Will the iPhone Be Here in 2007?

It looks like Bloomberg has started to dig into the rumor that a Taiwanese contract manufacturer, Hon Hai (which does business as Foxconn) has secured contract to make 12 million iPod mobile phone handsets for Apple.

Hon Hai Precision Industry Co., the world's largest contract electronics manufacturer, declined to confirm or deny a newspaper report that it will make mobile phones with iPod music-player functions for Apple Computer Inc.

The company won a contract to make 12 million iPod handsets, the Commercial Times reported today, citing unidentified industry sources. Taipei-based Hon Hai doesn't comment on market rumor, spokesman Edmund Ding said, while Vincent Tong, at Hon Hai's handset-making unit, also declined to comment.

I ignored this rumor when it surfaced yesterday, since it originated (or rather, it's translation originated) with the less-than-dependable DigiTimes. We'll see, I guess.

At any rate, this rumor has taken on some more heft as a few Wall Street analysts have plugged the handset numbers into their revenue models for AAPL, seeing some significant new cash flowing to One Infinite Loop. This story from AppleInsider quotes Bear Stearns' Andy Neff's take on the Foxconn rumors.

"Extrapolating the news reported by Commercial Times in Taiwan (of Hon Hai shipping 12 million Apple iPhones in the first half of 2007), we ran some numbers to get a sense of the incremental impact," Bear Stearns analyst Andy Neff wrote in a research note to clients Wednesday morning.

The analyst, who had been modeling the Cupertino, Calif.-based iPod maker to earn $3.07 per share on $24.5 billion in revenue during 2007, said sales of the new device could add an additional $0.70 in earnings-per-share and $6 billion in revenue.

"Our estimates include 30 percent potential cannibalization of total (current) iPod unit sales by iPhone introduction," he wrote.

Neff's other assumptions (which are probably of more interest to buyers of Apple phones than buyers of Apple shares) are that the phone itself would be priced at $300 without a carrier subsidy.

Which raises the question of just how Apple would decide to break into the phone market? In the US and Canada, mobile phones are sold largely as a subsidized accessory to your wireless service contract. The carrier absorbs some of the cost of the handset in exchange for a one or two year commitment. As a consequence, they control the user experience (electing to disable features that might conflict with their business strategies) and the branding to some degree (my Motorola handset has T-Mobile logos on it). If there are two things Apple guards with intense passion, they're the user experience of their products, and their branding. Seems like the conventional way to sell mobile phones doesn't apply to Apple.

Some have speculated that Apple might start their own mobile phone service, leasing the wholesale wireless network from one of the large carriers to create a Mobile Virtual Network Operation (MVNO). Virgin Mobile is an example of the MVNO business. Unfortunately, it's one of the very few examples of a successful MVNO: Disney, ESPN, MTV, and many others have tried, and failed, to create MVNOs that are extensions of their core brands.

Wired's Leander Kahney took a look at this situation a couple of days ago, and raised an interesting third possiblity:

The most likely scenario, as Jupiter analyst Ian Fogg has pointed out, is that the iPhone will be a stand-alone device that will accept a standard SIM card. You'll pop the SIM card out of your current cell phone and plug it into the iPhone. It'll be just like buying an unlocked handset from Asia, except you'll buy it at an Apple store instead of on Craigslist.

An iPhone with no provider strings attached would be better for the online iTunes store than selling tunes over the airwaves, as some cell companies are trying to do.

Instead of cutting deals with carriers, Apple stays neutral. It also stays in control of the user experience, branding, and selling, keeping Apple front-and-center with the customer.

Could that work? Well, there's a small population of gadget freaks who will buy imported, unlocked handsets at a premium for their exclusive features (their size, finish, software, etc), but that's not a large enough market for Apple to care about. What may be on Apple's mind, however, is the number of people willing to spend $250 for an 8GB iPod nano. Might they be willing to spend, say, $50 more to have that iPod nano come with a phone? That's a pretty interesting possiblity. Where it's difficult for someone to justify buying a mobile handset from Nokia or Motorola when it's available for less when bought through a carrier (after all, it's the same handset regardless of whether it's subsidized or not), Apple's working with a very different value proposition.

Apple may be one of the few companies who can end-run the carriers, since they're not selling a phone; they're selling an iPod that happens to have a phone feature.


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