Missing iPhones not Really Missing, Says Analyst

Calculations that claim Apple Inc. is "missing" 1.4 million iPhones may be missing the point, according to an analyst, who said Monday that talk of uncounted phones overlooks the fact that the mobile market is only a small part of Apple's overall business.

"Stock analysts have been paying lots of attention to the iPhone numbers," said Ezra Gottheil, an analyst at Technology Business Research Inc., "and clearly the revenue [mobile service] providers give back to Apple affect profitability. But if you look at Apple, it's solidly profitable without the iPhone. The iPhone just takes it up to another level."

Gottheil was responding to calculations by Toni Sacconaghi, an analyst at Bernstein Research, that were widely reported last week. Sacconaghi used the 3.7 million iPhones reported sold by Apple and the 2 million activations cited by AT&T Inc. to conclude that about 1.4 million of the devices are either in inventory or have been unlocked.

"Some unknown number of iPhones are being unlocked by purchasers and some, probably a larger number, are being unlocked for resale," said Gottheil. "Some are in inventory. Some will be returned. And some are being used for the non-phone features, as iPhone Touches, until the owners can change their wireless contracts.

"We don't know the proportions," Gottheil added.

Still, he agreed that the calculations were important -- for some, anyway. "It's not a waste of time if you're trying to predict stock prices," he said. "Thank goodness I don't."

Some of the debate over Sacconaghi's estimates has centered around the number of iPhones that have presumably been unlocked, or hacked so that they work with the services of mobile providers other than those Apple has named as partners. Other discussions have focused on whether Apple has actually sold as many iPhones as it claims, or whether a large number are stuck in the sales channel.

While Gottheil argued that there are multiple ways to account for the "missing" iPhones, another analyst, Gene Munster at Piper Jaffray Co., put his money mostly on an increased number of unlocked phones to rebut the idea that inventories had been stuffed.

In a research note to clients, Munster estimated the number of nonactivated iPhones at 838,000, or approximately 25% of the 3.7 million Apple claims to have sold. Munster cited the fact that unlocking has "become easier" in the months since Apple estimated that about 22% of the iPhones sold in the U.S. were bought with the intention of unlocking them.

Gottheil agreed that a high number of unlocked phones would have an impact on Apple's profit statement, but he warned observers not to overlook the big picture.

In the past, Gottheil has estimated the revenue-sharing Apple demands from its partners at about $10 per phone per month. "This is a substantial revenue stream, generated at no cost to Apple, on top of the profit from the sale of the iPhone itself," he acknowledged. "If a substantial number of iPhones are never registered, iPhone profits will be less than currently estimated. Nevertheless, every iPhone sale brings profit to Apple."

He also disputed arguments that the "missing" iPhones mean Apple can't meet its self-imposed goal of selling 10 million of the devices worldwide by the end of 2008. Instead, Gottheil was confident that Apple will meet its forecast.

"Apple likes to make its numbers and will work very hard to make this one," he argued. "There are a lot of deals in the pipeline, and the available market will be much larger later in the year." If it needs to, Apple will reduce prices -- "There is room in the iPhone margin," Gottheil said. Apple will also upgrade the software on existing models and probably release new models as well, he predicted.

"Unless the global economy slows down profoundly, Apple will make the 10 million number, because the company will do everything [it] can to make it happen," Gottheil said. "If iPhone sales fall short of Apple's projections, it will embarrass Apple and disappoint stockholders, but the company will continue to be very successful."