iPhone's Overseas Exodus

That's the big takeaway from Apple's fiscal 2008 second-quarter earnings conference call. Overseas demand is driving U.S. shortages.

Two-and-a-half weeks ago, I discovered that the U.S. iPhone shortage was selective. AT&T had plenty of iPhones in stock—I called stores in 12 states—but Apple retail stores were sold out. I speculated about the effectiveness of Apple's advertising drawing customers to its stores rather than AT&T. That theory is no doubt true, but there is a much bigger reason.

Apple and AT&T stores sell iPhones differently. The mobiles come unlocked from Apple but must be activated at time of purchase from AT&T. Based on information from yesterday's earnings conference call, gray market sales largely account for the iPhone shortage, which is clearly selective to Apple online and retail channels. AT&T has plenty of inventory.

"We expected iPhone to decline more sequentially than it did," said Apple Chief Operating Officer Tim Cook on Apple's earnings conference call. Sales decline is a good assumption, given the post-holiday doldrums and 3G iPhone rumors spreading like California wildfires. Sequentially, iPhone sales declined 26 percent. There is no year-over-year comparison, as iPhone launched in June 2007.

Cook acknowledged that iPhone inventory is "low" in Europe and the United States, with the main problem being through Apple stores. People have been buying phones from Apple stores with the intention of activating them later, he said.

Cook gingerly danced around the problem through positive spin, saying the shortages are a "proxy for the worldwide demand of the phone." Huh? Meaning: Phones purchased from Apple stores in Europe and the United States are being unlocked and shipped to other geographies. Cook wouldn't quantify the number of unlocked phones but acknowledged that it is "significant."

To my aging ears, he didn't sound exactly unhappy by the gray market demand. The iPhone is potentially even a bigger hit product for Apple, if only the mobile could be sold in more markets—and through more carriers.

Apple Store shortages also explain some other recent iPhone activity: About three weeks ago, T-Mobile Germany cut its 8GB iPhone price to 99 euros ($155) through June 30. In Britain, O2 slashed the 8GB iPhone to 169 pounds ($333) from 269 pounds ($530). The ongoing theory: Carriers are clearing inventory ahead of the rumored 3G iPhone (We all know it's coming, right?).

I don't think so. There is an inventory problem, but it's coming from gray market competition, as buyers snap up iPhones from Apple and either use them unlocked or sell them that way. Unlocked phones are already sold in France and Germany, which could easily partially explain recent O2 and T-Mobile price cuts.

My prediction: Back-channel competition will continue until Apple reaches better equilibrium for supply and demand—that iPhone is available locked from at least one carrier—and ideally two or more—in most major geographies. Better: Make unlocked iPhones available unlocked from carriers in more countries. Already, there are rumors unlocked iPhones will come to Belgium and Italy after June.

Something else: Apple won't report revenue for iPhone sales from March 6 until after the iPhone 2.0 software ships, supposedly at the end of June. Now why is that? Apple announced the software update, which will be free to all iPhone users, on March 6. Apple executives gave the reason of accounting during yesterday's conference call, which makes some sense because iPhone is sold locked with subscription service agreements to designated carriers. But what if Apple plans something more, such as unlocking more phones with the 2.0 update? I'm no financial analyst and can't speak to accounting rules. But me wonders. Do you?

Posted by Joe Wilcox on April 24, 2008 11:38 AM