Thursday, June 26, 2003

Let the iPhone Hysteria Begin

The only email spam I consistently read comes from Apple. Every few weeks, they always manage to come out with some new iPod add-on that I must own. I think I’ve now spent over $1000 on accessories for my $179 video iPod.

Somehow this Apple spam consistently avoids the Bulk folder of my Yahoo! Mail account (while my girlfriend’s emails get flagged as spam. wtf?). Today’s message reminded me of this Friday’s iPhone launch. Being an Apple shareholder (AAPL), you’d think I would remember such an important date. But the iPhone hype has been on overdrive for so long that it’s easy to ignore when it dominates the headlines for 6 months.

Also today, Apple & its exclusive carrier AT&T announced 6 different service plans ranging from $59.99/mo for only 450 minutes to $219.99/mo for 6000 minutes. These monthly fees are on top of the $499 price tag for the 4GB model and $599 for the 8GB model based on a two-year service contract.

The $3000 Hobby (and Other iPhone Hurdles)

Judging by today’s selloff, I think potential customers are starting to realize how expensive the iPhone will be. If you sign the mid-range $99.99/mo service plan after purchasing the 8GB iPhone model, that alone will set you back $3000 during the two-year contract (without any accessories)!

Here’s a few other potential hurdles that could prevent the iPhone from exceeding its already lofty expectations:

  • You must be an AT&T customer to use the iPhone. With a market share of 20%, that means 80% of wireless customers must cancel their current contracts to sign with AT&T. Being a Sprint customer, I would have to pay a $175 cancellation on top of the $3000 price tag for the iPhone. AT&T’s exclusive contract runs through 2009.
  • Only 4 & 8GB of hard drive space? My tiny video iPod holds 30 GB for less than $200.
  • Recent surveys have shown that the majority of IT departments will not even consider the iPhone due to its PC incompatibilities & exclusive AT&T contract. That will dampen business spending & all but eliminate demand for the higher-tier contracts.

“Sell the News”

On Jan 9th 2007, Steve Jobs announced the iPhone at the Macworld Conference & Expo. The stock has since been on fire rising 50% to $125, adding $30 billion to the company's market capitalization. Will the iPhone really hold that much value for Apple? This huge runup comes after a fantastic finish to 2006 after Apple’s stock bottomed out at $50 in October. Thus, nearly everyone holding Apple is sitting on huge gains.

Expect an Apple selloff following the iPhone launch. 3 similar mini-selloffs have occurred during this recent runup:

  • June 26th: Apple announces 6 AT&T service plans for the iPhone. The stock drops 3% on investor concerns over the high prices.
  • June 11th: Steve Jobs shows off the iPhone at Apple’s World Wide Developer's Conference. The stock falls 5% after investors saw no “surprises”.
  • March 20th: Apple beats 4th quarter analyst earnings & revenue estimates. The stock falls on profit taking.

Apple’s recent success has created impossible expectations. With all the mega-hype already priced into the stock, just meeting expectations will create a selloff. Longer-term investors need not worry because the future looks bright with Macs gaining market share & the iPods continuing their dominant foothold on the music industry.

12 Comments:

At 9:33 AM, Blogger Hans said...

Hi Eric,
Thanks for the comment on my post about the iPhone . You present some very interesting arguments, and I can certainly understand your position. I, however, respectively disagree. But, it's good to see some well thought out analysis.

I agree that the AT&T network will be an issue for many people and it will be when a Canadian GSM carrier(i.e., Rogers) is found. But like I said, I think having the "real" interent is going to do wonders. Because of my Blackberry, I need far fewer voice minutes than ever before. Like I said in my post, the iPhone isn't for everyone.

Note: I, too, own shares in Apple (I've had them since 2002).

 
At 11:35 AM, Anonymous Joshua Tjia said...

Hi Eric,
Thanks for your post. I really like the iPhone. I thought it is the most amazing product in a long time. My wife wants it the first time she saw it :-). I have used all kinds of gadgets from Palm to Pocket PC, to blackberry. The iPhone looks really tempting. Thanks for putting the expenses of switching into perspective. I did not think about the $3,000 investment. And that's per device. We just switched to Verizon Wireless a few months too. We like VZW coverage. I know that at some area where my customers are, I don't get good reception from AT&T (some of their employees are on AT&T). So, I have to skip AT&T. But, the iPhone User Interface is really tempting.

Joshua

 
At 12:37 PM, Blogger cgull said...

Thanks Eric, but I think when you compare this phone with a BlackBerry or a Treo, you will get similar, maybe iPhone might be a higher for a 100 or 200 dollars more than them. But I think you should look at the use experience aspect. I think it is a wonderful and an innovative one. If other phones does give a similar experience, then it is good for the consumers. There are ways to work around switching to AT&T, I saw one article earlier today. There is always some hype, but so far what they showed on Ads and how the reviewers are feeling and doing the same things, give us some assurance that it really is the same as advertised. Let us wait and see what happens.

 
At 10:56 PM, Anonymous Piot said...

Eric, AT&T's service plans for the iPhone seem to be around the industry average for voice/data packages. It doesn't appear that you will have to pay MORE to use an iPhone .... maybe even a bit less. We have known the price of the hardware for 6 months ... so what's your point?

"With a market share of 20%, that means 80% of wireless customers must cancel their current contracts to sign with AT&T"
So are you saying that for Apple to be successful with this product they need to nab 100% of US wireless customers?

"I would have to pay a $175 cancellation on top "
Or you could just wait until your current contract expires. You don't have to buy the iPhone immediately!

"My tiny video iPod holds 30 GB"
Yeah! And how many GB does your phone hold?

 
At 2:49 PM, Blogger Eric B said...

Piot,
To your questions:

1) the iPhone service plans are different than AT&T's other products...
2) 80% of potential iPhone customers have to get out of their current contracts just to sign up with AT&T (aka "switching barriers"). again, the iPhone will be a great product but will not live up to the excessive expectations.
3) i agree that most people will wait. that's why the stock may struggle as initial sales #s will be weak.
4) the iPhone is supposed to replace your PDA, mp3 player & phone into one single gadget. if it only holds 8GB, people will continue to have separate gadgets. the iPhone fails in that respect.

 
At 9:22 AM, Anonymous Piot said...

1) Yes. AT&T plans are different. They actually appear to be MORE expensive for their other smartphones (Similar minutes/messaging/data). My point is that, when you say "starting to realize how expensive the iPhone will be" you fail to point out that the plans are .... pretty much the same as all the others.

Signing up to 1350(ish) minutes plus unlimited data is going to cost you around $2500 (+ the cost of the phone over 2 years) from ANY carrier.

2) AT&T and Apple don't need the whole 80% to switch. If only 10% switched, AT&T would have added 50% more customers!

And they don't have to switch this week.

3) Alternatively it might just grow at a steady pace as AT&T announce new customer figures over the next 18 months.

4) Poor argument. Apple's most popular iPod is the 4GB Nano. Not everybody wants to walk around with a pocket full of memory cards.

Yes it would be great if there was a 160 GB iPhone but it''s not a deal breaker.

 
At 1:35 PM, Anonymous Anonymous said...

Piot, I think you are missing his point. This iPhone is advertised as the end-all-be-all to replace all your media devices. But you have to spend $2500 - $5000 for a small iPod, avg phone, and inferior PDA. And he's not saying Apple needs 100% of customers to switch!!! Sheesh. The Iphone estimates are so high that these barriers to switch are going to disappoint investors.

Good article. I sold last month...

 
At 3:13 PM, Blogger Eric B said...

yes, 80% do not HAVE to switch. i never said that. just that these potential iphoners have a high cost to change carriers. sorry for the confusion.

i sold on thursday & it's held up thus far. monday should be interesting!

for now i'll stick with my $180 40GB iPod and $0 phone with a $35/mo plan. but judging for this weekend's crowds, many have already switched.

 
At 11:04 PM, Blogger JJ2000426 said...

The stock100.com prediction of SWC looks pretty impressive. Double in 30 days:
http://www.stock100.com/charts/200-30-SWC.gif

Don't you think it is time for next rally.

You can reasonably expect a 2000% return. No kidding it is next AAPL! The fundamental is incredibly good. Just research palladium.

 
At 6:43 AM, Blogger Eric B said...

Apple is falling today while the rest of the market (including tech) is up. Estimates have 500,000 being sold.

 
At 1:30 PM, Anonymous Piot said...

"i sold on thursday & it's held up thus far"
So. just for the record.... about $121 ?

AAPL up nearly 10% today. $132.75

 
At 2:05 PM, Blogger Thomas said...

good call brother, hope you made out on the dxd short too

eric b, u and rakim kick ass too

 

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