In September, after Apple slashed the iPhone’s price by $200, we estimated that the company would have to sell twice as many phones to make the same profit after the price cut as before it. The good news: Based on its Q4 results, it should do so easily. In fact, Apple is now selling enough iPhones per day in the U.S. to beat its low-ball, 2008 year-end worldwide sales goal of 10 million phones — without any help from abroad.
But Apple now has a new problem to think about: the company says about 15% of its iPhones were bought to be unlocked from AT&T’s wireless network — that is, their owners modified them so they’d run on other networks, or just never bothered to turn them into phones at all.
This has had a small but noticeable effect on Apple’s P&L. Apple and AT&T share service revenue on all activated phones — Apple’s cut is an estimated $120 over the two-year life of the service contract — and losing those dollars will effectively cut Apple’s margin on those phones in half.
Follow-up: Apple’s AT&T Bounty: $432 Per iPhone?
Apple said today that it sold 1.12 million iPhones in Q4. In the first 71 days of the quarter, it sold 730,000 phones — a run rate of about 10,000 phones a day. It cut the price of its phones on day 67, so we’re not sure how many it sold immediately after the price cut. But we do know that in the last 20 days of the quarter, it sold another 390,000 phones at the reduced price — a run rate of about 20,000 a day.
Using that run rate with our old profit model*, that would mean Apple would be generating a gross profit of $450 million per quarter — that’s 1.8 million units at a gross profit of $250 a piece*. But if about 15% of iPhone buyers continue to avoid AT&T, Apple will only be generating around $415 million — 1.53 million at $250 and another 270,000 units at $130 (no AT&T contribution). In other words, next quarter’s U.S. iPhone unlockers would cost Apple almost $35 million over two years. (And the 250,000 iPhones that Apple says were already bought to be unlocked could end up costing the company $30 million in profit over two years.)
Will things get worse? No. The first wave of iPhones was sold to early adopters with the passion and ability to unlock their phones (also factor in thousands of developers and tinkerers who simply wanted to play with the thing). The next wave of buyers are almost certainly going to be less likely to disable their phone — after all, they’re buying an iPhone! But those who do — for whatever reason — will still cost Apple money.
*For a detailed breakdown of our gross profit per phone assumptions, please see “iPhone Price Cut: Apple Must Sell Nearly 2X As Many.”
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