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Apple Sets U.K. iPhone Launch

Daniel Del'Re

Apple (AAPL Quote - Cramer on AAPL - Stock Picks) laid out plans Tuesday to launch the iPhone in the United Kingdom, marking the first step in its broader plans to mine Europe for sales as the continent becomes increasingly vital to the company's growth.

At a press conference in London, Chief Executive Steve Jobs said Apple will begin selling the iPhone on Nov. 9 through an exclusive relationship with the carrier O2, a subsidiary of Spain's Telefonica (TEF Quote - Cramer on TEF - Stock Picks).

"We're thrilled to be partnering with O2 to offer our revolutionary iPhone to U.K. customers," Jobs said at the conference. "U.S. iPhone customer satisfaction is off the charts, and we can't wait to let U.K. customers get their hands on it and learn what they think of it."

Apple is following the outlines of the game plan it sketched out when executives told analysts during a recent conference call that the company would begin selling the iPhone in major European markets during the current quarter.

The company is hoping that the regional popularity of the iPod and iTunes music service has seeded local markets with demand for the iPhone and the iMac as it opens new stores across the continent.

"Apple is pursuing a multipronged strategy and the iPhone is just one weapon in its arsenal," said Fati Naraghi, head of technology research at U.K.-based Newton Investment Management, which holds Apple shares.

Until now, Apple has taken tentative steps to reach the European crowd. Only 11 of Apple's nearly 200 stores are in Europe, and those are concentrated in the U.K.

But the iTunes music service is available in the native languages of 22 countries around the world, most of which are in Europe's affluent regions. Sales from Europe accounted for 23% of revenue and 30% of operating profit in the first nine months of the fiscal year.

Over that period, European sales jumped 33%, compared with 23% in the U.S. Operating profit in Europe more than doubled, vs. a 60% gain in the U.S. Sales in Japan, meanwhile, contracted, underscoring Europe's growing importance.

The launch of the iPhone in Europe comes as the device is enjoying success in the U.S. Apple sold its 1 millionth iPhone well ahead of schedule, and it has become the best-selling multimedia phone, or "smartphone," in the U.S., according to data tracker iSuppli.

The company is ramping up production to meet increased demand after it slashed the price of the iPhone by 33%, or $200, in the U.S.

Still, selling iPhones in Europe will be more challenging. Europeans, who are generally savvy users of mobile data features, may balk at the iPhone's slower "Edge" network. Most European carriers offer phones running on faster "3G" networks for easier Web surfing.

Europeans can typically use the same phone with different carriers, something Americans cannot do. They might find it stifling that the iPhone works only on a single carrier's network -- though hacks have already been devised to circumvent that restriction.

Apple is also dueling with antitrust regulators from the European Commission, which has just emerged battle-hardened from a victory over Microsoft .

Apple has resisted the Commission's calls for it to unlock iPod so that consumers can use them with music services other than iTunes. However, the company is just as unlikely to let the iPhone work with other music services, stoking regulators' ire.

In Europe, Apple will butt heads with Finland's Nokia (NOK Quote - Cramer on NOK - Stock Picks), the world's largest handset maker. Nokia has less than 10% market share in the U.S., so the iPhone is largely untested against the Finnish company's range of multimedia devices.

The iPhone "doesn't need to be the dominant product in order to be enormously successful," says Kirk Kim, portfolio manager at Transamerica Investment Management. "Apple needs to get into new markets, and the biggest upside comes from penetration into Europe and potentially Asia."

When factoring in generous payment terms from AT&T (T Quote - Cramer on T - Stock Picks) and now O2, Kim says that the gross margins on the iPhone approach 100%. That means that even if the iPhone isn't among the hottest-selling phones in the U.S. and Europe, it will still make a sizable contribution to Apple's sales and profitability.