DvDand Solutions, LLC

Yesterday, AT&T announced some stellar performance numbers for the 3rd quarter 2008 led by growth in Apple’s iPhone 3G products. AT&T activiated 2.4 million iPhones during the quarter and their wireless data revenue grew to $2.7 billion. More recently, Apple also announced a great quarter with record sales of 6.9 million iPhones during the quarter. However, the future is very uncertain.

The end of last quarter saw the beginning of the economic downturn. We have already seen the effects of the downturn on Nokia which said its Q3 revenue fell by 7% from previous quarter. Sony Ericsson has also been affected by the downturn with their sales down 10% over previous quarter and profits down 1% over last quarter. No one knows how long it is going to last. As such all three companies mentioned above have lowered their forecast for the next quarter and the new year. That was expected, that is not the big story.  

The bigger story is the profit squeeze that the Mobile sector is facing. Take for example AT&T which is considered the bellweather for this sector. As I mentioned earlier, its revenue grew impressively. However, it had to subsidize the iPhones heavily, to the tune of $900 million in the quarter which amounts to a 10¢ reduction in its earnings per share. Clearly, AT&T has to subsidize the iPhones to stay competitive with RIM Blackberry, T-Mobile’s G1 and Microsoft Windows Mobile based phones with various carriers including AT&T. However, it is going to get worse going forward as consumers reduce their spending and shun expensive plans. There is a danger that consumers might shun smartphones all together. As Sanford C. Bernstein analyst Craig Moffett said to BusinessWeek:

you wonder whether the iPhone runs any risk of tilting from being the next cool gadget to suddenly being a symbol of excess.

I have a feeling that not just iPhones, but other smartphones will end up looking like “symbol of excess”. If that happens, RIM will probably be affected the most. Unfortunately for RIM, its Blackberry Storm and Blackberry Bold launches are coming in the first quarter after the major financial crisis and as US heads into a recession. Whether RIM will see the same bounce in sales as Apple did, remains to be seen.

All carriers will see further worsening of their ARPU during Q4 2008, according to the IE Market Research Corp.’s 4Q 2008 United States Mobile Operator Forecast, 2008 – 2010 report. In Q208, the ARPU declined by 1.7% across all carriers. However, Sprint and T-Mobile will be more adversely affected as it takes them longer to get a return on their their investments in WiMax and 3G respectively.

Now that 1 million iPhone 3G (er, iBrick ) are out in the wild, is Apple laughing to the bank? Certainly, but it is not the reason for that. According to TechCrunch estimate, Apple might have raked in $5 million over the weekend since iPhone was released. Apple has not revealed any numbers. These are just back of the napkin calculation by Erick Schonfeld at TechCrunch. I am excited and looking forward to Apple’s quarterly results for this quarter. That is when the actual numbers will be revealed. If I were a betting man, I would bet on Apple posting bigger gain in revenue and profits due to the App Store than iPhone 3G.

With the much ballyhooed announcement of iPhone 3G at $199 starting price, it is going to sell fast like its previous version, when it is released on July 11. However, should businesses care about iPhone? After all, iPhone still accounts for only 6 million of 3billion+ phones worldwide.

With its Exchange support, MS Word, Excel & read-only PowerPoint support, and IT-focused security features, Apple is taking on both RIM Blackberry and Microsoft Mobile. With the new applications store and the rich revenue sharing model for developers, it has opened up a whole new world of possibilities. However, there are still some features that would make it a compelling case for businesses.

First being option of carriers. Granted AT&T is trying very hard to improve its customer service and take care of Apple customers, however, Ma Bell will have to do better to convince businesses to switch carriers just so that they can use iPhone.

Second, of course is the price. Apple did go ways in reducing the price barrier which Steve Jobs said was the number one barrier to adoption of iPhone. But, businesses look for volume discounts for both handsets and calling plans. It appears that AT&T has increased its data plan, while keeping the voice plan same for iPhones. This $10 per month increase combined with no volume discounts on handsets could be a deal-killer for businesses contemplating adopting iPhones.

In spite of these, businesses need to give iPhone the second look it deserves.