A Respectful Conversation Regarding The iPhone Nano

  • Posted: 28 June 2011 12:02 AM #31

    For the prepaid market segment, is it possible that Apple somehow reverts back to the original iPhone revenue sharing plan with the carriers to where they sell a reasonably price phone without a plan commitment and share in the ‘pay as you go’ data plan revenue…and any other slices of revenue they negotiate?  The idea of the 3GS could be a possibility depending on how much it currently costs to produce since it’s possible they could sell it reasonably cheaply and apple could still make some gross margin…..albeit less than the current iphones.  Maybe they could have less NAND storage to help out a little bit and cut some other corners that aren’t considered too important to the customers.

    I know that’s not apple’s standard MO to potentially sacrifice some upfront mgn on hardware sales, but due to the large numbers involved, and with apple’s cash and financial position, they could choose to sacrifice some initial gross mgn to land more mkt share and get more people ingrained into the ecosystem.  And they’re obviously more capable now financially to delay revenue and cashflow so now could be the time to embrace that strategy.

    One caveat though is that I seem to remember that some countries may not allow those revenue sharing agreements but I can’t recall the details on that.

         
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    Posted: 28 June 2011 12:02 AM #32

    FalKirk - 28 June 2011 02:57 AM
    CdnPhoto - 28 June 2011 02:43 AM

    Until very recently, I would have been the “No way” camp. Since then, I’d thought about what a lower model unsubsidized phone would mean.

    During my thought process, I recalled the last conference call where Tim Cook was asked about the PayGo:

    Gene Munster - Piper Jaffray Companies

    And a question first on the iPhone. Demand, obviously, has been phenomenal. And if we look down the road at the opportunity in the post- versus the prepaid markets, are there any considerations that you can share in terms of—that you weigh, in terms of price or subsidies or growing market share in this large prepaid market?

    Timothy Cook

    Gene, it’s Tim. Our focus has very much been on China. We wanted to understand that market and understand the levers there. And as I said before, we’re—iPhone sales were up over 3x during the quarter. And in the first half, we did over 5—just slightly under $5 billion in Greater China in revenue, which is about 10% of Apple, to put it in perspective. And it wasn’t but a couple of years ago that, that number would have been less than 2. And so it’s a sea change. And that’s certainly not, what I would call, a classic post-pay market by any means of the imagination. And so we have some ideas about other countries as well. I’m not in a position that I want to share those today. But we purposely put the bulk of our emphasis from an emerging market point of view on China to really learn, and then we’re going to take that learning to other markets.

    Gene Munster - Piper Jaffray Companies

    Would you know if China, if more than half of—do you know if more than half of China is prepaid?

    Timothy Cook

    I think considerably more than half of China’s prepaid, Gene. I think the first digit would start with a 9.

    When taking this with the comments by TC in the January CC where he said China was a priority, to me this suggests that Apple (and more appropriately, TC) is looking at a PayGo phone. If not for all markets, then at least for China.

    Did you (all) see this chart from Asymco?

    It takes your breath away.

    You can find it and Horace’s artcle, here.

    I hadn’t. His site wasn’t updated when I looked this morning. I’m glad to see the “start with a 9” comment on his site.

    I think in that part of the world, they’ve become accustomed to prepaid. The question is which is easier, to make a phone for that market or to change the minds of a billion plus people to go for a subscription model.

    This isn’t just about China either. In India, IIRC, the model is to pay for the phone up front and get credited back as you keep the phone.

         
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    Posted: 28 June 2011 12:03 AM #33

    Horace: ...most pre-paid subs see a full price for the iPhone (retail around $700 to $1000) vs. post-paid customers seeing a price of $200 or below. The $200 happens to be an important psychological price inflection point where volumes increase dramatically.

    I don’t think Apple is interested in the $200 smartphone market. They will go for the high-end of the pre-paid market. As usual, they don’t focus on unit market share as much as revenue & profit share. They want the top 10% of the pre-paid market, the segment that will provide 50% of the profits.

         
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    Posted: 28 June 2011 12:03 AM #34

    adamthompson3232 - 28 June 2011 01:59 AM
    iOSWeekly - 28 June 2011 01:42 AM
    mstefa - 28 June 2011 01:15 AM

    China mobile has more middle class customers
    than US as a country . If not this year, very soon.Asymco
    shows more postpaid customers in Asia than US
    and Canada together. Why would Apple go after
    lower profit market when it can’t even maximize
    the higher profit side due to production constrains?
    What am I missing?to use analogy, restaurant can’t make enough
    steaks at 20$ a pop, so let’s use the grill
    to warm up garlic bread instead?
    Me thinks get another grill and buy more meat!!

    if you head over to the AFB 3Q estimate index apple is predicted to be producing less iphones this quater than Q2, so it is pretty hard to argue apple hasn’t caught up production wise with current demand. likewise the shipping within 24 hours from the apple store for iphones has been there all year - the iphone demand/supply equation is now solved.

    Production is FAR from meeting demand. When iPhone is on 400+ carriers and the smart phone market stops growing we’ll see how high demand is. I suspect if we were on 400+ carriers today demand would be 50%+ higher than it is today. And the market continues to grow substantially (roughly 50% YoY). So any argument based on current production meeting demand is severely fundamentally flawed unless you are assuming there is zero incremental demand to be realized from adding carriers? If so, are you suggesting China Mobile is irrelevant to iPhone demand?

    I think the incremental add from new carriers is less than the growth the overall smartphone market will experience. yes I agree China Mobile will be a signifiacnt boost, but Tim Cook himself said over 90% of chinas mobile customers are prepay consumers, so I can’t see apple getting sustained growth in china after a large initial bump to start serving that 10% postpaid (a small amount of who would have bought on the greymarket).

    Edit: To clarify, I cant see apple having sustained iphone growth in china with an iphone priced at the equivalent of $649 USD.

    [ Edited: 28 June 2011 12:08 AM by Burgess ]

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    Posted: 28 June 2011 12:28 AM #35

    adamthompson3232 - 28 June 2011 03:16 AM
    iOSWeekly - 28 June 2011 03:03 AM
    adamthompson3232 - 28 June 2011 01:59 AM
    iOSWeekly - 28 June 2011 01:42 AM
    mstefa - 28 June 2011 01:15 AM

    China mobile has more middle class customers
    than US as a country . If not this year, very soon.Asymco
    shows more postpaid customers in Asia than US
    and Canada together. Why would Apple go after
    lower profit market when it can’t even maximize
    the higher profit side due to production constrains?
    What am I missing?to use analogy, restaurant can’t make enough
    steaks at 20$ a pop, so let’s use the grill
    to warm up garlic bread instead?
    Me thinks get another grill and buy more meat!!

    if you head over to the AFB 3Q estimate index apple is predicted to be producing less iphones this quater than Q2, so it is pretty hard to argue apple hasn’t caught up production wise with current demand. likewise the shipping within 24 hours from the apple store for iphones has been there all year - the iphone demand/supply equation is now solved.

    Production is FAR from meeting demand. When iPhone is on 400+ carriers and the smart phone market stops growing we’ll see how high demand is. I suspect if we were on 400+ carriers today demand would be 50%+ higher than it is today. And the market continues to grow substantially (roughly 50% YoY). So any argument based on current production meeting demand is severely fundamentally flawed unless you are assuming there is zero incremental demand to be realized from adding carriers? If so, are you suggesting China Mobile is irrelevant to iPhone demand?

    I think the incremental add from new carriers is less than the growth the overall smartphone market will experience. yes I agree China Mobile will be a signifiacnt boost, but Tim Cook himself said over 90% of chinas mobile customers are prepay consumers, so I can’t see apple getting sustained growth in china after a large initial bump to start serving that 10% postpaid (a small amount of who would have bought on the greymarket).

    Edit: To clarify, I cant see apple having sustained iphone growth in china with an iphone priced at the equivalent of $649 USD.

    If 10% are postpaid and China Mobile has 700M (is this an accurate number?) then we’re talking about 70M postpaid on China Mobile alone. If Apple can get half of them long term we’re talking about 35M per year. The total number of postpaid subscribers may also increase over time but assuming no growth on that front it will take Apple years to get those 35M sales. Additionally, CM is just one carrier. We have 200 more carriers to add over the next several years. That will yield substantial growth. Just look at the 1M iPhones currently running on T-Mobile. That tells you there is huge demand still on new carriers that don’t current offer the iPhone.

    If it is possible for Apple to double iPhone production in 2012 and still somehow have additional capacity leftover to make some other lower end phone I think Apple will consider this possibility. But I don’t think this is possible so I don’t think it will happen. There is massive upside still for the “regular iPhone” and until that is met I wouldn’t focus any energy on serving the lower end of the market.

    I agree with you on the figures for growth potential in the Postpaid market and that apple doubling iphone production next year. But I think you may be underestimating the importance and size of the potential prepaid smartphone market outside the US. to remain in the game from a marketsahre perspective, apple may need to double the prodution of the iphone models as it currently does, as well as introduce a whole new production line for a cheaper line of iphone Airs, or else suffer being marginalised to a niche vendor outside of the postpaid-dominated US/european markets.

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    Posted: 28 June 2011 12:29 AM #36

    FalKirk - 28 June 2011 02:40 AM

    There?s enough Claim Chowder on me to feed greater Boston Metropolitan area for over a decade.

    And I’ve got the SF bay area covered. I serve my chowder with sourdough bread. smile  I hope my comment was taken as friendly ribbing.

    I personally use these discussions/debates to adjust my opinions. There are good arguments on both sides of the question.

         
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    Posted: 28 June 2011 12:39 AM #37

    adamthompson3232 - 28 June 2011 02:01 AM

    When TC said they have some CLEVER ways of addressing this market do you think he was referring to a cheaper iPhone? I would bet a very large amount of money that TC doesn’t think cheaper is clever at all.

    Good point, but it wouldn’t just be cheaper. It would need to adapt to the pre-paid market. Maybe the clever part would be some modification of the pre-paid business model.

    BTW, I’m finding it hard to keep up with rapidity of replies on this discussion. I seem to miss one every once in a while.

         
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    Posted: 28 June 2011 12:39 AM #38

    I’m just back from 6 weeks around China and I can report that the amount of iphones and ipads that I saw was very healthy.  In 2 years China will surpass Japan as the largest consumer of luxury goods in the world.  The iphone seemed to be the top pick, way more than Blackberries.  Canon was 80% of the camera market with very few Nikons, which I found interesting.

    Though it was definitely the upper class that had the products I did see a young bus driver in the far west toting one (and using it while driving) so it is something to aspire to.

    As to whether Apple will introduce a “nano” iphone my thinking goes like this.  Many are saying that Apple doesn’t need to produce such a phone as they can sell every one they can make.  But this thinking is where the puck is.  Apple has proved willing to cannibalize themselves and in this situation, bringing out a nano phone would do just that: gain market share at a critical moment in the smartphone wars when most would say there is no need.  Apple’s “mission” is to bring ease, elegance and quality of computing to the masses.  If someone takes away the middle and low end eventually they will be marginalized and I think their experience has shown that there are unique ways to reinvent the “low end” just like they did with the mini (tablet) computer.  Perhaps it will be a low power cloud based app phone with a lower res screen.  I don’t know but I’d bet they are about to expand into the middle of the market soon.

         
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    Posted: 28 June 2011 12:52 AM #39

    Bryanyc - 28 June 2011 03:39 AM

    Many are saying that Apple doesn?t need to produce such a phone as they can sell every one they can make.  But this thinking is where the puck is.  Apple has proved willing to cannibalize themselves and in this situation, bringing out a nano phone would do just that: gain market share at a critical moment in the smartphone wars when most would say there is no need.  Apple?s ?mission? is to bring ease, elegance and quality of computing to the masses.

    Good point. I’m not sure there would be significant cannibalization. How much is the 3GS cannibalizing the iPhone 4? How much would the iPhone 4 cannibalize the iPhone 5? Not enough to really slow down sales of the lead device.

         
  • Posted: 28 June 2011 01:05 AM #40

    Drew Bear - 28 June 2011 03:29 AM
    FalKirk - 28 June 2011 02:40 AM

    There?s enough Claim Chowder on me to feed greater Boston Metropolitan area for over a decade.

    I hope my comment was taken as friendly ribbing.

    Absolutely. I made my comment with that understanding.

    Drew Bear - 28 June 2011 03:29 AM

    I personally use these discussions/debates to adjust my opinions. There are good arguments on both sides of the question.

    Agreed. I started this discussion precisely to see if I could learn from it.

         
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    Posted: 28 June 2011 01:24 AM #41

    Bryanyc - 28 June 2011 03:39 AM

    I’m just back from 6 weeks around China and I can report that the amount of iphones and ipads that I saw was very healthy.  In 2 years China will surpass Japan as the largest consumer of luxury goods in the world.  The iphone seemed to be the top pick, way more than Blackberries.  Canon was 80% of the camera market with very few Nikons, which I found interesting.

    Though it was definitely the upper class that had the products I did see a young bus driver in the far west toting one (and using it while driving) so it is something to aspire to.

    As to whether Apple will introduce a “nano” iphone my thinking goes like this.  Many are saying that Apple doesn’t need to produce such a phone as they can sell every one they can make.  But this thinking is where the puck is.  Apple has proved willing to cannibalize themselves and in this situation, bringing out a nano phone would do just that: gain market share at a critical moment in the smartphone wars when most would say there is no need.  Apple’s “mission” is to bring ease, elegance and quality of computing to the masses.  If someone takes away the middle and low end eventually they will be marginalized and I think their experience has shown that there are unique ways to reinvent the “low end” just like they did with the mini (tablet) computer.  Perhaps it will be a low power cloud based app phone with a lower res screen.  I don’t know but I’d bet they are about to expand into the middle of the market soon.

    Down here in NZ, the iPhone has 90% smartphone marketshare despite only being on one of the 2 main carriers and despite costing $750 USD subsidised on the most common smartphone plan. Tere is however a huge market for 2nd hand iphones which commonly sell for up to $400 USD for a last gerneration 8Gb model. I’d quite happily estimate that for every new iphone sold here, at least two thirds are resold to another user.

    It is the huge market for 2nd hand iphones that must have been noticed among many developed nations that will catch apples eye - a lot of 2nd hand sales at $300-$400 USD is money apple could be getting for a new iphone if there was a model priced at $400-$500 new unsubsidised.

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  • Posted: 28 June 2011 08:32 AM #42

    A couple of years ago, all the analysts were demanding that Apple produce a netbook. All the arguments were the same. Apple needed to address the low cost market. Instead, Apple produced the iPad and we all know what happened to netbooks after that.

    I don’t think that Apple is going to create a smaller or lower cost iPhone. But that doesn’t mean that Apple isn’t going to address the pre-paid market. I expect Apple’s solution to be as different from the iPhone as the iPad was different from the MacBook; as different from the low cost pre-paid phones as the iPad was different from the netbook.

         
  • Posted: 28 June 2011 10:45 AM #43

    Apple has a choice of additional iPhone markets to enter: more providers with current models, special phones for China and India, pre-paid phones, stripped down phones with lower prices, etc.

    All of these require R & D and additional manufacturing capability, and this must be resolved before additional market expansion is initiated.  I have little insight into what a Foxcomm/Apple manufacturing line looks like other than that it must be highly automated with lots of robots inserting parts.  I wonder how flexible they are in terms of switching from one model to another.  I wonder what is required to convert a line to a new product.  I am sure that throughput per line has increased over time, and a new line installed today must look different than one installed four years ago.  I have no idea how long it takes to install additional capacity and how long it takes to bring it to full capacity.  Most important, I wonder what the ROI and payback time is for adding new capacity.

    All of this is relevant to the decision of what market to tackle next.

    I would surmise that the highest priorities would be prepaid phones for China and India, and expanding the iPhone to other carriers while continuing to introduce new ans improved variants for the existing markets.  I could see this as requiring a tripling of manufacturing capacity (not all at once!).  This is an incredibly large challenge and opportunity for Apple/Foxcomm.

    With this on their plate I can?t see tackling a totally new, low cost model for the masses as having a high priority at this time.

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    Posted: 28 June 2011 06:35 PM #44

    adamthompson3232 - 28 June 2011 04:07 AM

    Another WS genius says no iPhone nano coming. That makes two geniuses today in the “against” camp and one in the “for” camp. Not that that means anything.

    http://www.appleinsider.com/articles/11/06/27/analyst_casts_doubt_on_reports_of_next_gen_low_end_iphone.html


    Hold on Adam. I am on record since 07 against the iphone nano. Nothing has changed. I just am not going to get into all of this all over again for the umpteenth time. tongue laugh


    BTW, shame on you Fal, just stirring the pot I guess.

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  • Posted: 28 June 2011 07:17 PM #45

    mbeauch - 28 June 2011 09:35 PM

    BTW, shame on you Fal, just stirring the pot I guess.

    I truly want to understand. Sadly, I still don’t. Like the iPhone, iPad, iCloud and a host of other items, I think that Apple has all the cards and they’re not giving any of us a peak.

    I guess we’ll just have to wait until Apple shows their hand.