Apple (AAPL - Cramer's Take - Stockpickr) CEO Steve Jobs will need to work some magic to hit his sales target of 10 million iPhones this year.
Since the iPhone's launch in June, Apple has sold about 4 million devices, including 2.3 million during the important holiday season.
To reach the 10 million mark, it needs to average 2.5 million phones in sales a quarter over the next four quarters -- or 200,000 more than what it sold during the big holiday season.
"The number is a challenge, but unless the global economy slows down profoundly, Apple will make it happen," says Ezra Gottheil, an analyst with Technology Business Research
Some analysts say Apple will have to cut deals with more phone carriers outside the U.S., upgrade the iPhone and most importantly, drop the price in order to reach its ambitious sales target.
Apple's sales efforts have been stymied by a sour economy that could put these pricey $400 phones beyond the reach of some consumers. There's also the problem of some 1.7 million "missing" phones -- the difference between phones that were sold by Apple and those that were activated by AT&T (T - Cramer's Take - Stockpickr), the telecom carrier with exclusive rights to the iPhone.
Activiation of the phones is crucial to Apple's bottom line because it gets a 10 percent of the cut in monthly fees charged by AT&T.
Apple investors are understandably worried about the situation, though iPhone sales represent a fraction of the company's revenue. Total revenue recognized during the quarter from sales of iPhones, iPhone accessories and payments from carriers was $241 million compared to $1.75 billion in overall revenue.
Apple's stock has fallen nearly 35% since it closed at a 52-week high of $199.83 less than a month ago. Apple shares closed up $1.53, or 1.2%, to $131.54 Tuesday.
Jobs unveiled the iPhone at the Macworld conference last January to much fanfare. Apple stock soared nearly 132% last year, mostly on strong interest in the iPhone before pulling back to its current levels.
Many analysts then deemed as low the target of 10 million phones in 2008. They saw the phone as a "game-changer" with the potential to take away market share from rivals such as BlackBerry maker Research In Motion (RIMM - Cramer's Take - Stockpickr) and Nokia (NOK - Cramer's Take - Stockpickr).
But now, some company watchers fear a softening economy and limited carrier agreements for the iPhone could take its toll on consumer interest in the device.
That's where dropping the price of the iPhone could help. Gottheil believes Apple could shave $50 off the 8-GB iPhone's current price of $399 by the middle of the year. Apple saw a 20% to 25% improvement in sales when it cut the iPhone price by $200 in September.
"There is room in the iPhone margin to cut price now," he says.
A price cut is a possibility, agrees Mike Abramsky, an analyst with RBC Capital. But what's more likely to happen, he says, is that Apple will upgrade the software in the existing iPhone and offer new models, including the much-awaited 3G version of the phone.
"I think everything, including a price cut, is on the table but Apple is pleased with the performance of the product and maybe more inclined to add capabilities such as GPS or location-based services, and Bluetooth for the same value in the iPhone, as well as offer 3G," says Abramsky. RBC Capital makes a market in Apple shares.
Despite investor fears, Apple's iPhone sales have been solid, says Abramsky. iPhone sales in the quarter ended Dec. 30 were up 107% from the previous quarter, while the smart-phone industry is estimated to have grown at 13% to 15%.
"The 4 million phones sold in the first six months is also double the initial run rate of the Motorola (MOT - Cramer's Take - Stockpickr) Razr," says Abramsky. "From our perspective, the early performance of the iPhone is nothing short of remarkable relative to other historic phone launches."
Analysts and investors also have been concerned about the difference between the number of iPhones sold by Apple and the devices activations registered by AT&T.
In its fourth-quarter earnings, AT&T indicated that about 2 million iPhones had been registered for the service on the company's network while Apple sold about 3.7 million iPhones during that quarter.
The difference of 1.7 million phones could indicate some excess inventory in the channel, which could come back to bite Apple's target of 10 million for the year and stoke fears of lower-than-anticipated demand for the phones.
Apple has not commented about the unlocked phones yet, and the company did not respond to a request for comment for this story.
Apple could have sold about 400,000 phones in Europe during the quarter, and about 20% have been sold unlocked, estimates Keith Bachman, an analyst with BMO Capital. In the U.S., about 25% of the phones sold could be unlocked.
The rest are likely to still be in inventory, while some will be returned and a small percentage are being used for nonphone features, such as iPod touches, until the owners can switch their wireless contracts to AT&T, says Gottheil.
The high percentage of unlocked iPhones should not deter investors, says Abramsky. "It's a leading indicator of the demand," he says.
As Apple signs up contracts with carriers in countries such as Canada, Italy, Spain, and Australia, Apple could bring more users into the fold, he says.
Meanwhile, U.K. mobile company O2 is doing its part to make the iPhone more attractive to its customers, in what some see as an attempt to revive flagging sales. The company said that while the cost of the iPhone remains unchanged, it will give three times as many free calls and text messages on its £35 ($69)-a-month service plan for iPhone customers.
Where Are Those Million iPhones? Everywhere.
Our readers think they have found the million unaccounted-for iPhones discussed in an earlier post — phones that were bought but then never activated on the networks of the wireless carriers that are Apple’s partners. They are all around the world, in many countries where Apple has not yet worked out deals with local carriers, indicating that these phones have been “unlocked.” A sample of some of the comments (with a little editing for punctuation):
Australia: “I personally know of one person who brought eight of these phones back from the U.S. to be activated here in Australia for family members.”
India: “I was in India a few weeks ago and I saw the iPhone being sold in almost every store.”
Brazil: “I live in Brazil and just about all my friends here, the who’s who of Brazil, have iPhones, all unlocked and adapted to our local carriers. ”
Bolivia: “Truth in my small third world country city in Bolivia, South America you can find iPhones available signs all over the cellular dealers.”
Colombia: “The iPhone is for sale in Colombia quite cheaply. That is in spite of it not being officially sold there by Apple.”
Elsewhere in South America (and Spain): “I live in South America, have couple friends in Mexico and some friends in Spain, most of them got iPhones for christmas. They are everywhere, gray market is huge over here, so no surprise.”
Uganda: “I am yet to get mine but I know two friends who already own iPhones here in Uganda, East Africa.”
Russia: “I live in St. Petersburg, Russia, and you can get an unlocked phone for $1,000. A simple phone call to any one of about 20 different dealers and there you go.”
China: “I live and work in China. iPhones modified to work on the Chinese cell networks are very easy to find at all the electronics markets.”
Kuwait: “Back home in Kuwait cellphones are all the rage. Having the newest model is a status symbol.”
Canada: “Here in Canada, iPhones are everywhere. A carrier plan has not been reached with Apple yet so all of them are unlocked.”
Thailand: “I am currently in Bangkok on vacation and in one mall alone I must have seen hundreds of unlocked iPhones for sale. On a quick calculation the local vendors are making about $50-100 per unit.”
New Zealand: “I work at a university in New Zealand and have noticed several Asian students using unlocked iPhones (no, they’re not iPod Touches), perhaps the gray market is the explanation.”
The Philippines: “Here in the Philippines, unlocked iPhones are easily available in most cellphone shops in the malls. No big deal. And it must be this way in a lot of other countries as well.”
It sure looks like it.