.
How did we get there? By creating a “before” and “after” iPhone gross profit model using estimates for the pre-cut iPhone unit mix, the subscription revenue share Apple gets per month from AT&T, and the estimated cost per unit. (Please see detailed assumptions after jump.)
After running the numbers, we estimate that Apple’s gross equipment margin per unit was 55% and is now 33% — still impressive as far as mobile phones go. Including revenue sharing payments from AT&T (which shouldn’t change because of the price cut), we estimate that Apple’s gross profit “before” was about $449 per phone, with $120 coming from AT&T over two years. Its gross profit “after” the price cut, meanwhile, is $253 per phone. That equals $196 less gross profit per phone, or a 44% drop.
Conclusion: To generate the same gross profit after slashing prices, Apple will have to sell 178% as many iPhones. Is this possible? Probably. The price cut, an expected European launch, and the upcoming holiday season should give Apple a nice bump in sales.
In unit terms (details after jump), we estimate that, post-launch weekend and pre-price cut, Apple was selling iPhones at a rate of about 900,000 a quarter. To generate the same gross profit after the cut, we estimate that Apple will need to sell 1.6 million phones per quarter. If Piper Jaffray’s startling estimate that the iPhone price cut tripled sales is even remotely accurate, this should be a slam dunk. And either way, because of subscription-based accounting that records the iPhone’s revenue and profits over 24 months, Apple’s phone business is unlikely to determine whether or not the company hits its quarterly goals any time soon.
- We assumed that 95% of iPhones sold “before” the price cut were $599 8GB models, per Piper Jaffray’s Gene Munster estimate (via PC Mag). (Last Tuesday, Apple discontinued the 4GB model, and lowered the 8GB model’s price from $599 to $399.)
- We assumed that Apple gets about $120 in monthly subscription fees from AT&T over two years per iPhone subscriber, based on estimates from Munster and research firm iSuppli. (Munster estimated that AT&T pays Apple $3 per month for iPhone subscribers that were already on AT&T and $11 per month for iPhone subscribers that came over to AT&T from another carrier. iSuppli estimated that 75% of iPhone buyers in July were existing AT&T customers. That means about $5 per month average, or $120 over 24 months — the length of AT&T’s iPhone contracts.)
- We used iSuppli’s iPhone equipment cost estimates to calculate before and after gross profit. In July, the research firm said it costs $265.83 to make an 8GB iPhone. We assumed the only physical difference between the 4GB and 8GB iPhones is the amount of memory in the phone. iSuppli said the 4GB unit has $24 worth less of memory inside than the 8GB unit. So we assumed the 4GB cost $24 less to make, or $241.83. (We then rounded to the nearest dollar.) We also assumed that the current, $399 8GB iPhone costs the same to make as the $599 8GB iPhone did in July. In the future (and possibly already), this cost will likely drop, but we do not include that in our model. Note that these figures don’t include R&D, royalties, marketing, distribution, or other expenses.
- Unit Sales Run-Rate: Yesterday, Apple announced that it sold 1 million iPhones in its first 74 days on the market. The company sold 270,000 of them in the frenzied first two days of availability (June 29 and 30). It then sold 730,000 iPhones in the next 72 days — an average about 10,100 per day. Ignoring those crazy first two days, that’s a run rate of about 900,000 per quarter, which would generate $400 million of gross profit under the “before” pricing scheme. To make the same gross profit after the cut, Apple would need to sell 1.6 million iPhones at the new price. (Thanks in large part to the AT&T payments.) We think that’s reasonable.