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. 
