The iPhone: Apple's $3 Billion Cash Cow

Dan Knight - 2007.07.25, updated 2007.07.26 - Tip Jar

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I stopped by the local Apple Store yesterday to buy an iTunes gift card. It was the first time I'd actually seen the iPhone.

I was struck at how small and thin the iPhone is. All of the photos make it look big, but maybe that's just to show off the very high resolution display.

I had to use Safari to check out Low End Mac, and I discovered that the site seems to be unreadable on the iPhone. I also discovered that the virtual keyboard works fairly well the first time you try it.

How Many Sold?

The big question that Apple will answer this afternoon is how successful the iPhone has been in terms of sales - at least through June 30.

AT&T has revealed one piece of the picture. 146,000 iPhones were activated on June 29 and 30. Add to that phones purchased on those dates but not activated until July 1 or later. And add to that phones ordered online that reached customers after July 1.

My guess is that Apple shipped 300,000 iPhones to AT&T stores, Apple retail stores, and through Apple's online store. I'm sure the actual number will be part of Apple's financials released later today. [Update: Apple noted sales of 275,000 iPhones during its first 30 hours on the market.]

How Much Profit?

Let's look at the big numbers: How much money is Apple making from the iPhone?

None of the following figures are known; they are all best estimates. Where numbers cover a range, we use the lower figures in our calculations.

Estimated cost to produce the $500 iPhone is $250. Let's assume that Apple sold half to AT&T at $400 and the remainder through its own channel at $500 (ignoring the extra profit from the 8 GB model).

150,000 phones at $150 profit plus 150,000 phones at $250 profit equals $60 million in profits.

Best guess figures for Apple's kickback from AT&T for each two-year iPhone service contract is $150 for AT&T subscribers and new accounts, $200 for those switching from another carrier. Let's assume 25% fall into the latter category.

225,000 phones with a $150 bounty plus 75,000 phones with a $200 bounty equals $48.75 million in additional income.

Finally, it seems that in addition to all of this Apple will be receiving $7-9 per month for the two years of the service contract.

300,000 phones at $7 per month times 24 months equals $50.4 million.

Let's add that up: $60 million from retail sales plus $99 million "bounty" from AT&T means $159 million added to Apple's bottom line over the next two years.

And that's just from first week iPhone sales.

Apple contracted to build 6 million iPhones over its first year and hopes to sell at least that number. (It also has the option to produce 3 million more.) Multiply first week numbers by 20 and first year iPhone sales should add over $3 billion to Apple's coffers.

That's assuming all sales are of the $500 model and that Apple only sells 6 million units.

The incredible thing is that if it costs Apple $250 to produce an iPhone, it makes back its entire production cost and then some ($300) each time one is sold through an AT&T store to an existing AT&T customer without even looking at the monthly kickback.

And the numbers are even better for iPhones sold through the Apple Store or purchased by those switching from other carriers.

Most of this won't show up in today's financials. Apple probably shipped 300,000 iPhones in June, making at least $60 million right there. The other money will come in during the months and years ahead.

No wonder analysts are projecting Apple stock to hit $200. And pretty impressive for a company that was "beleaguered" just ten years ago.

Dan Knight has been using Macs since 1986, sold Macs for several years, supported them for many more years, and has been publishing Low End Mac since April 1997. If you find Dan's articles helpful, please consider making a donation to his tip jar.

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