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TheStreet Open House

Apple's iPhone Slaps Palm

Apple's (AAPL) iPhone already looks like a smashing success from a financial standpoint.

In the past week, with the device's launch still three months off, a few analysts have already raised their sales estimates.

Even industry skeptics think Apple's deft design hand, and consumers' growing allegiance to the iPod brand, will push the company past its target of 10 million iPhones sold over 18 months.

That's only a 1% sliver of a market now topping 1 billion mobile phones sold annually. But it's a pretty sweet slice when you consider that the phones will be selling at $500 to $600 apiece.

"I think they'll sell 10 million to 15 million in a year, and that's at least an additional $5 billion on their revenue line," says one Wall Street analyst who has no rating on Apple.

That will be especially huge "if they get margins like RIM (RIMM)," he adds.

Analysts say most phone makers get fairly modest markups above the cost of producing the phones.

Manufacturers such as Motorola (MOT) and Nokia (NOK) get gross margins of 25% to 35% on the price they charge telcos for the phones.

But if some cost estimates are correct, Apple will be shattering that barrier by commanding 100% markups on its iPhone.

In January, tech manufacturing research shop iSuppli detailed the estimated cost of every chip component and the assembly expense for the iPhone.

For example, 4-gigabyte memory: $35; 8-gigabyte memory: $70; display screen: $33.50; manufacturing: $15.50. The grand total is $246 for the 4-gig-memory model and $280 for the 8-gig unit, according to iSuppli.

So how does Apple command such a huge premium?

iPhone
Virtual Keyboard Screen
Source: Apple

"First, don't call it a phone," says Ovum analyst Roger Entner. "The carriers have destroyed the value of the phone. To most people, a phone means it's free. It's like calling your car a Yugo."

Phone companies routinely subsidize the purchase of a new customer's phone in exchange for a one- or two-year service contract. A hallmark of Motorola's woeful financial performance last year was how the once wildly desired Razr phone became a freebie to entice new users.

Apple plans to sell the iPhone in its own stores and let AT&T (T) sell it online. AT&T's exclusive deal with Apple probably prohibits any toying with the prices, but AT&T will no doubt offer its own rebates to rake in lucrative two-year contracts.

However, don't expect much give on price from Apple.

Apple famously dictates every aspect of its business, from its secretive product launch schedules to the terms of its retail prices. There are no Apple discount outlets, and even its refurbished gear gets resold at nearly new prices. And instead of cutting prices as products get older, the company discontinues models and unveils new ones.

One of the only outfits comparable to Apple in the wireless industry is Research In Motion. The BlackBerry maker has some of the highest margins in the phone business thanks to its command of the big ticket business segment.

iPhone
music player screen
Source: Apple

Observers say the iPhone offers a direct challenge to RIM's hot new consumer device, the Pearl. But the BlackBerry business niche may not feel much pressure from Apple. The iPhone's OS X operating system and lack of basic office software makes it almost a pure consumer device.

But one outfit that sits squarely in Apple's path is Palm (PALM). The Treo, an expensive handheld computer phone, had many loyal fans before sleeker smartphones, such as Motorola's Q and Samsung's BlackJack, started chipping away at the Palm phone.

Now, with the imminent arrival of the iPhone, Palm seems doomed, say analysts.

"Palm is shaking in their sandals," says Ovum's Entner.

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