New iPhone Gears Up for Second Act

Sales of the 3G iPhone should easily beat expectations, analysts say. The phone goes on sale Friday in more than 20 countries.
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SAN FRANCISCO -- It's show time again for

Apple

(AAPL) - Get Report

.

The company's 3G iPhone will start retailing Friday in 22 countries and in its second act, industry experts say, the phone will be a best-seller beyond expectations.

Apple has set itself a sales target of 10 million iPhones for this calendar year but that was much before the company announced the 3G iphone at the attractive initial price of $199 for a 8-GB model, which is $200 lower than its predecessor. Apple has priced the 16-GB 3G iPhone model at $299.

Four analysts polled by

TheStreet.com

said they expect Apple to beat its target comfortably thanks to strong demand for the 3G phone and rave reviews from first-generation iPhone buyers.

Apple could sell as many as 14 million phones this year and about 80% of those will be the 3G iPhone, industry experts say.

The less-than-bullish

reviews

of the 3G iPhone pointing to the poor battery life, the lack of widespread availability of the 3G network and the high cost of owning the phone are unlikely to affect demand in any meaningful way, analysts say.

"The expanded international distribution of the iPhone, subsidized pricing getting the device into a price point necessary for more mass market adoption and the software upgrades are what will be important catalysts for iPhone sales," says Mike Abramsky, an analyst with RBC Capital. Abramsky does not own shares of Apple and RBC does not have an investment banking relationship with the company.

AppleStock: Checking In With iPhone Fanatics Outside an Apple Store

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The availability of mobile applications for the phone through the company's App store also offers users the potential to customize their iPhone and turn it into a truly convergent device, bringing phone, multimedia and applications together. It's a powerful hook for users and software developers and will be a big draw for buyers, analysts say.

Abramsky says he expects Apple to sell 11.6 million 3G iPhones over the next six months, pushing total sales of the iPhone to the 14 million mark this year.

At the end of the June, Apple had sold about 2.4 million first-generation iPhones.

Oppenheimer analyst Yair Reiner estimates sales could be even higher at 15 million iPhones this year, while Toni Sacconaghi, an analyst with Sanford Bernstein, is at the lower end of the scale with 11 million.

In the past few years, Apple has created a reputation for beating its targets by a comfortable margin and the iPhone should be no exception, analysts say.

"When Apple gave that its target 10 million iPhones target, the iPhone was being distributed in just six countries," says Reiner. "I don't think anyone realized they would have close to 70 countries for the next version and in many of those countries the phone would be sold at a fraction of what it does in North America." Reiner does not own shares of Apple and Oppenheimer does not have an investment banking relationship with the company.

A successful 3G iPhone launch could mean a strong revenue stream for Apple.

In fiscal 2007, the iPhones generated about $123 million in revenue or just about 1% of Apple's total revenue. By fiscal 2009, which ends in Septemeber 2009, the iPhone could generate about $8 billion and represent about 20% of Apple's revenue, says Reiner.

Apple amortizes revenue from iPhone sales over 24 months. That means in the next six months alone, the company will clock a little less than a $1 billion dollars from 3G iPhone sales, says Abramsky.

Lines for the 3G iPhone are likely to be longer than what Apple has seen for its earlier version. And Apple's challenge will be in meeting demand for the phone.

About 56% of 3,567 consumers surveyed by ChangeWave Research who plan to purchase a smart phone in the next 90 days say they're getting an Apple iPhone, a 21-point leap from the previous survey.

The survey also notes that BlackBerry maker

Research In Motion's

(RIMM)

share of consumer planned purchases fell 6 percentage points to 23% during that period, while

Palm

(PALM)

came in a distant third with just 3% of planned purchases.

About one-in-two current iPhone owners say they are "very likely" to buy the 3G iPhone for themselves or someone else in the future and most don't plan to wait long. About half of the group said they will purchase a new iPhone within the first 90 days of release.

The high eventual cost of ownership for the iPhone is unlikely to give potential buyers a reason to pause.

With the 3G iPhone, Apple shaved the $200 off the price of the phone compared to its predecessor, offering it for $199 with a two-year contract with

AT&T

(T) - Get Report

. But including higher data charges, the phone is likely to cost users more over its lifetime than its older version.

But Apple audience have never been one to go after a bargain, says Ezra Gottheil at industry research and consulting firm Technology Business Research. Apple's products, including the iPod and the Mac computers, are routinely priced higher than competitors.

"Apple has never appealed to the cost-conscious part of the market in any of its products," he says.

And if buyers didn't balk at a phone that was priced at $499 when it was introduced they are unlikely to do so now, says Gottheil.

Some critics have pointed to the lack of widespread availability of the 3G network in the U.S.

While AT&T's 3Gnetwork's reach is limited, iPhone also has wi-fi capabilities that should translate into greater Internet browsing coverage for users, say Gottheil.

Internationally, the 3G network is much more widespread and will ensure the iPhone is big draw for potential buyers, says Reiner.

As for the higher battery consumption, RBC Capital's Abramsky says it is an issue for all 3G smartphones and potential users are unlikely to be turned away from the device for that reason alone. Battery consumption on the 3G iPhone is higher than its predecessor because of the strain of being on the 3G network,

initial reviews say

.

Shares of Apple were up $1.39, or 0.8%, to $175.64 in recent trading.

The company's stock has gained about 18% in the last three months while rival RIM's stock has essentially remained unchanged over the same period. Other competitors such as

Motorola

(MOT)

and Palm lost ground among investors. Motorola was down about 23%, while Palm's shares remained unchanged over three months. The Nasdaq composite index was down about 1.2% during the same period.

With the 3G iPhone, Apple will stand tall among smartphone makers. It could also create a halo effect similar to that of the iPod, where strong iPod sales translated into growth in the company's Mac division, boosting Apple's overall financials.

"The iPhone potentially has a similar effect of bringing new people into the Apple brand and platform," says Oppenheimer's Reiner.