Apple cell phone is real and ready for production - analyst

"Our research indicates that an Apple-designed smart phone has moved from concept to prototype and recently has progressed to near completion as a production unit," analyst Shaw Wu told clients in a research note on Tuesday. "We believe this smart phone has been in development for over 12 months and has overcome substantial challenges including design, interference, battery life and other technical glitches."

Pointing to the existing smart phone market, Wu noted the challenges companies face when trying to produce a converged product of high quality. However, he said Apple chief executive Steve Jobs "is finally satisfied with the end product Apple engineers have produced in terms of quality and the right blend of cell phone and portable media player."

Given Jobs' previous track record, the analyst said he has the utmost confidence the Apple branded cell phone, which he says will conform to a sleek candy bar form factor, will meet the highest of standards with "no exception."

"Clearly, we would like to share more detail as we have conducted extensive work on the product pipeline, but for now, here is what we will convey," Wu wrote. "The design will be an iPod nano-like candy bar form factor and come in three colors (we are not certain of the exact colors but we suspect black, white and platinum, similar to Apple's current color scheme of iPods and Macs)."

For Apple to enter the cell phone market in the United States, it would first need to gain approval from the FCC. The process would require the traditionally tight-lipped company to disclose both photos and specifications in public filings prior to launch. But Wu says Apple could avoid premature public disclosure by announcing the device in advance with a later ship date. Moreover, he said, it could possibly submit the filing through a OEM manufacturer, similar to the route Microsoft took by gaining FCC approval for its upcoming Zune player through a Toshiba filing.

Still, what is unclear to Wu is Apple's go-to-market strategy for the device, which he believes is an ongoing and serious debate within the Cupertino, Calif.-based company. While it could take the traditional route and partner with existing wireless giants like Cingular and Verizon, it could also adopt the MVNO (mobile virtual network operator) model, where it would rent and then resell space from such carriers under its own brand.

"We believe the go-to-market strategy is likely the gating factor in Apple shipping its cell phone imminently," the analyst wrote. "However, we believe the company's 155 Apple stores will prove to be a boon regardless of the marketing strategy, proving Apple local presence and competitive advantage."

Nevertheless, Wu said, he is "very positive" about Apple's prospect for building a material smart phone business given its strong brand name, loyal customer base, unique user experience, large installed base of 58 million iPods, and what he estimates to be about 300 million iTunes users.

"Should Apple gain 1 percent share in the billion unit [cell phone] market, we believe that could amount to a $2 billion opportunity assuming around 10 million units at a $200 average selling price (similar to its current iPod), but not including potential services and accessories revenue," he wrote.

Wu notes that despite being universally panned by critics, LG's new Chocolate phone is a strong seller for Verizon, accounting for nearly 15 percent of its volume. "We view this as a positive for Apple as this indicates that the US market has some degree of market acceptance of converged cell phone-MP3 player and that a product of mediocre quality like the LG Chocolate phone can still do very well," he wrote.

Given the results of his findings on the Apple cell phone project, Wu is modeling modest contributions (about $100 million) from cell phone sales into his fiscal year 2007 outlook for the company. "We believe our cell phone assumptions are conservative given the high-end user demand for an Apple cell phone and the key point is that this is an incremental new opportunity that could help drive sales of other Apple products," he told clients.

The analyst is now modeling Apple to generate $22.2 billion in revenue and $2.60 in earnings-per-share during fiscal 2007. He also raised his price target on the iPod maker from $75 to $91.

For additional information on the Apple's cell phone initiative, please see a recent AppleInsider piece, which similarly reported that the device is nearing arrival.