Apple Makes $831 On Each AT&T iPhone

Ponca City, We Love You writes "The NYTimes reports that Gene Munster, an analyst at Piper Jaffray, has studied Apple's financial statements and come to the conclusion that AT&T is paying Apple $18 a month, on average, for each iPhone sold by Apple and activated on AT&T's network — up to $432 over a two-year contract. This shows how much incentive Apple has to maintain its exclusive deal with AT&T rather than to sell unlocked phones or cut deals with multiple carriers. Last week Apple disclosed that 250,000 iPhones had been purchased but not registered with ATT that Apple thinks are being unlocked so Apple has now taken action to curb unauthorized resellers by limiting sales of the iPhone to two per customer and requiring that purchases must now be made with a credit or debit card — cash will not be accepted." The latter article links to a US Treasury page explaining the incorrectness of the widely-held belief that cash cannot be refused for any transaction.

Comments

Math.

[attemptedgoalie]

$399 phone
$432 from 24 months @ $18/month
----
$831

that math is wrong

[G Fab]

as correct as that explanation is for the 831 number, the math is wrong.

apple doesn't get iphones from fairies. They pay money to build them.

Re:that math is wrong

[attemptedgoalie]

iPhones are magic, and you know it. :-)

Ok, you're right. That is, unless Apple is using Oompa Loompas to make them. Then, they might be free. The materials are all derived from recycling old Newtons and glued together with the tears of Apple fanatics upset about the $200 price drop.

Re:that math is wrong

[mr_matticus]

The math is not wrong. Apple gets $831 from each iPhone. That doesn't mean it profits $831. It has a number of costs, from raw materials to labor to prorated warranty costs, all the way to packaging, shipping, inventory management, advertising, and ongoing software development; there's always then burden-shifting among products--some products may subsidize others and therefore have an apparently increased profit margin to cover the lower margins on a different product. Deducting all of these would be impossible for an analyst to do without intimate knowledge of Apple's overall operation.

It's better to report the total without them taking wild-ass blind guesses as to how much of that is profit (like iSuppli's crazily inadequate "what it costs" figures). Even if those numbers are right (and sometimes they just pull costs out of their ass because it's "close enough" to something they've seen before), that still only gets you to gross profit. And at the end of the day, gross profit is nowhere even close to the much smaller net profit.

Re:that math is wrong

[mr_matticus]

They're not reasonable figures, though, is the entire problem.

When they don't have data on a particular component, they use something they deem to be relatively similar. They extrapolate an approximate price based on what they feel is an appropriate price at a given (assumed) volume level. They never seem to account for time or place of purchase, either, which can be significant factors in volatile markets. For example, they used a run of the mill touchscreen price for the iPhone, without multitouch and without the daylight-readable backlighting.

Each step of the game is an approximation adding further error to the calculation, and by the end, they almost invariably end up at a "cost" figure that is below reality, sometimes significantly. I have some experience in various litigation involving some of the products they've assessed, and based on what we get in discovery, iSuppli's numbers are, in comparison, highly conservative and geared toward getting the highest possible gross profit rather than providing the most accurate figure. They generate the biggest stir when people think that actual manufacture costs peanuts, so it makes sense from their perspective, but it does a disservice to everyone.

Re:that math is wrong

[mr_matticus]

What is the value in utterly unreliable numbers? It provides absolutely no insight--products cost substantially less for the pieces than the finished good and retail price. Shocking!

Without being able to get within 20% in some cases of the actual materials cost, it doesn't inform any conclusion about the product. The general gross margin range they report is 25-50%--practically that entire variation is within their margin of error in reporting the figures in the first place. Thus, the assessments, apart from being nerd porn, are perfectly vacuous.

I think most people can figure out that almost nothing is sold without a gross margin of at least 20%, and that 50% isn't terribly uncommon either. Unless iSuppli shows up with a 75% margin one day, there's nothing useful about it.

Re:that math is wrong

[Holmwood]

It's the nature of engineering and cost estimates. Of course they are going to be inaccurate to some degree. If you can point to more accurate estimates that are publicly available then great. If there are better firms than iSuppli at cost estimating, then wonderful.

Getting to within 10% of the cost of goods sounds fantastic to me. Within 20-25% still sounds not bad. It's a lot better than a total guess, which seems to be what you're suggesting. (gross margins of between 20 and 50 %).

Incidentally, on the whole matter of Apple making money:

I'm not a big fan of the iPhone -- it's simply not the product for me. Part of that's price, much of that's the lockin -- on apps and to a carrier if you want stable seamless firmware upgrades.

But I'm delighted to see it succeed and delighted to see Apple making lots of money off it. I doubt Apple's going to take 70-90% of the smartphone market, and if they do, it'll be because they deserve to. People like RIM and Nokia will have manifestly failed to execute.

Apple making lots of money off of smartphones means, ultimately, cheaper and better smartphones for everyone.

I have a fantastic Samsung media player. It plays Ogg Vorbis. Terrific features. Inexpensive, too. And an absolutely horrible interface. The iPod's wiping out players with horrible interfaces. Great. That's good for us all. The latest Samsungs are immeasurably better.

Smartphones will get better and cheaper because of the iPhone. That's good for everyone.

Re:that math is wrong

[dedazo]

The math is not wrong. Apple gets $831 from each iPhone. That doesn't mean it profits $831

Then perhaps the obvious flamebait headline should have been crafted to reflect that simple fact. But in the age of one-liner evangelism, Apple Makes $831 Revenue (Though Not Really Profit, Mind You) On Each AT&T Phone Although That's Pretty Much Irrelevant To Everything, We're Just In It For the AdSense Revenue just doesn't work.

I'm having trouble trying to understand the mindset of people who think $831 or $8,311 represents "greed". If the market will bear it, that's the correct price. Otherwise Apple would have sold 1,000 iPhones instead of 100,000 or however many they've shipped so far.

Re:that math is wrong

[jollyreaper]

I'm having trouble trying to understand the mindset of people who think $831 or $8,311 represents "greed". If the market will bear it, that's the correct price. Otherwise Apple would have sold 1,000 iPhones instead of 100,000 or however many they've shipped so far. "Whatever the market will bear" is a two-way street. Businesses will try to whore their wares for top dollar but customers (I despise the label "consumer") will try to find the best deal possible. If they know that there's a shitload of profit built into a given deal, customers will try to beat down the vendor so they can pay less. And that's a fair move in capitalism. If a vendor I use is making a 15% markup, that may well be completely fair and just. If he's making a 75% markup, I want to know about it, and I'll certainly try to prevail upon his better nature or take my business elsewhere.

Re:that math is wrong

[Durandal64]

Except that iSuppli doesn't attach error bars to their estimates. They just state them as-is. Without error bars, estimates that have error are useless.

Re:that math is wrong

[eclectic4]

" And that's a fair move in capitalism. If a vendor I use is making a 15% markup, that may well be completely fair and just. If he's making a 75% markup, I want to know about it, and I'll certainly try to prevail upon his better nature or take my business elsewhere."

You don't understand... if something is marked up 75%, there most likely isn't business elsewhere. Is someone else selling iPhones besides Apple? Are they cheaper? Get the picture? If I told you Oil was being sold at a 100% markup, are you going to trade in the car for a bicycle as a show of "taking your business elsewhere?" No. You are either going to buy this "widget" for "this price" or you aren't. Supply and demand set the price, not it's known markup. If you are going to use markup in your purchasing decisions, know that it will have zero effect on everyone elses purchasing tends, and therefore will do nothing more than satisfy your strange needs to not give too much profit, even if demand supports it.

Good luck.

Re:that math is wrong

[mr_matticus]

Getting to within 10% of the cost of goods sounds fantastic to me. Within 20-25% still sounds not bad. It's a lot better than a total guess, which seems to be what you're suggesting. (gross margins of between 20 and 50 %). Except that it's not. A range of 20% is no better than a total guess, and a range of 10%, while narrowing the gross margin gap by about a third, does not exceed "total guess" for net profit (which ultimately is the only one that matters). In what way do you consider it superior to a total guess?

An error of 20% on a parts bill will move you from one end of the gross margin scale to the other. In other words, the error of the estimated cost rarely does any better than the standard margins on products. Then there is absolutely no guidance whatsoever on net profit figures, which are what really matter. The company itself can be assessed, but it's pure folly to try to do it for individual products.

Let's take a product. Retail price $100, iSuppli guess: $58 for parts. That's 42% gross profit, and we will use your conservative and overly generous 10% range for accuracy. The possible gross margins range from 47% to 36%. What does this mean? That they fall in the normal range of 20 to 50%. What did we learn? Nothing. We already knew it was almost certainly going to be in that range, and regardless of where it falls, it's unremarkable because it's the normal range. The only place it would be noteworthy would be if iSuppli found figures grossly outside that range (e.g. 75% or 5%), and that basically never happens.

What do you gain by knowing that the product is within a normal range of markup? The "smaller iSuppli margin" product could easily be the bigger-margin cash cow, and an attempt to minimize the pocket-lining of corporations can't be undertaken with the information iSuppli supplies, if you'll pardon the pun.

When your margin of error covers the most of the basic spread of possibilities, you're not providing a service. Trying to peg it down to some quasi-accurate Ouija-board figure without any real knowledge gets us nowhere useful. iSuppli rarely, if ever, has provided anything better than a 20% range on a 20% range, which means it has never demonstrated or even rationally suggested that any given product is a better "value" than any other. It relies on faulty analysis for people to make that claim and gives them a quasi-factual, half-true basis to do so. This can only cause harm.

The entire system is highly variable from company to company, and even among products from a single company. Without details, it is impossible to get any accuracy beyond a massive range. Gross profits are usually 20 to 50 percent. Net profits for self-sustaining (i.e. not loss-leaders) products are usually 5 to 20 percent. Anyone offering you any level of accuracy beyond that without specific documentation is lying.

Re:that math is wrong

[GaryPatterson]

(Irritating teenager in an Apple store grasps for iPhone, bugs parents and then just takes one from the stand.)
(Lights flash, teenager freezes mid-grasp.)
(A group of small, odd men enter from a previously unnoticed doorway under the iMac stand.)

Oompa Loompa doopity do
I've got an iPhone here for you.
Oompa Loompa doopity day
Sign here and here and take it away.

What do you get when you follow a craze?
Buying everything to the end of your days.
What do you do when you're nose-deep in debt?
You will pay all your wages, that's a certain bet.

I don't like the look of it.

Oompa Loompa doopity dah
If you are cautious you will go far.
You can live in happiness too
Without credit like the Oompa Loompas doopity do!

(Irritating teenager is sucked down a pipe, parents watch in horror and are led away by an Oompa Loompa)

Re:They make money. So what.

[SamP2]

A business doesn't have to cater to what's BEST for the customer. A business needs, and ONLY needs, to provide the following two points:

- A better product value (this includes technical specs, service quality, license agreement, and of course price) than any other competitor can offer;
- A NET gain for the customer for purchasing the product (in other words, no matter how objectively "crappy" the product is, the customer will be more satisfied buying the product than not buying it.

Out of the whole range of options which satisfies the above two points, a business will always choose one that is best for the BUSINESS, not the customer.

E.g. If more people cared about carrier lock-in and less about the flashy buttonless display, then they wouldn't buy iPhone in particular, would they? Can't say I'm terribly thrilled by Apple's tactics, but I find it perfectly fair that in a free market society where competition to Apple DOES exist, Apple has the full right to say "either take our products how they are and with all strings attached, or take a hike".

If you don't like this business model, then you do not support free market in principle (not preaching whether that is good or bad, just stating the fact).

Re:Too bad apples lawyers do not understand Law.

[Todd Knarr]

Cash must be accepted as payment for debts. IOW if you owe someone money and offer cash in payment, they can't legally refuse to accept it. If you do not owe them money, though, then no debt exists and that rule doesn't apply. A merchant's entirely free to refuse any method of payment for a transaction where no debt exists yet.

For the iPhone, this means that if you walk up to the counter wanting to buy, they're allowed to refuse to sell for cash. Once you've bought the phone and used the service and now owe them money for that service, however, they're not free to refuse a cash payment.

Re:Too bad apples lawyers do not understand Law.

[rueger]

Sigh... from the US TREASURY PAGE that is LINKED from THE SUMMARY above:

Question: I thought that United States currency was legal tender for all debts. Some businesses or governmental agencies say that they will only accept checks, money orders or credit cards as payment, and others will only accept currency notes in denominations of $20 or smaller. Isn't this illegal?

Answer: The pertinent portion of law that applies to your question is the Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled "Legal tender," which states: "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.

Of course, perhaps you just don't believe what the US Government would write on their own web site. Which raises the question of why you would trust their currency enough to use it.

useful information

[m2943]

People say things like "it's Apple's right" and "good for them". Of course, it's Apple's right to do those deals.

Nevertheless, where do you think this money is coming from? Do you think that AT&T is giving that to Apple because they are such good buddies?

No, you are paying for it one way or another (e.g., by paying a premium for their sluggish EDGE service).

Re:Freeing the Hardware

[thbb]

This is the legislation in France, where the iPhone will be sold by Orange before the end of the year.

The legislation says that "linked sale" (vente lie'e) is forbidden: if you offer some good for sale, you are not allowed to force the buyer to buy a service together with this good.

There has been a debate in the press about whether Apple would renounce selling iPhones in France or find a workaround.

The trick Orange will use is to propose the iPhone at a prohibitive price (1000 euros?) and offer a massive discount for any plan purchased with it. But consumer watch organizations are quite powerful here, and they could sue if they show the price is too high and the scheme is actually a disguised "vente lie'e". The consumer watch organization are allowed to use surveys and statistical analyses to show this, so Orange and Apple will have to play tight at this game.

BTW. I'm surprised so many of you in the US have plans around $60/month. I pay 14 euros/month for basic service, but it's plenty enough airtime.

Re:Cingular/AT&T doesn't get my phone purchase

[porcupine8]

I don't think that's true anymore. Many people choose to live within their means these days when Credit Card Companies screw everyone but the very wealthy with astronomical percentage rates and draconian fee structures.

LOL. Yes, and they also don't take out zero-down mortgages, make car-buying decisions based on the monthly payment rather than the total cost, or rent extra-fancy furniture/tvs/etc when they could buy cheaper versions.

Average number of credit cards per U.S. household: 12.7

Just because you and your few closest buddies have some clue about financial planning, doesn't mean 99.9% of people do.

Someone has to say it ...

[lotsofsand]

You're clearly comparing Apples and Oranges here.