Elgan: A new iPhone this summer?

Everybody's freaking out about Apple's iPhone sales, but look closely enough and you'll find good news

Apple reported record sales, record profits and record revenue Tuesday. The company sold 2.3 million computers, 22.1 million iPods and 2.3 million iPhones in the fourth quarter of 2007.

Unfortunately, shares immediately "tumbled" because the company's outlook for the second quarter "fell short of Wall Street's expectations," according to Forbes.com.

Apple reported Tuesday that since its launch June 29 and up to mid-January, it had sold 4 million iPhones, but most analysts were expecting a number more like 5 million.

The most conservative estimate of iPhone sales would make it easily the most successful cell phone launch in history. In its first try, Apple gained 20% of all smart phone sales and clobbered everyone except, of course, Research In Motion, which sold nearly double that percentage.

So why are Apple fans so defensive and investors so disappointed? And where do analysts get these inaccurate expectations?

How to 'disappoint' Wall Street

I wrote a column in this space a year ago in which I criticized Steve Jobs for both the timing and substance of his iPhone announcement. In that column, I said that "Jobs raised Wall Street expectations too high" and "made the mistake of specifying Apple's target of selling 10 million iPhones by the end of 2008."

Apple fans slammed my column in the form of thousands of e-mails, blog posts and columns questioning my mental health, IQ or ethics. One of the more polite critics, MacDailyNews, said that "If anything, Wall Street has so far greatly underestimated iPhone's impact."

Whether Apple reaches, almost reaches or doesn't get anywhere near reaching its 10 million unit target is irrelevant. Announcing that target set up Apple to disappoint and robbed the company of a chance to beat expectations all around, which it certainly would have done.

In reality, the iPhone has been far more successful than anyone should have -- or would have -- expected. We're talking about a 1.0 product in a market entirely new to Apple. To have sold 4 million phones in just over six months in a mature market and competing against the likes of RIM, Nokia and others is, or should be, astonishing and impressive.

Instead, everyone is gnashing their teeth and either lamenting or explaining away what is generally perceived to be a "failure." And that's the trouble with Steve Jobs' "reality distortion field." It doesn't actually distort reality, just the perception of reality by those infected.

So let me say an obvious truth that I haven't heard anyone else say: All this "disappointment" and nervous chatter about Apple's iPhone numbers is the fault of Steve Jobs. He gets the credit for delivering such exciting keynotes, and he deserves the blame when those keynotes raise expectations too high.

1.3 million iPhones 'missing'?

As of mid-January, Apple said it has sold about 4 million iPhones. But carriers report fewer than 3 million iPhone customers. In all, it appears that at least 1.3 million iPhones are "missing."

After some quick-and-dirty math, the site iLounge concluded that about 35% of all iPhones sold in 2007 are unlocked.

But I don't believe that. Using an unlocked phone is niche-market behavior and definitely not for the masses.

A recently published report by financial analyst Toni Sacconaghi at investment research firm Sanford C. Bernstein and Co. said that "the data points to a significant amount of iPhone channel inventory." That makes a lot more sense. It's very likely that nearly all these missing iPhones are sitting on store shelves gathering dust.

So why is Apple 'confident'?

AT&T said yesterday that it ended 2007 with about 2 million iPhone customers total.

The Financial Times reports that iPhone sales in the U.K. fell below expectations in the previous quarter. Apple reportedly sold 190,000 iPhones in the U.K. since its launch Nov. 9, which is less than the carrier's target of 200,000 and Gartner's estimate of 350,000 to 400,000. Overall, European sales are similarly below projections.

Apple reportedly lowered projected shipments of iPhones for the current quarter (from January through March) from 2 million iPhones to between 1 million and 1.2 million (based on information from Taiwanese iPhone component suppliers).

Here's the most interesting bit: Given all this data pointing to high inventory, lowered shipments and "disappointing" sales, why did Apple's Chief Financial Officer Peter Oppenheimer say Tuesday that Apple "felt confident" about reaching its goal of 10 million iPhones by the end of 2008?

Apple would need to sell 200% more iPhones than it already has in order to reach this goal. Either Apple can't wait to "disappoint" Wall Street again, or the company's got one of three things up their sleeve: New markets, new prices or new iPhones.

At this point, I don't think new markets can get Apple anywhere near 10 million by the end of the year. It has already hit the biggest potential markets. Talks with Chinese carriers haven't really started. And I doubt China would provide a huge market for the iPhone anyway. The iPhone is too expensive for China and, besides, it has already got a bunch of iPhone counterfeit clones for Apple to compete with.

I also don't think new pricing will do the trick, although I am willing to predict that Apple will drop iPhone pricing this year. The cheapskate holdouts aren't going to out-buy the rabid Apple fans and gadget freaks who already own iPhones.

The most likely scenario is that Apple will unveil a new iPhone this summer, or fall at the latest.

This is interesting because to date we have no way to estimate how often Apple plans to refresh the iPhone line with new versions. The iPod Nano is the only Apple player to be refreshed every year like clockwork. The other models vary from 20-month cycles for the Shuffle to the subyear cycles of the Classic.

A new iPhone is likely to offer goodies like 3G, GPS, more software flexibility and fixes for the many small annoyances that some current users complain about.

The only way Apple could possibly feel "confident" of reaching 10 million units by the end of 2008 is if the company were to sell more iPhones during next year's holiday season than it did during the 2007 season. And the only way to do that is to sell to existing users. And the only way to do that is to come out with a new iPhone.

And that's good news.

Mike Elgan writes about technology and global tech culture. He blogs about the technology needs, desires and successes of mobile warriors in his Computerworld blog, The World Is My Office. Contact Mike at mike.elgan@elgan.com or his blog, The Raw Feed.

Copyright © 2008 IDG Communications, Inc.

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