I am as much an iPhone cultist as the next guy, but Piper Jaffray analyst Gene Munster is taking this cult thing a little too far. He estimates that by the end of 2009 there will be 55 million iPhone users and that the iPhone App store alone could be a $1.2 billion business. Whatever he’s smoking, I want some of it.
Now, don’t get me wrong. I think the new iPhone apps will be the single biggest reason to buy a 3G iPhone, but there is no way they are going to pull in $1.2 billion in revenues in 2009. Let’s take a closer look at Munster’s assumptions, which AppleInsider discussed earlier today.
To be fair, the $1.2 billion is Munster’s most aggressive scenario. The conservative scenario for iPhone App Store revenues is $416 million and the “neutral” case is $777 million. But any way you slice it, his entire analysis lies on two faulty assumptions. The first one is that a certain percentage of “active” iPhone and iPod Touch users will download one free app and buy one $10 app every year from the iPhone App Store.
While this seems reasonable enough at first glance, Munster himself knows it to be bunk. In an informal survey he took of iPhone developers at the recent Apple developer conference, he found out that 70 percent of iPhone apps are likely to be free and that the price of those for sale will quickly drop to $3 or less. Of course, Appleinsider also covered these findings, but failed to note that they contradict the Munster math laid out in the earlier post. If 70 percent of apps are free, then the chances of every active user purchasing at least one of the apps for sale drops considerably.
Let’s take Munster’s neutral case. He estimates 77.7 million active users will get two apps each (155.4 million total). But if 70 percent of those are free, that would bring in only $466.2 million in revenues instead of $777 million. And if the price drops from $10 to $3, that further reduces the revenues to $140 million. For his aggressive scenario (where he is essentially assuming that 121 million apps are sold at $10 each), the total take would drop from $1.2 billion to $364 million.
But wait. We still have not addressed his second major questionable assumption. The total number of Apple iPhons that will be out there by the end of next year. His 55 million “conservative” estimate is anything but. So far, Apple has sold 6 million iPhones since it launched nearly a year ago, and is on track to sell 10 million total by the end of 2008. Munster thinks it will be able to sell 45 million in 2009, or more than seven times what it sold during its first year. Yes, the price cut (if you can call it that) to $199 will spur more sales. But not 7X more sales.
Munster is on the fringe here. As my former business 2.0 colleague Philip Elmer-DeWitt at the Apple 2.0 blog illustrates in the handy chart reproduced below, most other Wall Street analysts put 2009 iPhone sales at less than 25 million. And that’s even with revised numbers after the new pricing was announced. Toni Sacconaghi from Bear Stearns thinks Apple will only sell 10 million. So that could easily cut Munster’s iPhone App Store revenues by half again.
If the iPhone App Store pulls in just $150 million next year, I would still consider it a success. Apple makes plenty of money from the phones and the subscriptions. The more free apps there are, the better, actually. That is just one more reason to buy an iPhone.
I estimate 84.3 million phones sold in the first quarter, with each owner purchasing 2-3 apps at $55 each. This is a net of $11.6 billion. Extrapolate to the rest of the year for a total of $46.4 billion in 2009 for iPhone apps. If anything, I’d say Gene Munster is horribly pessimistic!
Sorry, forgot to cite my sources:
http://www.jamphat.com/rap/
Face the facts, Nokia maintains a 45,2% market lead in 3g “smartphones”. RIM comes second with their Blackberry at 13,4% and Apple is admittedly coming strong as a newcomer with 5.3%.
At the first quarter 08 the total amount sold was about 32 million phones. Apple might be huge in the US, but the rest of the world is a still a bit far away. Especially the markets where things are actually happening.. (China, India).
Good luck to Apple though, I know they’re making the market more competitive and thus raising the bar.
Oh, I forgot to link my source too: Gartner research
http://www.gartner.com/it/page.jsp?id=688116
I agree that the numbers do not seem to make a lot of sense. But I disagree with the general sentiment that Apple will not make plenty of other revenue from the iPhone. For example, I know plenty of people who are willing to drop $5 for a game on their mobile phone, so why should they not do the same thing for the iPhone? Also, Apple is selling all the media including music, TV shows, movie rental as well apps and games, on the iPhone and the total revenue from all that should be well over $1B.
Then there is the revenue stream from MobileMe. Plenty of people, including me, seem to think that it is a good idea. I have not seen any estimate on what that will bring in.
Gene Munster is awesome…at marketing headlines that get him attention.
@Lasse good post.
Let’s be clear and give credit were credit is due. Apple has 5.3% of *World Wide* smartphone market in less than 12 months. That is freaking off the chart from a scale standpoint.
If anyone thought that the two day/overnight lines were long last year I would venture to guess that this new phone will have three day/overnight. Does anyone really think that BlackBerry or Nokia will put out a product were people will camp over night? I sure don’t.
And the rest of the world does want this phone. My father who lives in South America and is 68 years young told me yesterday he is getting the new iPhone when it comes out. However, he did fall short from claiming he would be camping overnight outside the store. Damm, exciting times ahead!
Those analyst estimate are often too aggressive and should be taken with cautious..
[quote]Now, don’t get me wrong. I think the new iPhone apps will be the single biggest reason to buy a 3G iPhone[/quote]
Apps will work just fine on the Gen1 iPhone.
I agree with Richard, $15 ARPU per phone does not seem unreasonable. Data from Palm users in the platform’s heyday indicated, that even then, users downloaded a large number of low cost apps. If the purchase price is low most people won’t worry about rooting around for a free substitute app that might not work as well.
The key is volume and the way to achive this is to make purchase hassle free while making it easy for developers to market to consumers. Apple’s approach seems to be just what the doctor ordered.
Gene Munster is Jobs’ tool and a Mactard.
Will there be the possibility that some genius could develop a hack that allows iPhone application to be installed and used without purchasing through the Apple App online store ? This will sure to affect into the profitability of the market. In the past, the iPhone has been hacked to accomodate custom application (Tunewiki) and customization, wouldn’t the same case happen ?
Despite the iPhone being an amazing product, lets face the fact. Its still a $80/month product! There is no way it gains that much adoption. The costs must come down in order for these phones to gain that much market share. Its like the days when broadband internet access cost $60/month. It took cheap DSL and cable for it to reach mainstream users.
The one thing that the iPhone has going for it is that the people who buy it expect premium. So they may be more likely to buy an app when compared to a Nokia user. They expect to pay a bit more for their experience, but they expect the experience to be consistent in quality with the iphone itself.
Just wanted to point out that the new iPhone is not required to use the new 2.0 software (which supports third party apps).
3G is very tempting but truth be told I think the new software is much more exciting than the new hardware. At this point it’s not worth a $200 up front fee and an extra $10 a month just to get 3G, to me anyways. I know you also get GPS but I have no use for that
Correction to above post. I should have said ONE THING the iPhone has going for it….
Pay $5 for a mobile game? Why not just install the all the console emulators on your N95 phone.
Hey look at this, I can change my own battery if needed on my N95 without voiding my warranty…
The Sony, Nintendo and Microsoft models are to, more or less, lose money on the hardware and make lots and lots of money on the software.
Traditionally cell phone makers get their initial payment and nothing else.
So - Apple is walking the line between these 2 models. Not losing money on hardware, not taking such large profits from applications, music, videos etc, but in the end it’s going to be a great source of revenue over the 10 year span of the iPhone (much longer than consoles!).
Don’t forget also that iPhone cuts Apple’s dependence (albeit slightly) on iPod and Mac, and grows the Mac market too as the shiny-happy-Apple feeling rubs off onto their other products.
So - it’s not all about the iPhone, just as the iPod isn’t all about the iPod.
I think you all greatly underestimate the foreign markets… watch and see.
@dmose, perhaps we are underestimating the foreign markets. However, given that they only sold 6M in the US during the first year, 60M worldwide is a huge leap. Especially with the competition introducing their own touchscreen phones.
I hope you are right, as that would signal a major shift in what drives mobile phone sales, and also opens up the worldwide mobile software market. For a developer like myself, that’s a good thing.
Yes. Don’t underestimate:
1. Foreign markets
&
2. Halo effect (http://www.macworld.com/article/43132/2005/02/oppenheimer.html)
I should have said ONE THING the iPhone has going for it
i was talking to a iphone app developer the other day, what i heard is apple has lots of rules to push app to app store…if that is the case, ppl will bypass app store, hack phone and install apps from wherever they can find
hope apple corrects the problem and don’t act like these greedy telcos who made app availability nothing to impossible….now paying price to apple strategy
I too think this is do-able. You guys are pessimistic because you’re looking at iPhone apps the way you look at other phone apps. I can envisage so much education, language learning, local news/content based games that will appear on the store.
And you guys are underestimating the foreign market. I saw two iphone related books among the top 20 books sold in Thailand bookstores. This is a country where there is no legal distribution. There is just so much anticipation among the consumers as well as local developers. Never before they had a centralized distribution system such as what Apple has created.
This prediction is laughable at best.
For argument’s sake, even if there are 55mill people who want it, can Apple actually get that many out of its factories by next year? Remember iPhone 1.0 shipment problems? It took apple how many years to reach 100mil ipod shipments? And that’s just mp3 players.
As for all those foreign markets comments. HA! iPhone 1.0 was supposed to rock Europe. What happened there?
Munster is a big APPL fanboy. He has been pumping APPL stocks for a long time now. He predicted APPL stocks go up to $205 by this year. Just another lame analyst.
@Erick The $10 dollar is the total apps / user for the WHOLE year. Not cost per app. I can see people buying 5 apps at $2 for a whole year.
Iphone is coming to India by the end of this year. The numbers in India will be BIG!
I would like to see more on the ‘foreign markets’ angle.
First year, iphone was in, what, 5 countries?
This year, iphone will be in 60 countries?
I doubt even George Bush could wreck Apple’s momentum worldwide.
On second thought…
Wait, aren’t you the guys that fully believe that the $15B valuation of Facebook isn’t a complete con?
STFU, TechCrunch.
First you have to figure out what the real price of the iPhone is.
O2 UK will come up with a pay as you go option, so we all can estimate the real price.
IMHO the new 8 GB iPhone will go for $500-$550 and that is way to much to reach the mainstream consumer.
“Apple iPhons that will be out there by the end of nextyear”
6th paragraph
He is basing his yearly revenue # on the number of handsets in the market at the end of the year, not the average? Isn’t that a major mistake? They start the year with 10M, they end with 55M - that means the average in the year is 32M (not to mention they sell a bunch in Q4 which weighs down the average).
Silly.
Well, I think it’s possible, because Apple is spreading it’s iphone over the world and here in Brazil, I have lot’s of friends waiting for Claro to start to sell it. About Apps, my company is researching how to use IPhone’s processing power and tools…
Hey, with $240million investment for a 1.26% equity in Facebook, a $15 billion dollar valuation seems plausible.
That being said, I’m gonna roll with Erick’s assessment of Munter’s projections.
what about Anroid with gPhone - would that not eat some money?
“”If 70 percent of apps are free, then the chances of every active user purchasing at least one of the apps for sale drops considerably.”"
IF a frog had wings it wouldn’t bust its butt all the time!
Your IF variable is lacking as most analyst. There will be several applications well over the $9.99 mentioned at the WWDC. So one must WAIT and read the tea leaves or pull the slot machine handle… I’m going LONG - way long on Apple. I’m expecting +20 million in sales before XMAS. Granted the 3G iPhone could have been awesome… but now we will have to wait for the 3.0 version and hope Apple gets it right finally.
HH
1.2 billion. this is very high. if they reach at this money they will make 2 billion 2010 because many of the countries are going to use iphone, like my country Turkey. Vodafone start to collect people who wants an iphone.
@Prakash and others
Let’s get a bit realistic. Not everyone has a “silicon valley income”! India’s per capita income (nominal) is US$977 (http://en.wikipedia.org/wiki/India).
Apple will sell iPhones in India but certainly not a huge number. The same reasoning applies to most of the countries outside a part of EC, North America and a few others.
Some of the math here (from TC) doesn’t necessarily make sense. At the very least, you’re making huge assumptions. Free apps can make up 70% of the store, but the quality could potentially mean that they make up a disproportionate amount of the downloads. Or more likely, the quality probably goes the other way, 70% of the apps are free, and likely 60% (or some other random number) of them turn out to be worthless and left undownloaded.
The real fear here is that people still haven’t learned from problems of the internet. Everyone (many helped by VC funding) will push the price of apps down to $0, and it’ll be a massive race to see who can build the least viable business without any revenue model. Awesome.
I think the analyst is high on the number of phones, but low on the money spent on applications. People will spend way more on app than you think. You have to remember, every phone is an iPod too. So every time they go to the iTunes music store, they’ll be marketed the App Store. And their credit cards will already be in there, and its only a few dollars… You can see how this will work out well. I think entrepreneurs who develop iPhone applications are going to do very very well.
News just broke here in Europe, that the price for a non-operator-bound iPhone will be EUR 499 (8G) and EUR 569 (16G) respectively. Good luck penetrating the Chinese and Indian markets with that. Don’t get me wrong, there certainly are potential customers there, but making iPhone cheaper was just an illusion.
@Tom, good to see an unbiased comment.
PS. nice website you have there
Nice article.
http://tekno-world.blogspot.com
Rajeev Vashisht
Erick, I can’t see why your choice of what numbers to plug into the model makes any more sense than Munster’s:
Because Munster says people will choose 2 apps, you like that and are going to keep that number. No rhyme or reason, but it makes your case. You take that 2 and conclude that because 70% of apps are likely to be free, and because people are only going to get 2 apps, it’s game over.
Look at it an entirely different way. Munster is really only saying people will buy $10 worth of apps from the iPhone store. Now come on, who hasn’t spent $10 on something for their iPhone since they bought it? So maybe the number is $4 or $6 instead of $10.
What is also not reflected is what Draconian lengths Apple might go to in order to force the issue. We don’t yet know how critical App Store is to their revenue model, but we do know they have gone to ridiculous lengths to lock up the phone in order to protect it. That doesn’t sound like a company that agrees with you when you say, “The more free apps there are, the better, actually. That is just one more reason to buy an iPhone.”
After all, look how they handling Flash support. More on my blog for details on that:
http://smoothspan.wordpress.co.....obe-flash/
(man, when will people stop the dumb comment linkspam. Guys, it’s not only obvious, but it’s insulting. I put your sites on a blacklist.)
I think the key point is not the average price of the apps, or what percent of the apps are expected to be cheap/free, but whether there are going to be killer apps that are must-buys at a high price point.
So far there’s nothing obviously amazing in the demos, but you know Popcap has to be readying their entire suite of properties; Super Monkey Ball will be the Wii Sports of the device just because of the novelty; and so forth. And, on the ‘business’ side, there will probably be one or two high margin winners, maybe in instant messaging or something similar.
Remember, the people who buy iPhones are not super price conscious — $15 one time on top of the existing network spend is not completely out of line as an average spend, especially if the buying procedure is as seamless as Apple seems likely to make it…
Gene Munster is speculating at the markets expense he’s hedging his bets the little greedy ludite this guy is not smart….he’s just greedy….. why do we even giving him an ear to listen….. stop covering him and his exploits….
How can you base pricing of apps on such a small statistically invalid sample size of 20 devs? It’s hard to believe that so many blogs have taken this ridiculous number and run with it. Garbage in = garbage out.
I don’t know why there so much hype about this iPhone thing, who would ever want to listen and download music and applications on their phone?
Plus, the record labels will never allow Apple to sell copyrighted music…plus no one will ever want to spend the time to download music…ASK IBM
Source: FFW to 5:00 into this clip…
http://www.youtube.com/watch?v=yGE61LMwaLo
Seriously, $15/user is minimal, and the forecasts on actual sold units is very reasonable, considering they sold 20M in 1 year, at $399, no GPS and no Exchange support, in 25 countries…at a price point of $199 and all the new bellsand expansion into 75 countries, 50M by end of 2009 is very reasonable
I agree that the “conservative” estimate of 55 milion users is a little high, but I don’t think that $10 per user per year is ridiculous. I think one needs to factor in that the masses are the next adopters of the iPhone, i.e. customers that are less tech savvy than the early adopters. So workarounds like installing a NES emulator, or correctly installing a free program may not be a workable solution to someone with limited tech knowledge. $10 for one video game a year. . .I see this as reasonable.
Great analysis Erick!
Being in line with the other analysts does not set you apart from the crowd. Making absurd high end estimates does. It also puts you in favor with the company that you’re covering. Henry Blodget was king of over hyping the internet stocks in the late 1990s and back then people actually thought they knew what they were talking about.
I think $10/user is a reasonable and conservative estimate. However, what WAS ridiculous is assuming that 70% of the software will be free, based on polling 20 people in a non-random environment.