The elimination of carrier subsidies on smartphones in the U.S. has been done in a strategic way that shifts costs, but adds very enticing benefits that very well could accelerate device sales with more frequent upgrades.

The move to eliminate subsidies for smartphones in the U.S. has been done in a way that disguises the cost shift from the wireless carrier to the consumer.  In a society that evaluates cost based on the 'here-and-now' (the what do I have to pay to leave with this phone right now mentality) rather than the long-term, the way in which installment plans have been implemented will not stunt growth of device sales, rather, they may actually accelerate it, with the attractive annual upgrade options embedded in the value proposition.

Unsubsidized Installment Plans:

The unsubsidized installment plans are the newest trend that U.S. carriers are offering, which effectively eliminate the subsidies and allow the carriers to collect the full device cost rather than just the $199.99 that is collected upfront for the latest-and-greatest smartphone.  A subsidized contract provides the customer the opportunity to purchase an entry-level flagship smartphone for $199.99, as opposed to $649.99 (the unsubsidized price of a 16GB iPhone 5S).  These new installment plans allow a customer to pay $0 upfront, but then divides the full price of the device $649.99 into either 20 or 24 installment payments.  So for a 16GB iPhone 5S, an additional $32.50 monthly charge is added for the 20-month installment plan, or $27.08 for the 24-month installment plan.  Note that these installment payments are in addition to voice and data plans.  

But $0 down is just one of the appetizing incentives presented to customers contemplating an installment plan; the other incentive is just as powerful - upgrade rights. The key hook of the installment plan purchase is that customers on the plans have the right to trade in their smartphones after a certain number of monthly installment payments have been made (12 in the case of the 20-month installment plan, 18 in the case of the 24-month installment plan) and upgrade to a new device at no cost. Since OEMs are releasing new flagships annually now and everybody wants "the latest", there is a large incentive to go with an installment plan that allows for the annual upgrade.

When carriers sell phones using traditional subsidies, they collect the $199.99 upfront, but that's all they collect as far as the device cost goes, and the gap of $450 ($649.99 - $199.99) is the effective subsidy. Under this scenario, they rely heavily on the 24-months of contractual service (voice & data) revenue to more than offset the subsidy.  With the installment plans, the carrier is now collecting the full $649.99, but over the span of 20 or 24 months. So even if a subscriber chooses the 20-month installment plan and elects to upgrade at no cost after 12 installment payments have been made, the carrier has received the following:

• The device - as it has to be traded-in, which can be refurbished and sold
• $390 of device-related payments ($32.50 x 12 installment payments), which far exceeds the $199.99 that a customer would pay upfront on a traditional subsidized plan
• Monthly service revenue, which would run at least $60 per month for the lowest data plan

Your typical customer does not understand the elimination of the subsidy.  In fact, they see these installment plans as a great deal as they can walk into a wireless store, pay at-most a $35 activation fee, and walk out with a brand new phone.  What they don't understand is that even after 12 installment payments, they have paid 95% more ($390 vs. $199) just for the hardware than they would have under a subsidized program, while still paying the same service revenue that they would have incurred under a subsidized purchase.

It Gets Better:

Installment plans and elimination of subsidies sound like it would eliminate being tied to a contract as well, which is another way that these plans are being pitched - ummm, not so much.  The fine print on these installment plans requires that if at any point you decide to cutoff service, you owe the remaining balance of the device.  So in the example of an iPhone 5S, if you decide to cutoff service after 10 months, you owe the carrier $325.00 ($649.99 less 10 installment payments of $32.50).  So while the carriers are touting these new plans as contract-free, it's merely semantics.  In all reality, the $325.00 balance due after 10 months of service is effectively a contract termination fee.

The Alternative:

When the move away from subsidies started coming up, one likely thought of a scenario that had the customer paying the full price of the phone upfront at the time of purchase, which would be $649.99 for a 16GB iPhone 5S.  However, when given more thought, that wouldn't work for the carriers for a number of reasons, including:

• It would cause people to keep using the same device forever and thus, wouldn't allow for new activations and would put the carriers on the hook for unsold units that they have been contractually obligated to purchase under MOQ clauses with OEMs
• It would not tie the customer to the profitable side of the business - monthly data and device access fees. After all, after you have paid for a device in-full, there is no contractual obligation - you become a month-to-month subscriber

Conclusion:

The elimination of subsidies in the U.S. has been given much attention and has largely been viewed as a very negative trend for the OEMs (AAPL, Samsung, HTC, etc.).  However, the negative attention has largely been overstated and perhaps isn't even a negative at all.  With the old subsidized contract, a customer could only upgrade after two-years.  The new installment plans are being sold to customers as a $0 down and upgrade every year type of deal, which are both very enticing to your average person not doing the math or not understanding how subsidies work.

It should be noted that the international markets are an entirely different animal, in the sense that in most countries where credit quality is weak or non-existent, phones do require payment in-full upfront.  The carriers in these countries are much more concerned with recouping device costs than their domestic counterparts, who are looking much more at metrics like ARPU and churn.  As emerging markets establish better credit systems, the installment plans that have led the subsidy elimination in the U.S. will likely become a similar way to disguise who is paying what, and the shift in focus will move to ARPU and other usage metrics.

“On Monday’s earnings call, AAPL disclosed a number of reporting changes that would occur beginning with its first fiscal quarter of 2015 (Dec-14). These prospective reporting changes are a classic move to disguise the performance and metrics of two of its newest products.”

On its FQ4 earnings call on October 20th, AAPL announced a series of new reporting changes that will begin in FQ1 2015 (Dec-2014).  These changes include:

• Segment reporting: Historically, AAPL has reported sales on a geographic level for all of its indirect sales distribution and then included a segment called "retail", which effectively captured all of its direct (brick-and-mortar and online) sales.  It will now allocate those retail sales to the geography in which those sales occur and will eliminate the "retail" segment altogether.
   
• iTunes, software and services: AAPL will begin rolling in its Apple Pay revenue into the category called "iTunes, Software, and Services", which previously included the net payments for iTunes sales, iOS App purchases (30% retention), AppleCare. Mac App Store, and some other miscellaneous items.
   
• Creation of "Other" product category: Previously, AAPL's six main product categories were iPhone, iPad, iPod, Mac, iTunes Software and Services, and Accessories.  AAPL will now condense that to five categories with the elimination of iPod and Accessories, and the addition of "Other".  Other will include iPod, Apple branded accessories, 3rd party accessories, Beats hardware sales, and starting in FQ2 (Mar-2015), Apple Watch.

All of these changes seem 'logical' and somewhat benign at first-glance, but clearly there is a reason for these changes.  AAPL is very deliberate and strategic with any changes its makes, especially with the information it presents to the public in its SEC filings, and after a second look, it appears as though AAPL may be looking to disguise more of its business performance than highlight it.  Here are some thoughts:

• Retail: The change to the segment reporting is by-far the most "logical" of the changes.  As explained on the call, the elimination of retail as a category better aligns with how management evaluates the business, which is by geography with the associated retail sales of those geographies.  AAPL Retail is heavily concentrated in the Americas region, with nearly 60% of its stores in the United States alone. That said, this new reporting change will boost the Americas region on a revenue basis.  In its most recent quarter (Sept-14), the Americas made up roughly 40% of sales.  China revenue was suppressed by the inability to obtain regulatory approvals on the new iPhone 6 models until FQ1 (Dec-14).  One possible rationale (beyond alignment of management's evaluation) for this particular reporting change may be to show less dependence on foreign sales by allocating retail sales (the majority of which will go to the Americas) by geography.

• iTunes, Software and Services: Clearly, this reporting update (not change) is to disguise (or rather, not disclose) Apple Pay revenue.  Cook mentioned on the call that there is contractual relationships with the banking institutions (which we knew already) and that those contracts are private matters.  AAPL is rumored to be getting a cut (% of dollar spend) off every Apple Pay transaction.  What that number is, nobody will ever know as it will be embedded in this product category.  What is interesting is that the company usually discloses total iTunes and App Store billings (gross amount) on its earnings calls. Analysts will certainly be trolling for any data they can get out of management as it relates to Apple Pay (# of points-of-sale, additional retailer sign-ups, geographic roll-out, gross dollar transactions of Apple Pay, etc.). 

• Other: This is the change that I think caught most analysts off-guard, and specifically, the notion that Apple Watch would be rolled up into this nebulous category effectively known as miscellaneous. When asked if the inclusion of Apple Watch in "Other" signaled the company's expectations for the product as "muted", Cook was very quick to dispel that idea.  In fact, he went so far as to say exactly why the company is including Apple Watch in "Other", which is to not disclose unit sales, ASPs or other relevant sales data for competitors to see.  This could become a real problem for analysts if the Apple Watch does end up gaining traction.  Many analysts are modeling a $450 ASP on the Watch (mix of all three models), so if the company were able to move a couple million units in the first quarter of availability, you're talking about nearly a billion dollars of revenue - still not that significant. However, the question will become, at what point will AAPL start breaking out Watch data - when it becomes five billion? ten billion?  

What's interesting about the Watch this is that AAPL broke out iPhone and iPad data separately from nearly the beginning of the product launches.  Perhaps this lack of transparency on Watch performance is based on lessons learned from the past?   The iPod is now a rounding error and its inclusion in this new category was destined to happen - one of the big questions is how long it retains a tab on the AAPL online store website with the other products, rather than being shoved into "accessories"?  I think inclusion of Beats here is also a "logical" choice based on the nature of the product and the fact that AAPL has no desire to show the revenue run-rate of this acquisition.

In any case, these reporting changes and updates were done in a very deliberate manner and designed for the "double-down on secrecy" theme.  Some of them (like segment reporting) are not going to make much of a difference to analysts.  Others, like the roll-ups of Apple Pay and Apple Watch into larger categories will cause nightmares for analysts - at least that is the hope.  The bigger that these revenue streams are, the harder the quarterly financials will be to model out. 

“Success in the post-smartphone era is reliant on the ability to create a suite of services to enable practical everyday solutions that optimize the device’s hardware. We are nearing a point of ubiquity where ‘speeds and feeds’ aren’t, in-and-of-themselves, going to win new users. The post-smartphone era will be defined by the stickiness of the platform, which goes far beyond the pixel density of the device’s display or the number of cores powering the SoC.”

On Monday, CNBC interviewed renowned venture capitalist, Roger McNamee of Elevation Partners, was asked about AAPL's Monday morning announcement of 10 million iPhone 6 / 6+ units sold over the three-day period since the phone became available for sale on Friday, September 19th.  While McNamee did offer some insights on the incredible sales, he shifted the conversation into a much more insightful point about where we (the inhabitants of the civilized world) are in the 'smartphone cycle'.  In short, McNamee commented that the smartphone market is a mature market now and that nearly everybody 

that will have a smartphone has one, and is likely going on to their second, third, and so on.  In making that point, McNamee went on to talk about what really matters now in this mature market - for AAPL, that's iOS 8 - operating system that runs AAPL's services, applications and binds its broader ecosystem. Specifically, he mentioned that AAPL-Pay is going to be huge, and one example of how the world's most valuable company will stay ahead in the continuing evolution where we see diminishing returns on hardware innovation, and increasing utility of services that run off the software - it speaks to the ever-present notion that mobile hardware is becoming a commodity with the last big OEM entering the realm of phablets. 

It's No Longer About Getting People In; It's About Making Them Stay

There have been a number of articles written since AAPL's keynote on September 9th that address its new AAPL-Pay service, which is set to debut in the United States in October and will run off of NFC chips in its latest 6 and 6+ handsets.  Most of these articles talk about the prospects of the initiative in the context of "revenue and earnings accretion", and the conclusion is, it won't move the needle of a company running at $200B per year.  I believe that while this contextualization is interesting, it is completely missing the point. AAPL-Pay is not about revenue accretion related to the reported $0.15 that AAPL will receive on every $100 of transactions using the service, it is about adding another link to the ecosystem chain that is going to inevitably lock iPhone users to the platform.

AAPL's Fully-Integrated Portfolio of Services That Will Keep the iPhone Installed Base Strong

In recent interviews post-launch, when Tim Cook talks about the iPhone, he does not shy away from discussing the phone's thin aluminum design, high-resolution retina HD screens, or its practical and reliable TouchID sapphire sensor button.  However, when the topic shifts to what the iPhone means to AAPL, his context shifts to a discussion of 'value' predicated on an incredible convergence of "hardware, software, and services" with each component critical to the value of the other, and most importantly, a bundling that only AAPL can achieve.  And he's absolutely right.  Just today, there is an article on CNBC discussing that Samsung's tough times have less to do with AAPL's strength, and more to do with its co-dependence on GOOG, who provides the Android OS that Samsung, and nearly every other OEM runs on its smartphones.  AAPL's "closed garden" approach to integrating hardware, software, and services enables services, functionality, and attributes, which include:

• TouchID (first a security lock for phone access, now a password enabler for a multitude of apps);
• iMessage - a ubiquitous way to read traditional SMS msgs on any AAPL device;
• iTunes / iTunes Match - media platform to rent, buy, stream, and manage all of your digital media including movies, tv shows, and music; 
• iCloud Drive - storage feature for access to documents, pictures, and other media from any AAPL device;
• The App Store - 1.3M device-specific apps vetted and approved by AAPL for function, malware, conformity, and 'taste';
• iWorks - cloud-based productivity suite for word processing, spreadsheets and presentations;
• Find my iPhone - a systematic way to track the location of all of your AAPL devices from your iPhone to iPad to MacBook, locate them via a beacon sound, and remotely wipe if stolen; 
• AAPL-Pay - a new NFC-based payments platform supported by processors who transact over 80% of all credit and debit transactions - to debut in October.
• Trust - it was reported this week that AAPL has potentially up to 885 million iTunes accounts with credit cards on file.  If true, this would be a treasure trove that only further clarifies how / why AAPL was able to strike the deals it did to get the AAPL-Pay service to market.  It also implies that those not supporting the service are likely working to get there. For the record, AAPL has previously stated it has 500 million iTunes accounts with credit cards on file.
• Uniformity - by April 2014, just about seven months after iOS 7.0's release, 87% of iOS devices accessing iTunes were running its latest operating system (OS), while its major OS competitor, Android, had its highest penetration (34%) running on Android 4.1 "Jelly Bean" - released in late June 2012. 

While each of these items alone seem marginal, when aggregated, it forms an incredibly consistent ecosystem that enables convenience and security that a disjointed hardware and software platform approach can never replicate.  AAPL has had its share of problems with iCloud, but those holes are quickly getting filled and it is very easy to see the residual effect - a growing platform with higher engagement, an increased willingness to embrace mobile commerce, and a halo effect of increased device purchases - in fiscal Q3, AAPL set June-quarter records of 35.2 million iPhones (with channel contraction), and 4.4 million Mac computers, especially impressive given the PC industry's continued contraction.

Square Pegs Won't Fit in Round Holes

Nobody has been able to create a ubiquitous mobile payments platform because they can't get the square pegs to fit in the round holes - the seamless coordination between the hardware maker, software provider, and third-party processors simply does not exist.  GOOG Wallet has been out for over three years now and has seen very little penetration because of the inherent disconnect between the hardware from the likes of Samsung, HTC, and LG with a heavily fragmented operating system.  Even if they got that type of cooperation, the inherent differences in the hardware alone make the application of the solution inconsistent, unreliable, and confusing.

Now that AAPL has had a year to refine TouchID, build relationships with merchants / credit card processors, and ensure the secure enclave in the device protects sensitive information, it will roll out a platform next month that will likely gain more traction in its first few months than GOOG wallet has been able to achieve in the three-plus years since it debuted in the United States.

A recent article by Nicole Arce of Tech Times summarizes much of this differentiation between GOOG Wallet and AAPL-Pay and the prospects for each: 

"Both Apple Pay and Google Wallet use near-field communications (NFC) to send the user's payment information to the point-of-sale terminal. However, Apple says paying with Apple Pay will be as quick and easy as simply holding the iPhone on the contactless reader and tapping the finger on the screen...

Google Wallet, on the other hand, requires users to swipe their phones awake and enter a PIN. If one would take a look at the Google Wallet page on Google's website, it's not something that many people would easily understand. The page tells users they can use loyalty cards, share card information and scan bar codes, but that doesn't paint a picture of what Google Wallet can really do. Apple, on the other hand, creates the need for a mobile payment system by saying that carrying multiple credit cards is a hassle and the magnetic stripes they use aren't very secure at all. With Apple Pay, consumers can pay for their purchases at more than 200,000 stores nationwide by simply tapping their finger on their iPhones. Most people don't know where they can use Google Wallet to pay for their purchases.

"First of all, people don't know where they can pay with their phone or how to do that. Apple, which taught how to use their finger on a phone as opposed to a keyboard, will be able to pull this off."

A major difference between the two systems, however, is that Apple says Apple Pay will have no access to the user's purchase information except for the most recent purchases listed in Passbook, which also carries the user's credit card and bank account information. Google, on the other hand, sees information on the user's purchases, which could make or break the decision for any user to use Google Wallet. [Emphasis Added]

It is interesting that the last point in this article discusses access to data - if the quantity of iTunes accounts with credit cards referenced above is any indication, AAPL has sufficient "trust" within its ecosystem - which will be critical for mass adoption of a service based on sensitive personal financial information.  Nobody knows whether AAPL will finally crack the code with the "true" mobile wallet, but if history is any indication, it is far more likely to succeed than any of its predecessors attempting to push this paradigm shift in the frequency and way that electronic payments are made. 

I Want to See Some Numbers

In AAPL's quarterly SEC filings, it has a product category labeled "iTunes, Software, and Services", which includes revenue from:

• iTunes Store (net of payments made to media content providers)
• App Store (net of payments made to developers - AAPL's 30% retention)
• Mac App Store
• iBooks Store
• AppleCare / Licensing and Other Services

This product category will likely contain the revenue generated from AAPL-Pay.  This product category ran at $17.7B of revenue over the trailing four quarters (FQ4 2013 - FQ3 2014), and grew at 16% year-over-year (FQ4 2012 - FQ3 2013).  To put that in perspective, the revenue derived from this product category if considered a standalone company would place it #160 in the 2014 Fortune 500 rankings.  Needless to say, this is an extremely important aspect of AAPL's business, not to mention its fastest growing product category.

In the famous movie, Wall Street, Charlie Sheen's character (Bud Fox) asks Michael Douglas' character (Gordon Gekko), "how many yachts can you waterski behind?"  The question is essentially asking, "when is enough ever enough?", and is analogous to the questions that are creeping up very quickly on the majority of smartphone OEMs out there running fragmented hardware and software, which include:

• How much more does a user care about a 500 PPI screen over a 400 PPI screen?
• When will software skins provide more than just a layer of unnecessary features like eye-scrolling?
• When will the fingerprint sensor work reliably and in a natural ergonomic way?
• How much does a user care about having an octa-core processor or 3GB of RAM? 
• How much better of a picture does a 40MP camera on a smartphone produce compared to an 8MP camera where one company optimizes the translation from exposure to the Image Signal Processor (ISP) to the System on a Chip (SoC) to create a photo?

These are relevant questions because unless the Android OEMs can each develop a blossoming 'ecosystem' with an annual run-rate approaching $20 billion that provides practical and intuitive everyday solutions, the only differentiation is in the "speeds and feeds" and gimmicky software skins.  In short, the post-smartphone world isn't about getting people into your platform; the post-smartphone world is about making it hard to leave - which has everything to do with services, and nothing to do with specs.

“The first problem with AAPL is that they bring so much hype; the second problem with AAPL is that they sometimes actually live up to the hype.”

After using the new iPhones for the past 60-hours, I can safely conclude that they have lived up to the hype.  But that's the easy answer, and generally-speaking, the same conclusion that every reviewer from Walt Mossberg to David Pogue to Joe Schmo tech-blogger has come to as well.  In my opinion, there are nuances to the conclusion.  This was the second consecutive year that AAPL debuted two new iPhones simultaneously.  However, unlike 2013, this year's upgrades were about premium and premium plus.  While the 'plus' 5.5" model is the more highly-coveted of the two phones, both provide significant upgrades from last year's flagship 5S model.  As the picture below shows, you never knew how small the 5S really was, until you see the 6 and 6+.  This review is strictly on the hardware, with some small caveats for software features.

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The new iPhone lineup.  From Left to Right: 4" iPhone 5S, 4.7" iPhone 6, and 5.5" iPhone 6 Plus.

The iPhone 6 Plus

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128GB Space Gray VZ iPhone 6+ (Model A1522) running on AT&T Network with Anti-Glare screen shield.

I had the Samsung Galaxy Note 2 and actually really enjoyed using it.  The big screen was, well big, but the improved media consumption capabilities (movie watching, reading, and photo viewing) proved that big phones do have a place in today's society.  It was really the OS, TouchWiz skin, and overall cheapness that Samsung has perfected that made me ditch it after a week.  The iPhone 6+ is AAPL's trump card in the increasing market for phablets.  The AAPL brand name (let's not forget about the power of that 12-digit intangible asset), thin aluminum chassis (7.1mm), rounded edges, and curved display glass really makes for a nice feel in the hand - much more so than any of its competitors in the market today.  It's so cliche to say, but it's a premium feel that you will not find in any other smartphone (with the exception of maybe a Vertu) on the market today.  Sure, people are going to complain about the ugly lines on the back, the slightly protruding camera, and the Helvetica font used for the "iPhone" inscription, but let's face it, if those are your biggest complaints - you have a winner.

The 1920 x 1080 (401PPI) screen is amazing.  Sure, you'll find over-saturated 2K displays on smartphones out there with PPIs approaching 500+, but like with AAPL's camera technology, display quality is not just about numbers (speeds and feeds).  AAPL's displays are accurate (sRGB), don't over-saturate colors, and provide the user with a display that is hard to match no matter what pixel count you have.  The other thing worth noting about the screen is the curved edges - TC made a big point about this (the singularity between chassis and screen) in his interview with Charlie Rose, and I didn't understand why - after using the phone, I now know why.  In the past, the squared nature of the iPhone chassis provided a definitive end to the aluminum and beginning to the cover glass.  With the new generation iPhone's, that disconnect is all-but-gone.  The best thing I can compare it to is an infinity pool where you just see the edge just fall off, but it's better because now you can feel it too - it really is something, and you won't understand any of this fanboy-ish jibber-jabber until you actually hold one in your hand.  Here are my key takeaways summarized:

• Battery Life: Off-the-chart.  At first, I was surprised to see the battery drop down to the 80% level rather quickly, but then it stayed there for a while...and a bit longer...and yet a little longer.  The battery life in-and-of-itself makes this phone a must-upgrade.  The extra $100 is well worth what you would have spent on an ugly battery case anyways.
   
• TouchID: I have used TouchID for a year now and honestly, after figuring out a few tricks (e.g., programming the same finger multiple times to get better results, which still holds true), I found it pretty damn accurate and reliable on the 5S.  For anybody that's really given this feature a chance to be useful -or- tried any of the competitor offerings, you know that this is no gimmick.  And like a Ginsu Knife commercial, "but wait, there's more..."  TouchID is even better on the 6+  I've been using this thing at the beach and have found the sensor to be less sensitive to moisture, more accurate and faster - very pleased with the improvements here especially with the multitude of apps (and list growing by-the-day) that are now using TouchID as a secure and quick password enabler.
   
• A8 Chip: They say the A8 chip is x% faster, and I can honestly say that it is...just kidding.  I can't freaking tell - I've always felt that iOS is a very smooth experience, even compared to the octa-core 4GB RAM powered SoC's being thrown into any Android phone these days.  It's smooth, but unless you're a hardcore gamer, which I'm not, I doubt you'll be able to tell - it's a seamless experience and for 90% of users, that's good enough.
   
• Media Consumption: Aside from battery life, this is the one place that the 5.5" really puts itself in a new class above the 6.  Movies look phenomenal on this screen - everything from full-screen YouTube, to AAPL's own HD keynote, to HD iTunes movies, it all looks great.  It's definitely going to take some time away from your tablets (iPads, iPad Mini's, Nexus, etc.).  It's really about convenience and having that type of display at the convenience of your pocket is undeniably powerful.
   
• Camera:  It is clear that the new 6+ camera is 32% better than the camera on the 5S from the shots I took - once again, just kidding.  The 5S had a great camera and from all reviews, the 6+ camera is great.  The pictures I got were pretty amazing, but the 240 fps videos are something else.  I see more and more $200 point-and-shoots becoming paperweights.
   
• Is That a 6+ in Your Pocket, or Are You Happy to See Me? The inevitable question...is this phone too big for the average consumer. If you ask me, the answer is no.  There's a reason this phone is impossible to get right now - bigger is better - the way that AAPL has crafted a 5.5" in-hand device was done in a manner that no other consumer electronics company in the world has or will replicate. The 6+ is a big phone, no doubt about it, and it's not for everybody.  However, if you're teetering between the two, the 6+ is where it's at.  And if you don't like it, you can always saw off the extra 0.8" of screen - once again, just kidding.
   
• What Storage Capacity Should I Get? Well considering the fact that one of the biggest benefits of the 5.5" display is media consumption, why would you not max this thing out with 128GB?  The fact is...you're going to put more pictures, more movies, more everything on this phone.  I think the most idiotic thing to do is to buy this phone with 16GB - iOS 8 requires over 4GB of free space just to install.  Buying a 16GB iPhone 6+ is equivalent to the idiocy of spending $220,000 on a Ferrari and opting for the Honda engine, when the real Ferrari engine is only $10,000 more.  You only live once - be bold.
   
• Which Carrier Should I Go With?:  Go with VZ - if you didn't know, all VZ iPhones are unlocked on GSM networks - meaning you can take your phone, slip in an AT&T, T-Mobile, PAYG, or any other GSM sim card and it will work.  I use my VZ phone with an AT&T sim card and it works fine - I've been doing this with the 5 and 5S - never had any issues with connectivity, accessing v-mail, etc.  Additionally, if you do stick with VZ, it was just announced that VZ finally joined the 21st century and now supports simultaneous voice and data use - previously, if you were on a call, you could not receive or write text msgs / emails, surf the web, or multi-task with any other function that required data...poof - that limitation is gone.

I will note that the new vibration is amplified and quite frankly, annoying - on both the 6 and 6+.  However, I can live with it - I just question why this needed to be messed with in the first place.

Bottom Line: Once you pick up the iPhone 6 Plus and use it, you'll want one.  Go Big-ger or Go Home.

iPhone 6

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128GB Gold VZ iPhone 6 (Model A1549) running on Verizon Network.

The iPhone 6 is also a great phone - I just use it less because I have the 6+...bigger is better.  It's sleek, it's fast, and it's even thinner than the 6+ (6.9 mm).  The battery life is significantly better than the 5S - by the way it was shown during the keynote, I was expecting virtually the same battery life.  Don't get me wrong, you're not going to get 18-hours of heavy use like you will with the 6+, but I would be shocked if you got the 4.5 hours of use that we've all been used to getting on the 5 / 5S.  The 6 is a great phone, and it's selling like there's no tomorrow, it's just not the 6+, and some people will be perfectly happy that it's not.  The 6 is a significant upgrade over the 4S / 5 / 5C / 5S. Let me put it differently, it's a "must-upgrade" over any of those devices mentioned.

CONCLUSION:

When TC said that the new iPhone's would spark "the mother of all upgrades", he wasn't kidding.  But, in the past, those upgrades were largely people that were already iPhone users (the iPhone installed base). AAPL's foray into the world of large screen smartphones (phablets) is going to take market share from Android - whether that be Samsung, HTC, ____ insert random OEM running Android, it doesn't matter. When the only differentiation point is now moot, and with AAPL's new payment service launching next month (another story for another day), people are going to flock to these new phones.  The question isn't how many is AAPL going to sell? The real question is...how many can AAPL make?  Samsung's latest flagship S5 'reportedly' reached 11 million sales in its first month of availability.  This morning, AAPL announced that it had sold 10 million in its first three days of availability, and that's with a nine country roll-out, which didn't include any sales into mainland China (unless you count the Chinese mafia smuggling them in, which I don't). The crazy part is thinking about all of those people that are still waiting to get their hands on these phones - the 6 is shipping in 7-10 business days and the 6+ is holding steady with lead times of 3-4 weeks in the U.S. AAPL plans to have the phones in 115 countries running on the networks of 200+ carriers by the end of calendar 2014.  Simply put, the limitation is supply, not demand.

THE IPHONE 6'S REALLY ARE BIGGER THAN BIGGER IN EVERY WAY - NO MATTER WHICH WAY YOU STACK THEM.

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iPhone 5S, 6, and 6+ stacked on top to show size differentials.  Note that this photo does not show depth with the 5S at 7.6mm, 6 at 6.9mm, and 6+ at 7.1mm.

“It is very important when evaluating sales figures provided by AAPL surrounding the new iPhone 6 models to understand how certain sales will slot into various accounting periods, and ultimately, how these differences are accounted for in channel inventory.”

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Apple's 2014 / 2015 Flagship iPhone Lineup: iPhone 5S, iPhone 6, iPhone 6 Plus

For the past few years, it has become customary for AAPL to make announcements regarding unit sales following its first 24 hours of presales and first weekend of sales.  There are a few considerations that need to be take into account when thinking about what these numbers actually mean, but more importantly, how they translate to its quarterly financial statements.  A lot of the issues are timing-related, but they can, and do affect how investors and analysts alike interpret the performance of the company.  Investors and analysts evaluate the company quarter-by-quarter and can create massive volatility based on those interpretations.

4 MILLION PRESALES

This year was the first year since the iPhone 5 launch in Sept-2012 that AAPL offered presales on its flagship phone - last year, the iPhone 5S was not offered for presale due to extreme supply constraints. Nonetheless, the 4M presales in the first 24-hours this year doubled the iPhone 5, when APPL announced 2M presales in the first 24 hours in September-2012.

Will all 4 Million Presale Units be booked to FQ4?

The answer to this is NO.  Without getting into returns and exchanges, which will likely occur, the revenue recognition of sales drives the answer to this question.

• Apple Retail & Online:  For all sales through AAPL Retail and Online, revenue is recognized when the customer takes possession of the item.  Therefore, if a customer pre-ordered a phone that had a 3-4 week ship time, they will not take possession of that unit by the time AAPL closes its fiscal 4th quarter at 11:59PM on Sept. 27th.  Note that all iPhone 6+ models by carrier / color / storage are all currently at 3-4 week ship times.  However, all iPhone 6 units are currently at 7-10 business days.  My hunch is that the majority, if not all, of these "7-10 business day" units will in-fact be delivered to customers by the 27th.  However, if any are still in-transit (e.g., with a 3rd party parcel carrier) when AAPL closes its books on the 27th, they will actually be counted as deferred revenue and reported in the ending channel inventory number.
   
• 3rd Party Sales:  AAPL uses a different revenue recognition methodology on sales through authorized 3rd party retailers such as its wireless carrier partners and big-box retailers.  Revenue on these sales are recognized when the 3rd party takes possession of the inventory, NOT when they sell it through to an end user.  So this means that all presales through Verizon will be counted in FQ4...right?  No.  All of the carriers were showing lengthy ship times, particularly for the 6+.  AAPL will only recognize revenue on sales to the extent that the 3rd party sold the unit through to a customer or had the item in its inventory on the 27th.  Any 3rd party sales that have not passed through the 3rd parties' inventories will be recognized when AAPL sells those units into the channel.   

OPENING WEEKEND UNIT SALES

Come the morning of Monday, September 22nd, AAPL will likely make an announcement of how many units it sold over the opening weekend.  Will all of these units go to FQ4?  YES.  The number that they will report on September 22nd is in accordance to GAAP.  For people that are not versed in Generally Accepted Accounting Principles, here are the basics:

What will be included?

• AAPL Deliveries to Customers on Opening Weekend: All pre-orders through AAPL's online retail store delivered to customers between 9/19 - 9/21
   
• AAPL Direct Sales: All sales that have been made directly to customers through AAPL's brick & mortar stores ("the campers")
   
• 3rd Party Channel Sell-In: All units that AAPL has sold in to the channel regardless of whether somebody has actually purchased the unit.  Therefore, any type of channel inventory build will be included in this number, where channel inventory build is defined as units sold into the channel that have not been sold through to end-customers.

What will be excluded?

• AAPL Transitory Units: Online AAPL retail orders that have not been shipped or are in-transit to their respective buyers - shows up as deferred revenue; reported in channel inventory number.
   
• 3rd Party Channel Unfulfilled Demand: Orders made through 3rd party channel partners that AAPL has not been able to fill (e.g., sell-in to the channel).  Even if a channel partner has received an order for an iPhone 6, AAPL will not recognize the revenue until the channel partner has received that unit. So, the backlog of orders sitting with carrier partners will not be recognized as revenue assuming units to fulfill that backlog are not sitting in the carrier partners' inventories yet.
   
• China: Nobody has really been able to provide a good explanation of when or why the iPhone 6 launch in China has been delayed.  Reports out of China have indicated that it is "protectionist regulatory barricades" to shift demand towards home-grown handset OEMs like Xiaomi and Meizu.  Whatever the case, China continues to grow its revenue presence on AAPL's geographic revenue breakdown.  While the lack of any sales on the opening weekend in China will hurt the compare, I'm not sure by how much.  The reason for this is that the 5C / 5S were not available on China Mobile when AAPL launched the handsets last September, AND the immensely popular 5S was in very short supply.  Therefore, I'm not sure that the China contribution to the 9M opening weekend unit sales last year was huge.  However, when you're talking about comparables, any country with the revenue presence of China is going to hurt.  We just don't know by how much...yet.  The good news is that those sales will merely be pushed to FQ1 of FQ2 2015 numbers.

2014 VS. 2013 COMPARISON

The 2013 9M unit comparable was likely inflated by up to 3M iPhone 5C units sold into the channel and sitting on shelves, which makes for a tough 2014 comparable.  However, I do believe AAPL will trump that number for a couple of reasons. #1: Both iPhone models are popular, whereas last year the 5S was estimated to outsell the 5C on opening weekend by as much as 4:1.  I believe the iPhone 6+ will outsell the iPhone 6, but not by nearly that margin. #2: The relative popularity of both iPhone models inevitably alleviates supply issues.  The iPhone 6+ is going to be in tighter supply, but when people actually see the 6+, I think a lot will opt for the 6, just due to size - the 6 is a significant upgrade in screen size from the 5 / 5S / 5C, but is not too big that they can't hold it in one hand.

IT'S JUST A TIMING ISSUE...ISN'T IT?

In the end, this is not rocket science.  These revenue recognition issues are mere timing, but as I stated, they do affect market sentiment.  When invested in a company that is measured on the unit sales of one product on a quarter-to-quarter basis, it's important to understand how these numbers are split up and which go to which quarter.  If AAPL had chosen to build 3.3M of channel inventory in its holiday quarter last year (FQ1 2014), it very well could have met the 54 - 55M units that the Street was expecting.  Instead, it reported 51M units and that miss, more than any other, was the driver that sent shares down 10% in after-hours trading.

KEY NUMBERS / COMMENTARY TO LOOK OUT FOR IN COMING WEEKS

In the coming days and weeks, there are several key numbers / data points / commentary to pay particular attention to:

• Opening Weekend Sales - Reported number will be on GAAP basis and will include channel build if supply is there.
   
• FQ4 iPhone Unit Sales - Reported GAAP unit sales for the quarter-ending Sept. 27, 2014. 
   
• iPhone ASP - Everybody is expecting a sustained increase to iPhone ASPs because the popular 6+ starts at $299.  Additionally, many expect the new storage tiers to entice users to make the $100 jump from 16GB to 64GB with both the iPhone 6 and 6+.
   
• Backlog Commentary - How has AAPL managed the supply / demand balance?  What type of backlog did it exit with?
   
• Clarity on China - What is going on with the iPhone 6 China launch?  Is it regulatory issues?  Issues with the carriers?  Other?
   
• Channel Inventory -  What was the change in channel inventory between FQ3 2014 and FQ4 2014?  Was there a build and if so, how much?  As stated, the build last year was an unprecedented 3.3M units, which likely accounted for the shortfall in FQ1 2014.  For the iPhone 5, the channel build was only 800,000 units.  Note that the channel number is going to include "transitory" units as well - units that have been ordered from AAPL, but did not reach their end customers by 11:59PM on Sept. 27, 2014.
   
• Commentary on Legacy Models:  What is AAPL seeing and therefore, how should analysts be modeling in contributions from the 5S and 5C?  With the 16GB and 32GB 5S dropping down to $99 and $149, respectively, is AAPL seeing any meaningful pickup in demand for these phones.  My guess is that the revamp of the lineup with the 6 and 6+ are going to make the 5S and 5C look real old real fast in the United States. However, international markets behave differently with price elasticity.

CHANNEL INVENTORY HISTORY:

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AAPL's historical ending channel inventory vs. reported sales and underlying sell-through.  Note that red "X" marks a quarter in which AAPL refreshed the iPhone product line.

Image Source: Forbes

In mid-August 2013, Carl Icahn made headlines by announcing over Twitter that he had taken a $1.6 billion stake in AAPL, claiming that the company was significantly undervalued.  Over the course of the proceeding months, Icahn put forth his suggestions about what the company should do with its massive hoard of cash to return greater value to shareholders.  Among those suggestions was an additional $150 billion of share buybacks and an increased dividend.

When AAPL failed to impress investors with its revamped 5S and 5C iPhones in September-2013, the stock fell over $56 (split-unadjusted), or 11%, from $506 (9/9/13 close) to $450 (9/16/13 close).  Through that turmoil, Icahn bought more stock, increasing his stake at a per-share price between $465 and $467.

Icahn continued to lobby for the company to return additional capital to shareholders and even had dinner with TC to express his viewpoints.  Finally, in April-2014 AAPL announced that its board had authorized the expansion of its capital return program to over $130 billion by the end of calendar 2015 - the largest capital return program ever on record.  Icahn acknowledged that the expansion of the capital return program was good enough for him and most expected him to exit his position, with a healthy, yet modest gain.  But, he didn't....

As a show of faith in the company, its management, and his continued belief in the enterprise's under-valuation, Icahn not only kept his stake, but expanded it further.  On a split-adjusted basis, it is estimated Icahn currently holds 52.5 million shares of AAPL, which equates to about 0.9% of the company's outstanding diluted share count (6.05 billion).

By using different data points and information put forth by PED, I estimate his average, split-adjusted cost basis to be $83.80 per share - in reality, I think it's actually lower.  As of Friday, August 22, when AAPL closed at $101.32, the estimated value of his position is $5.319 billion, equating to a pre-tax gain of $919.3 million.  Additionally, he has participated in AAPL's dividend payout, which is estimated to add another $78 million in cash.  In total, his returns look to be about $1 billion ($919.3 million in stock price appreciation and $78 million in cash dividends) in a bit over a year - a return of roughly 23%.

While Icahn receives much criticism for his tactics to enforce change within companies he believes are undervalued, he didn't achieve a net worth north of $25 billion by picking the wrong horses to ride.

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Update: On April 28, 2016, Carl Icahn announced that he had exited his position of ~53 million shares of AAPL (~$5.025 billion) citing concerns about the company's market position in China. As of the close on May 5, 2017, had Icahn held onto AAPL, his stake would be worth ~$7.894 billion. He left ~$2.869B plus quarterly dividends on the table.