Analyst weighs in on Apple's rev-share arrangement with AT&T

Due to the unique terms of iPhone sales and pricing, analysts for Piper Jaffray said Thursday they believe AT&T has agreed to a revenue sharing plan with Apple where the iPhone maker would receive a small portion of each subscriber's monthly service fees.

"While we do not know the exact details of the agreement, we conservatively estimate that AT&T gives Apple $3 per month (over the life of the 24 month contract) for every iPhone customer already with AT&T and $11 per month for every new subscriber," lead analyst Gene Munster wrote in a note to clients.

Specifically, the analyst believes the monthly revenue sharing involves $3 per month for service and data fees related to all iPhone users, and AT&T gives Apple an additional $8 per month for iPhone customers who transfer service to AT&T in order to use the iPhone. Such an arrangement, he said, could add 2 cents to his per-share earnings estimates for Apple in 2007, 15 cents in 2008, and as much as 58 cents in 2009.

Clearly, Munster explained, Apple's average revenue share per iPhone user depends significantly on the mix of current versus new subscribers. He cited an in-house June 29 survey of 253 iPhone users, which found that 52 percent were switching from a carrier other than AT&T.

"Our survey, however, consisted mostly of early adopters who would be more willing to cancel non-AT&T contracts than the general customer base," he wrote. "For that reason, we estimate for the mix of iPhone users that are new to AT&T will drop from 52 percent in June to 44 percent in the September '07 quarter and continue to drop over time as AT&T gains an iPhone user base."

Munster is modeling for Apple to sell 3.2 million phones in 2007, 12.4 million in 2008, and 45.0 million in 2009.

"These estimates may seem bold, but we believe Apple can garner 7.0 percent of the handset market share in North America and 2.8 percent share in the rest of the world by 2009," he told clients. "We assume Street pricing on the iPhone will have dropped to $338 by 2009 from $542 in 2007. Additionally, it is critical to keep in mind that the iPhone combines iPod and mobile handset, which should attract more than just a mobile phone customer."

As part of his model, the Piper Jaffray analyst has factored in cannibalization of the iPod from the iPhone by lowering iPod growth rates from 35+ percent yearly growth in fiscal 2007 (and prior years) to 10 - 15 percent in fiscal 2008 and 2009.

Munster made no changes to his Outperform rating and $160 price target on shares of the Cupertino-based electronics maker.