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Apple Puts Coal in Stocking for Would-Be IPhone Gifters

Requirement That Owners Must Sign Contract May Have Cost Company $80 Million in Holiday Sales

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SAN FRANCISCO (AdAge.com) -- As she ticked off her holiday-shopping list, public-relations executive Rebecca Sullivan prepared to buy her husband an iPhone. But like many other potential gift-givers, she was thwarted in trying to put the hottest handset around under the Christmas tree.

Missed opportunity? Some say holiday season could have been a boon to iPhone.
Missed opportunity? Some say holiday season could have been a boon to iPhone. Credit: Cate Gillon
Simply put, it's impossible to surprise someone with an iPhone. To get one, the owner must appear in person and sign a two-year contract with a wireless carrier (in this case, AT&T). You can't even purchase one for someone who is already a subscriber. That restriction likely cost Apple a lot of potential revenue -- according to one estimate, $80 million in missed holiday sales.

Piper Jaffray estimates that the company sold 3.8 million iPhones in December, just over half of what it estimates were fourth-quarter unit sales. Andrew Murphy, an analyst at the firm, calculates that Apple could have sold 300,000 to 400,000 more iPhones if it were easier to give them as gifts. Since the entry-level 8GB phone costs $199 (with that pesky two-year contract), the unrealized revenue could be as much as $80 million.

"Could [sales] be higher ... if it was easier to gift?" asked Mr. Murphy. "Yes, you could say they could have sold more."

Apple declined to comment. AT&T paid $900 million to Apple to carry the iPhone in the last quarter alone, including subsidizing the cost of the device to make it more manageable for consumers.

Frustrated gifters
In a culture where a person is accustomed to buying anything she wants as long as she can cough up the cash, the hurdle left a bad taste with some would-be iPhone purchasers. An underbelly of discontent surfaced in the blogosphere and in the post-holiday water-cooler chatter. Rene Ritchie, editor of theiphoneblog.com, said the site "fielded many, many questions from frustrated would-be iPhone gifters."

Apple's workaround was to dangle iPhone gift cards starting at $25. But the idea of giving or receiving a piece of redeemable plastic just didn't have the full-throttle thrill of giving away a glistening iPhone. On Mr. Ritchie's blog, one poster lamented "how impersonal unwrapping a gift card instead of the phone itself on Christmas morning" is.

Of course, it's common practice for handset makers to lock in to exclusive deals with wireless carriers, making many other phones essentially un-giftable as well. This time there was hue and cry because, well, it's the iPhone, with its attendant cult following common to all things Apple. But it does underscore the inflexibility of the carrier-phone arrangements in the U.S., in which consumers cannot choose their phone separately from the network.

Apple has chosen to support only the GSM network with the iPhone, and not on CDMA, which is supported by Verizon and Sprint. But even if the phone were sold with other wireless services, it would still require a contract (which helps defray the cost of the phone to the consumer), which once again renders it impossible to gift.

AT&T good choice
Still, analysts widely laud Apple for its decision to align with AT&T, and point out that the two-year contract raises the affordability of the phones. Moreover, they say, exclusivity gives the wireless partner reason to lavish marketing attention on a handset. "It's such a great phone that you really need a strong carrier that's going to commit to it, market it ... make it their top phone, and have a strong customer base and a network that fits with what the phone is trying to do. AT&T had all of that," said Larry Swasey, a wireless analyst at Visant Strategies.

CCS Insight's John Jackson said there will always be opportunity costs, but "Apple is bigger than Christmas. I wouldn't have necessarily done it any other way. I suspect Apple has few regrets."

To be sure, Apple is on the lookout for ways to get its handset into more hands. The iPhone recently went on sale in Walmart stores, and if Piper Jaffray is right, Apple will debut a low-end iPhone model by the end of the first quarter. If that scenario bears out, people could start gifting the iPhone to themselves.

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