Apple Can Target 500 Million New iPhone Subscribers
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Remember the days when Nintendo (NASDAQOTH: NTDOY.PK) first released its Wii? The company launched the gaming platform before Christmas, hoping that the buzz of Christmas shopping would ignite sales. And Nintendo was right.
The Wii was so hot that stores couldn’t keep it stocked. Customers camped out in line in hopes of being able to acquire the coveted Wii, and profits accrued to the gutsy entrepreneurs that paid friends to wait in line with them so that they could sell the new Wiis on eBay, where Wii prices were exorbitantly high.
Like the Wii, the hot launch of the iPhone 5 is another Apple (NASDAQ: AAPL) product to sell out – except that its launch leaves the Wii in the dust. With demand outstripping supply, Apple likely could have sold more than “over five million” iPhones over the first weekend. However, producing more iPhones is just one way for Apple to sell even more phones. Apple also has a bench full of potential new distributors.
A large part of Apple’s success has come from adding carriers. Apple originally started with AT&T (NYSE: T) only in the United States. Being the sole distributor of the iPhone is like having the only excavator during the gold rush. Though heavy iPhone usage weighed on AT&T’s network, Apple lovers used AT&T. And it even sold out of pre-ordered iPhones when Apple made a new release. Obviously, AT&T benefited from selling the iPhone.
But now AT&T does not have an iPhone monopoly. According to The Wall Street Journal, “By last December, after the launch of the iPhone 4S, Apple's smartphone was with 230 carriers in 105 countries. That helps explain why iPhone sales grew to 93 million devices in 2011 from 4 million in 2007.”
One of those firms that saw a huge profit was Verizon (NYSE: VZ). Verizon announced that its operating margin hit a record 31.8% last quarter. Also, it activated an astounding 3.4 million Android phones and 3.1 million iPhones, 651,000 of them iPhone 5 models. The gusto brings Verizon to a total of 90.4 million retail postpaid connections.
In 2011, Sprint (NYSE: S) began offering the iPhone 4S. Having three major U.S. carriers exploded the iPhone’s growth. When the iPhone 4S hit the market, pre-orders topped 1 million in the first 24 hours, according to Apple’s website. Sprint’s $15.5 billion payment to Apple over the next four years for the iPhone may not pay off until 2015. However, Sprint expects the iPhone to add to its profits, to slow customer defections, and to bring on new users.
Apple still has a number of expansion options. T-Mobile USA, South Korea’s LG Telecom, Japan’s NTT DoCoMo, and China Mobile are large carriers that do not yet offer iPhone 5. The latest iPhone is the first of its kind to offer a chip compatible with China Mobile, the world’s largest carrier.
One analyst estimates that Apple can still target 500 million subscribers, a 50% increase from the 1 billion already targeted by Apple’s current carriers. Further, of those 500 million, only 175 million come from the T-Mobile, LG Telecom, NTT, and China Mobile.
New carriers offering iPhone would add enormous profits to Apple’s coffers, and it would spur further growth. However, once the distribution channels start maxing out, Apple’s iPhone will likely move from a tremendous growth story to a cash cow – a product that could potentially fund other Apple innovations.
No doubt that, upon release, the new device has become akin to a fixed commodity – there are only so many phones that Apple can produce, but there are millions of hungry buyers who want to buy them. Every year Apple makes its product available to a new network of people, boosting its sales figure. But this year – at least in the short-term – the company ran out of phones to sell.
Like Nintendo, Apple’s iPhone 5 has become something of a coveted commodity. The difference is that while the Wii was a shorter hit, iPhone upgrades are here to stay.
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Evan Niu, CFA owns shares of Apple, AT&T;, and Verizon Communications. The Motley Fool owns shares of Apple. ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and AT&T.; Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.