Absurd assumptions about the iPhone

Dan Frommer of the Silicon Alley Insider sees the world as flat and static — at least when it comes to Apple's iPhone. Two days ago, he estimated that the iPhone wasn't meeting Apple's expectations based on the absurd assumption of flat sales — despite the obvious fact that sales will not be consistent over the time period analyzed. Between now and the end of 2008, Apple will experience two holiday shopping seasons when they have historically experienced huge surges in sales. Apple will also enter at least two new markets, Europe and Asia. And while a 3G version of the iPhone is unlikely to arrive in the US before the holidays, an upgrade of some kind is certain in the next 15 months... as are additional price cuts. All of which will produce sales increases and likely fuel further upward momentum to Apple's pricey phone. Not content with poor analysis of unit sales, Frommer is now extending his simplistic assumptions to iPhone profits.

Frommer asserts that Apple will need to sell 78% more iPhones to recoup lost profits from the iPhone price cut, but his assumptions are so broad and flawed, his analysis is pointless. Not only does he continue to assume consistent sales — even after finally admitting that several factors will boost sales, he uses iSuppli's assumed bill of materials cost and Gene Munster's unsubstantiated AT&T subscription fees. He ignores R&D, marketing, and other expenses when these expenses should decline over time. And worst of all, he assumes the cost of producing the iPhone will remain static! In Frommer's world, components do not get cheaper. Increased volumes do not result in cheaper prices. It doesn't matter that Apple is the largest consumer of NAND Flash (and likely the touchscreens used in the iPhone and iPod touch), that they get the best pricing, that they just further increased their consumption of iPod and iPhone components by expanding the iPod line.

While any analysis will have its assumptions and early iPhone predictions were over-ambitious guesses, what is the value of such conservative and flawed attempts at analyzing the iPhone numbers? Particularly when Frommer's own conclusion regarding profits contradicts his conclusions about unit sales. Maybe Apple will ultimately be disappointed with its iPhone strategy and results, but it will not be as big a disappointment as Dan Frommer's analysis.