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Tuesday, December 09, 2008, 08:00 am PT (11:00 am ET)

Reports: $99 Wal-Mart iPhone would be atypical, risky move

Research firms and investment banks are welcoming a move that would see Wal-Mart carry the iPhone later this year, but warn that a special $99 model would stand in contrast to the company's proven strategy while also presenting unnecessary risk.

"We believe a $99 iPhone would be atypical of Apple's premium brand strategy," UBS Investment Research analyst Maynard Um told clients in a research note. "More likely is a scenario in which select Wal-Mart (& possibly Sam’s Clubs) are simply added as further iPhone distribution points (like Best Buy)."

The analyst recognized that a cheaper iPhone model could stimulate incremental demand, but said it would also cannibalize sales of both the 8GB and 16GB models and, to a lesser extent, the iPod touch.

More specifically, he estimates that sales of a $99 4GB iPhone would cut into Apple's fiscal year 2009 per-share earnings estimates by about 27 cents, requiring the Wal-Mart deal to generate sales of an incremental 1.5 million units to offset the impact.

Over at Barclays, analyst Ben Reitzes noted that a move intro Wal-Mart could help boost December quarter iPhone sales, as Apple would need to fill the discount chain's supply channel with handsets, which the iPhone maker in turn recognizes as sales. However, he too believes rumors of a $99 model will prove inaccurate.

"It is not like Apple to offer one special SKU for one non-Apple retailer, confusing views on pricing and driving traffic away from its own stores," the analyst told clients. "We believe it is more likely Apple will allow Wal-Mart to sell existing SKU’s at prices it desires (likely a small discount)."

Reitzes, who estimates Apple will sell 4.5 million iPhones during the December quarter, said the company is likely to expand its iPhone product line in 2009, potentially up-scaling with a 32GB iPhone version early in the year and offering a smaller, less expensive form factor down the road that plays better in "pre-paid" markets.

Pacific Crest analyst Andy Hargreaves also commented on the immediate benefits Apple would see by padding Wal-Mart with inventory. Should each of the discounter's stores received 150 iPhones before the end of the year, it would add approximately 540,000 units to the company's December quarter sales, he estimates.

Hargreaves pointed to a recent study that suggested iPhone 3G has seen its strongest growth from consumers that make between $25,000 and $75,00 per year. As such, he believes a high percentage of Wal-mart customers are potential iPhone purchasers.

With the weak economy driving traffic to Wal-mart stores over specialty stores, sales of iPhones at Wal-mart could help offset potentially weaker sales at AT&T and Best Buy stores, he said.

Hargreaves is currently modeling Apple to sell about 5 million iPhones during the December quarter.