For the first time ever, Apple Inc. (AAPL) will be selling the “unlocked” version of iPhone 4 in the US starting this week end, meaning that starting this quarter, the iPhone 4 will not be tied to a specified telecom network. The unlocked version is already available overseas. The new version of unlocked iPhones will be available through its online stores.
The unlocked iPhone 4 is being priced at $649 and $749 for the 16GB and 32GB models, respectively, and are available in black and white colors.
AT&T Inc.(T) was for long the sole distributor of Apple’s iPhone, to which the company added T-Mobile at the end of 2010. Both these networks sold the GSM version. Verizon Wireless, a division of Verizon Communications Inc. (VZ), was added in January.
The unlocked version of the iPhone 4 (GSM model) will enable the user to select any GSM network of his/her preference. Therefore, users who frequently travel abroad could select any local network provider of their choice, saving on the roaming bills that are being levied in case of network-tied iPhones.
However, we feel that users in the U.S. do not have many options as they are compelled to choose their network either between AT&T and T-Mobile (T-mobile has been taken over by AT&T). So we feel that releasing the unlocked version is more of a marketing strategy than anything else. Apple has adopted this strategy to boost sales.
For Apple, iPhone 4 has been a great catalyst for growth as in the March quarter iPhone sales grew 111% year over year, reaching an all-time quarterly record of 18.6 million units.
Lately Apple has been in a spot with all the legal battles pertaining to patent rights with HTC, Eastman Kodak Co. (EK) and Samsung. Moreover, last Tuesday, Apple settled the patent dispute with Nokia Corp. (NOK), but will have to make a one-time payment to the latter and is to pay regular royalties going forward. Particulars of the financial terms were not divulged.
More importantly, Apple has received unfavorable verdicts in a couple of cases at the International Trade Commission (ITC). As ITC has the authority to block import of products that infringe U.S patents, the lawsuits could cause a dent in Apple’s very sizeable cash balance. It may have to pay a hefty fine or a recurring license fee, which will hurt its profitability going forward.
Apple along with Google is facing increasing scrutiny from the US and European regulators for their alleged role in infringement of users’ privacy. We believe Apple’s iAd business will be impacted by increased legislation to protect users’ privacy. Year to date, there have been at least five related legislations, three of which were designed to empower users to turn off tracking.
No doubt, Apple is a great company with a loyal customer base, international expansion, competitive pricing strategy and a solid cash position. We remain positive on Apple’s long-term growth. However, increasing competition in most of its major product segments, possible delays in product launch, higher operating expenses and increasing legal complexities compel us to maintain our Neutral rating over the long term (6-12 months).
Currently, Apple has a Zacks Rank of #3, which implies a Hold rating in the near term.
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