Apple's ambitious iPhone 3G plans

Peter Burrows
29 Aug 2008

Forecasting iPhone sales is one of tech's toughest guessing games. Since Apple's iPhone 3G came storming out of the gate with 1 million units sold in the three days after it went on sale July 11, analysts have scrambled to come up with a reliable forecast for how many of the devices the consumer electronics maker will sell in the coming years.

Many analysts expect Apple (AAPL) to sell around 11 million iPhone 3Gs in 2008 and another 25 million in 2009. But perhaps the most optimistic forecast is from Piper Jaffray (PJC) analyst Gene Munster, who expects the company to sell 13 million this year and 45 million next year.

While final sales can't be known until after the fact, clues are emerging as to Apple's production plans. As of mid-August, they were ambitious, BusinessWeek has learned. Apple plans to build 40 million to 45 million iPhone 3Gs in the 12 months through August 2009, according to a person familiar with the company's plans. The low end of that range is 52% more than the 26 million Munster expects the company to sell in that time. Apple boosted its production plans when initial sales proved stronger than the company expected, says the person, who requested anonymity. On launch day, the company expected to build 30 million iPhone 3Gs in 12 months. Apple declined to comment beyond reiterating that it expects to reach a stated goal of selling 10 million iPhone 3Gs in 2008.

The company's ability to reach that 40 million-plus goal will likely hinge on a successful introduction in several countries by the end of next year. Apple will also need to avoid component supply constraints and, maybe most important, address complaints over the performance of the updated version of its popular music-playing mobile phone.

Speeding things up

Apple's intention to sell the iPhone 3G in an ever broader circle of countries gives analysts cause for optimism. Analyst Michael Cote of Cote Collaborative recently told Fortune magazine he estimates Apple sold 3 million iPhone 3Gs in the first month, when the product was only available in 22 countries. Even if the sales growth clip slows after the initial burst of sales to gadget lovers, overall iPhone unit sales growth could accelerate given Apple's big international expansion plans. The company expects to begin selling in 20 more countries on Aug. 22. By next year, Apple may also be selling in the vast, swiftly growing Russian and Chinese markets. Also, Apple recently expanded distribution to include 986 Best Buy (BBY) stores.

Until recently, the major problem facing Apple and its partners was how to get enough iPhone 3Gs to market. Daily production has been running at around 150,000, says the person familiar with Apple's plans. If maintained five days a week for 52 weeks, that pace implies an annual production of 39 million devices. Suppliers of iPhone parts are used to handling far greater volumes; cell-phone makers such as Nokia (NOK) sell hundreds of millions of phones a year.

Apple will also need to reduce the time it takes to activate a phone once it's purchased at retail stores, says Needham & Co. analyst Charlie Wolf. 'The physical process of activating the phone is the bottleneck,' Wolf says. The process can take as long as 30 minutes, though Wolf says he's been told that Apple is working on improvements aimed at reducing the procedure to about 15 minutes.

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