Apple's $99 iPhone may boost market share
"There's nothing even close to an 8GB iPhone that's close to $99," said Ryan Jacob, who manages the Jacob Internet Fund, which owns Apple (AAPL) shares. "You'll be surprised how many 8GB phones they'll sell at $99 even though it's the older version."
Apple will boost its share of cell phone sales by opening the door for consumers who refuse to pay more than $100 for any mobile phone, no matter how many bells and whistles are packed inside. With Apple's new 3.0 software on its 3G phone, which cost $199 before Apple dropped the price yesterday, new iPhone customers get added new features at half the cost of last year's model.
When companies drop prices below certain levels, such as $200, $150, or $100, "it really does have an impact on volumes," Jacob said in a telephone interview with DailyFinance. "In this economy, it's going to help. Making these price cuts was necessary in order for Apple to stay competitive."
It also doesn't hurt that Apple's price cuts come just after Palm (PALM) began selling its iPhone competitor the Palm Pre on June 6 for $199. Now Apple has an iPhone at half of what the Pre costs.
Once Apple's contract with AT&T (T) ends in two years, other carriers, such as Verizon (VZ) will begin to sell Apple's lineup of iPhones. "One of the biggest inhibiting factors is using only the AT&T network," said Jacob, whose fund has $35 million under management. "It'll be a big positive for Apple if they can expand to other networks in the future."
As other phone companies begin selling iPhones, it "will continue to become a larger revenue stream for Apple," he said, which will benefit Apple shareholders. Because Apple recognizes the revenue of each iPhone sale over the life of the two-year contract, "there's a long-tail here," said Jacob. "That understates rather than overstates the economics" for Apple's earnings. It's somewhat like a subscription business model because Apple has 24 months of income to post on future earnings for each iPhone sold.
The short-tail backlash for Apple is this: angry customers. Apple users who bought the 3G phone last year can only upgrade by paying an additional $400 on top of the price of the iPhone 3G S before their two-year contract with AT&T expires. That, and knowing they paid $199 for a phone in the past year that now costs $99, will certainly cause resentment among current iPhone owners. Apple's spokeswoman wasn't immediately available for comment when phoned by DailyFinance. (Full disclosure: I own an iPhone 3G and don't plan to pay extra to upgrade to the 3G S.) Some customers will pause before plunking down their dollars knowing that a better deal for the same phone is a year or less away. That's true of almost all Apple products, but cell phones are purchased by a wider audience.
For those who are buying their first iPhone, or who didn't upgrade to the 3G from the first version of the iPhone, the news of cheaper models with more memory and features is good.
Whether it's the new 3G S or the souped-up version of the 3G, what's being offered for the cost is "impressive" enough to entice customers to consider buying iPhones, Jacob said, or look at the competition and decide an iPhone isn't as expensive as they may have thought.
Anthony Massucci is a senior writer for DailyFinance. You may follow him on Twitter at hianthony.