By Aidan Malley
Published: 07:00 PM EST (04:00 PM PST)
While some early adopters and investors have criticized Apple for slashing the iPhone's price so soon after its debut, PiperJaffray has remained confident that a $399 iPhone for this fall will be positive -- even after Apple has had to mend its fences with store credit.
Reassuring his company's investment clients, PiperJaffray senior analyst Gene Munster argued in research notes issued late this week that Apple's
new $399 price for the iPhone and the subsequent
Apple Store credit were not signs of desperation on the part of a device maker with cooling sales figures. Instead, these were parts of a longer-term strategy to establish a better foothold in the cellphone market.
By cutting the price this quickly, Apple would quickly overcome many of the initial objections to the phone and gain wider acceptance sooner, Munster said. Although his investment research firm had previously predicted that wide-scale adoption of the iPhone would not occur until the end of 2009, the surprise discount now meant that Apple would reach its stride sooner, albeit at the expense of its historically high profit ratios.
"Apple is investing iPhone profit dollars over the next few quarters in order to be a legitimate player in the phone market. We think this is the right strategy," Munster said, explaining that as many as half of all would-be customers cited the high starting prices as the chief obstacle before this week.
And though many have interpreted the $100 in-store credit largely as a form of damage control in the face of an unanticipated backlash, the researcher believed that Apple has used the opportunity to develop an early loyalty that would normally be impossible in the handset business.
The Cupertino, Calif.-based electronics giant has had a knack for instantly developing loyalty, Munster wrote. By making peace with angry customers, the company could solidify its name in a market climate where users are much more likely to remember their carrier's name than the phones in their pockets.
"We found in our survey of 200 iPhone users that about half of them did not know the manufacturer of their phone prior to getting the iPhone," the expert said. "In other words, there is virtually no brand loyalty in the mobile market. If Apple can build brand loyalty [...] like they have in the music market, the iPhone should emerge as a major driver to Apple's long-term business."
The reports also took care to explain that the seemingly bleak circumstances weren't liable to significantly damage Apple's bottom line. If Apple were to completely wipe out its profit margins on the iPhone, overall margins would still be a healthy 27 percent assuming no improvement in sales after the price drop. These figures would slowly improve as manufacturing costs dropped and more units were sold.
Handing out credit to the earlier iPhone buyers was also unlikely to hurt Apple. Though about 850,000 iPhones were estimated sold as of this week and would amount to $85 million in apparent losses, most of that financial hit should vanish in practice, according to PiperJaffray. Not all customers would necessarily redeem the credit -- and since the offer would be exclusive to the company's own online and retail stores, the company would still collect part of the credit back as profit.
This would mean only a 2 percent dip in profit for Apple during the fall 2007 and winter 2008 quarters, the analyst group reckoned, and the loss could be halved if these customers spent an average of $100 more beyond what their credit would provide.
Munster also drove home a belief that the new iPods accompanying the iPhone price drop were appealing to a wide-enough range of buyers that their introduction would boost Apple's sales numbers for the final quarter of the year, offsetting the iPhone's effect on overall income.
"We believe these products at these price points will be compelling to both first time iPod owners and current iPod users looking for an upgraded device," he said. "As such, these new iPods will likely serve as catalysts."
