Stop the Noiz

Apple's iPhone Crushes Netbooks Where It Counts

Frank Fox - 2009.08.11 - Tip Jar

Here is a simple formula everyone who writes about business should know:

Units sold x Avg. price x Profit margin = Gross profit

Using this simple formula, we can see that Apple is in a much better position with the iPhone than all the other computer makers combined are doing with netbooks.

Let's do the math and prove our point.

Projected 2009 Netbook Sales

First, let's find out how many netbooks are going to be sold this year. Display Search predicted that worldwide sales of "mini notebooks" would grow to over 33 million. That is a huge growth in this market when compared to the 16.4 million sold in 2008. The netbook is definitely on a growth trend; I'll be extra generous and estimate that 34 million will be sold by year end.

Next, we need an estimate of the average selling price for a netbook. Netbooks are mostly selling at a price between $300 and $500. For example, the Dell Mini 10V starts at $299, and fully tricked out it goes up to $474. We'll set the average price at $400, but high volume sales of the lower priced models could pull the average lower.

Finding the average profit margin is not going to be exact, but typical margins at Dell are between 15% and 20%. Just to be extra fair to the PC makers, we'll use the higher value of 20%.

Projected 2009 iPhone Sales

Time to do the same for the iPhone. The last three quarters sales of iPhones are as follows:

The average is 4.5 million units per quarter - 18 million for the year. Since the iPhone has continued to sell well during the recession, and because the iPhone 3GS is a new model, I will go out on a limb to raise my estimate to 20 million for the year.

What does the iPhone actually cost? The iPhone you buy in the store is subsidized by AT&T, so you pay $199 for the 16 GB version, but AT&T subsidizes this by several hundred dollars. Early reports stated the 16 GB model costs AT&T $599.

It is possible that AT&T will pay less as time goes on, if the price they pay is based on units sold. In other words, $599 for the first million and then a price break for every million iPhones sold after that. So just to be fair, we could say that AT&T is paying Apple on average $400 to $600 per iPhone.

The average profit margin on any item is not something Apple gives out. We have to look at typical margins for Apple - usually 33% to 35%. We also have data from iSuppli that estimates the price of components and assembly at under $200. Apple could have a sizable margin, above 35% per phone. We'll take a conservative approach and use a 35% margin.

Crunching the Numbers

Time to use a little math to finish the comparison off. The iPhone - even at a conservative $400 price to AT&T - is still able to beat the profits on all netbooks sold by every PC vendor in the world. They are not just beating rivals Dell or HP at home; the Display Search data is for worldwide sales.

20 million iPhones 20 million iPhones 34 million Netbooks
$400 avg. price $600 avg. price $400 avg. price
$8 billion in sales $12 billion in sales $13.9 billion in sales
35% margin 35% margin 20% margin
$2.8 billion gross profit $4.2 billion gross profit $2.7 billion gross profit

What makes this so bad for the rest of the PC vendors selling netbooks is that I didn't try to include the iPod touch in the comparison. The iTouch is popular, selling in the millions, and it has a similar price and markup. Unfortunately, Apple doesn't break out sales of the iTouch from other iPod models, so it is hard to get good numbers to use.

When Apple says that they see the iPhone as a device that competes with netbooks, believe them. It not only competes, but it crushes all the competition in what matters most to a company, profits. Apple not only makes more on each unit sold, they rake in still more selling songs, videos, and apps to use on their hardware.

Looking Ahead

The other half of the story is that the sale of netbooks will level off long before the sale of iPhones. Netbooks are laptop replacements, with a market today of 130 million.

The cell phone market today is in the billions. If Apple chooses to diversify the iPhone, as it did with the iPod, it could someday be the kind of phone everyone uses. LEM

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