Analysis - The iPhone 3G launch frenzy is over and if you were among those to leave Apple or AT&T stores empty handed, then there is a good chance you will get your phone in a much quieter "direct-fulfilment" environment this week. But the massive hype and demand left us wondering how many iPhones were sold to enable some conclusions whether Apple supplied reasonably enough units or if this was yet another case (remember the PS3 launch?) of deliberately undersupplying the launch market. Let’s have a closer look.

Being a financial analyst can be a tough job, especially if you had to cover the iPhone 3G launch. In terms of sales estimates, you are dealing with an overly secretive company anyway and in this specific case, a usually perfectly executing machine failed on multiple fronts, which could mean that you have to pull at least some estimates out of your nose. When analysts issued their iPhone 3G sales estimates last Friday, no-one factored in the activation issues that spoiled the party. And it appears that many analysts may have largely underestimated Apple’s ability to resolve the nightmare and get back on its feet quickly, making the equation even more complicated.

According to Yankee Group, Apple’s hiccup may have been just that and the research firm now thinks that the iPhone 3G may have been the largest consumer electronics product launch in history, taking over the title from the original iPhone.

Analysts now say that official sales results "fall in line with expectations", but Friday estimates varied greatly, from 425,000 (Piper Jaffray) on the low-end to one million (RBC Capital Market) and all the way up to three million on the high-end. Before we crunch the numbers, remember what Apple constitutes as a sale: Apple Store sales are recorded when the sale takes place at the store register. Sales to Apple’s U.S. and overseas carriers are considered wholesale and are recorded when an iPhone leaves the docks in Asia.

A reduced price and an expanded international distribution model are now helping Apple to boost sales, but a lack of online sales and activation issues have cut into the handset’s true potential. Activation issues affected sales the most since the sales time was increased beyond 15 minutes (sales at Apple stores last year took about 1 minute each).

"Making history is never easy or smooth," said Yankee Group analyst Carl Howe. "Apple’s competitors should be happy about the problems they had. Imagine how many iPhone 3Gs Apple would have sold if the launch had been problem-free," said Howe.

It is interesting to note that analysts don’t see widespread iTunes activation server issues that led to bricked handsets as a sign of a sloppy launch preparation on Apple’s part, but rather as an indication of the overwhelming demand.

iPhone 3G sales turn analysts upside down

Some analysts underestimated Apple’s ability to get over the activation issues and Piper Jaffray’s Gene Munster is one of them. The analyst originally projected only 425,000 units sold from Friday morning to Sunday evening, estimating it would take Apple 17 days to pass the one million mark.

"We underestimated the number of phones sold per hour throughout the weekend and Apple’s recovery from activation issues. While we believe Friday’s 24 phones per hour is probably a close guess for Friday, the number likely increased significantly on Saturday and Sunday, well above our previous estimate of 28 phones per hour," the analyst said in a revised statement sent to clients yesterday.

"The summary is that demand is good, execution was average," Munster told Bloomberg. He says iPhone 3G sales are 40% higher than last year, citing "international availability in 21 countries and 60% lower entry-level price point" as key drivers, translating into 4.08 million iPhones sold this quarter.

For RBC Capital Market’s Mike Abramsky, the launch weekend sales turned in exactly the one million units he predicted on Friday, citing pent-up demand, expanded distribution and lower price points. Abramsky expects 5.1 million units for the fourth quarter and 6.5 million for the first quarter of 2009. If he is right, Apple has a shot at overtaking Research in Motion (RIM) as the world’s second largest smartphone company. RIM is currently selling about four million smartphones per quarter.

Analyst projections aside, the demand for the iPhone 3G appears strong across the majority of the 21 launch countries. As indicated by the iPhone availability tool, Apple has run out of iPhones at 95 of its brick-and-mortar stores in the UK. Some AT&T stores are also sold out, but the carrier still signed up customers who will receive the handset with the next iPhone shipment. Unexpected shortages after just three days may indicate that Apple underestimated the demand (RBC’s Abramsky estimated the initial iPhone 3G production at 1.5 million units). European markets that showed sluggish demand last year are now reporting overwhelming iPhone demand and strong sales.

Overseas market finally taking off

O2, Apple’s UK iPhone carrier, said that it is sold out of initial iPhone supplies, promising new shipments this week. "We’re seeing phenomenal demand. I was staggered," said O2’s chief of convergence services Dominic Hulevicz on Friday. "In some of our stores we have been selling 40 iPhones an hour - the same level of sales those stores usually do in a day," said O2 spokesman. Hulevicz said that the carrier has seen demand "coming from all areas," including corporate markets. The executive noted that the handset subsidy has brought in the new variable to the iPhone equation - price conscious shoppers.

Piper Jaffray’s Gene Munster estimates that the top 5 market in terms of launch weekend sales are the U.S. (400,000), UK (250,000), Italy (88,000), Mexico (69,000) and Germany (48,000), with an average of 18,000 units sold in each of the 19 other countries. His survey among 283 attendees of Apple and AT&T stores in New York and Minneapolis revealed some interesting facts about the general sales pattern.

This year, 38% of users were upgrading from the original model and 39% were PC users (25% last year). Customers are mostly upgrading from Motorola (20% this year, 35% last year) and Samsung (13% this year, 9% last year), indicating that these two companies may be the hardest hit by the renewed interest in Apple’s gadget. The iPhone’s commanding ability to bring in subscribers at the expense of competing carriers remains strong - with 38% of iPhone buyers being new to AT&T (52% last year).

The $199 price point seems to be the sweet price point as 65% of customers are purchasing the higher capacity 16 GB model, down from a whopping 91% that bought the higher capacity 8 GB model last year. The new iPhone accelerated iPod cannibalization; with 46% of buyers saying they will not use an iPod in addition to the iPhone (29% last year). Ironically, only 9% are buying the iPhone 3G because of the lower price, contrasting what most analysts are citing as a key sales driver. 85% of buyers said they’re getting the handset for the new features it offers.

This claim is echoed by RBC’s Abramsky who says that "the iPhone 3G remains unmatched by competitors in its interface and user experience," but added that virtually the same camera, 3G drain on battery life and increased service plan pricing remain valid points of concern.

Gene Munster noted that global demand for the iPhone is "better than expected." The analyst believes that the trend will continue when Apple delivers the handset to the additional 58 countries during the year. "In addition, we expect Apple will sell phones in China and Russia by year end. The only problem is production, but we continue to believe 45 million units for 2009 is achievable," said Munster.

How do 1 million iPhones translate to dollars?

If anyone had any doubt that Apple is either losing money or earning less on iPhone 3G (which is estimated to cost $173 to manufacture), Yankee Groups’ break-down clears the picture. The research group says that iPhone 3G launch may have been "the largest consumer electronics product launch in history," estimating that Apple posted about $433 million in first weekend iPhone 3G sales, based on the assumption that two thirds units sold were 8 GB and one third 16 GB model and an average price of $433 after the carrier subsidy.

The first iPhone was estimated to ring in at $150 million (in inflation-adjusted dollars). To put that in perspective, Windows 95 brought $122 million in the first four days, while the Xbox360 delivered $128 million during the launch weekend.

Yankee Group also estimates that the 10 million downloaded applications over the App Store made $3.5 million, with $1 million belonging to Apple since it takes 30% out of what the developers charge for their applications. The research firm said that most of the downloaded applications were free, but it echoed other analysts’ claims that Apple’s future earnings from the App Store will overtake iTunes profits once the iPhone installed base and the number of available applications increases. RBC’s Abramsky dubbed the App Store as "value builder" over time, comparing it to the powerful iPod/iTunes combination. Apple CEO Steve Jobs confirmed that the goal of the App Store is to push iPhone sales.