Analyst: Apple Gets Healthy Share of AT&T Contracts

On Friday, Piper Jaffray analyst Gene Munster raised his target price for Apple stock to $205 on the basis of research that indicates that Apple is getting a healthy share of revenue from AT&T for every iPhone contract.

"While we do not know the exact details of the agreement, we conservatively estimate that AT&T gives Apple $3 per month for every iPhone customer already with AT&T and $11 per month for every new subscriber," Munster wrote in a research note released to clients on Thursday.

Munster conducted a survey of 253 iPhone users and found that more than half switched to AT&T from another provider, providing Apple with substantial revenue from the new customers its hot new phone is bringing to AT&T. Over time, Munster said, the balance would shift to existing AT&T customers and fewer new customers.

Major Growth for iPhone

In his research note, Munster predicted major growth in iPhone sales -- 45 million units by 2009, after modest sales of 3.2 million in 2007 and 12.4 million in 2008. Munster noted that Apple's iPod sales were slow at first but that, at a certain point, sales skyrocketed. "One thing we learned with the iPod is that when a device is game-changing, the demand will come," he said.

Munster also said he believes that the iPhone price will drop to the mid-$300 range by 2009, driving up volume. "The debate on where Apple shares will be in 12 months is largely dependent on whether the Street believes Apple can sell 45 million iPhones in fiscal 2009 for an average price of $330," he said.

Andy Hargreaves, an analyst who covers Apple for Pacific Crest Securities, said he doubts the Cupertino, California-based company will drop the price that far. He pointed out that Apple is not necessarily aiming at the volume part of market. "They want to have a premium offering at a premium price, so I don't see the price coming down a lot," he said. "Apple's history is not to lower price but to add features."

When it comes to a second-gen iPhone, Hargreaves is predicting support for 3G, a faster processor, and a modest price decrease. The lack of 3G and the slowness of AT&T's EDGE network have been among the top complaints among iPhone users, but Hargreaves said those factors haven't affected sales and satisfaction with the phone. He predicted a 3G version of the iPhone will be released within a year.

Cannibalizing iPod Sales?

While declining to comment directly on Munster's revelations about the iPhone revenue-sharing deal, Hargreaves did say that the iPhone has already transformed the cell phone industry. "It changes the model for a cell phone sale from, 'Here's a free phone that's subsidized with perhaps overpriced service' to 'Here's a phone where you're paying for the device and you buy the service separately.' It makes it a little more clear what you're paying for."

Hargreaves said this model fits better with Apple's philosophy because the Mac-maker has more control over pricing. "They don't want to be in the situation Motorola is where the perceived value is diminished because the phone is given away," he noted.

In addition to speculating about Apple's revenue-sharing deal with AT&T, Munster projected quickly dropping sales volumes for iPods -- down from 35 percent yearly growth rates to just 10 percent to 15 percent growth -- because an iPhone is also an iPod and a video player. Hargreaves said he doesn't think iPhones will necessarily cannibalize iPod sales but pointed out that a slowdown is a natural part of the product cycle.

"There's a big difference between a Nano and an iPhone," Hargreaves said, adding that significant drops in iPod sales won't come for several more years. While the iPhone, with its big screen, might cut into Video iPod sales, Nanos and Shuffles will continue to see significant growth, he said.

At midday, Apple shares were trading at $141.50, up over 1 percent from yesterday's close.

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