High Margin Needed for Distribution

Implications: The almost 50% margin for Apple on the iPhone is needed because of different implications across these three channels:
1. Agent and dealer locations;
2. Big Box Retailers;
3. Company-owned stores.

Analysis: Cell phones and rate plan contracts are sold across three types of indirect sales channels: 1) Agent and dealer locations, 2) Big box retailers, 3) Company-owned stores.  At the four major wireless operators, distribution is predominantly exclusive agents and nonexclusive dealers.  For Cingular, the agents and dealers represent about 80% of the distribution in sales volume.  The problem for Apple is that the agent and dealer distribution buys the phone from the operator, but can sell to a customer at any price.  Agents and dealers can take the price difference out of their commission and residual from the operator.  An exclusive agent is less likely to bargain on an advertised price than a dealer selling multiple operators with comparative pricing.  At big box retailers, wireless follows their business model of timely SKU inventory turnover and strong coop advertising funds.  The iPhone SKU has to sell within 30-60 days or be adjusted in price.  Apple needs the margin to supplement coop advertising to clear the store inventory or do a “take-back” of the units.  In company-owned stores, cell phones will sell at the advertised or listed price.  But for Cingular distribution, company-owned stores are only about 10% of total distribution points.  And with only 170 of its own stores, Apple will be heavily distributing through agents, dealers and major retailers.