iPhone News Updated

SAN FRANCISCO (Dow Jones) - Apple Inc. continues to stand by its goal of selling 10 million iPhones this year, but some analysts continue to question whether demand for the iconic device is high enough to support that target.

Another issue remains iPhones that have been "unlocked" to be used on carriers other than Apple's exclusive partners, which include AT&T in the United States.

The iPhone, which was launched into the market last June, will only account for a small portion of the company's overall revenue this year. But Bernstein Research analyst Toni Sacconaghi predicted that the device could make up one- quarter of the company's total sales within the next four years, making the device a crucial part of the future of a company that made its name with its Mac computers and iPod digital music players.

In addition, Sacconaghi predicted in a report Friday that because the iPhone likely generates gross margins of 55% to 60% for every device sold - compared to 30% to 33% gross margins for the rest of Apple's product line - the device could be responsible for as much as 80% of Apple's future earnings growth.

As such, the analyst warned that challenges facing the iPhone business could have a significant impact on Apple (AAPL).

"While we believe the iPhone has the potential to drive material earnings growth for Apple, recent data points suggest the business is facing two significant challenges: (1) overall demand for the handset appears to be falling short of expectations; and (2) the incidence of 'unlocking' has been much higher than expected," Sacconaghi wrote in his report.

Sacconaghi pointed to the fact that Apple's iPhone sales averaged 180,000 units a week in the last quarter of 2007, which historically is Apple's busiest business period of the year. Based on that estimate, Saccohaghi forecasts that Apple should sell 7.9 million iPhones in 2008.

"Apple's goal of selling 10 million iPhones this year is optimistic, particularly if Apple insists on carrier revenue sharing without significant price cuts or new model introductions," Sacconaghi said.

Losing the 'iPhone premium'

Appple's shares have already given back much of the premium gained from the introduction of the iPhone last year.

The stock began the year in the $85 range, then began a run-up after CEO Steve Jobs announced the device at a trade show in early January. The stock reached the $120 range by the time the device hit the market in late June and continued to soar - topping the $200 mark by Christmas.

The shares have sold off sharply since - shedding more than 40% of their value. While the selloff was helped in part by an increasingly negative sentiment around technology stocks, Apple shares have suffered even more so. The Nasdaq Composite is off 14% during the same period.

Shares of Apple were trading down 2.8% at $118.13 by Friday afternoon.

"On balance, we believe Apple is now reasonably to attractively valued, especially in light of the company's strong free cash flow generation," wrote Sacconaghi, who rates the shares as market perform, or neutral. "However, we remain worried that the near-term news flow on iPod and iPhone could be incrementally negative."

Other analysts have sounded worries about the iPhone's outlook. After Apple announced a new 16GB model of the device earlier this month for $499, Keith Bachman of BMO Capital Markets wrote in a report that Apple would be better off with lower-priced models.

"We believe Apple generates more than $200 in gross profit over the life of the phone, compared with approximately $100 for the actual sale of the phone," Bachman wrote. "Consequently, we believe Apple would be much better off with lower-priced phones, with less profits at the time of sale, and significantly higher revenues/profits over the approximately two-year life of the phone."

'Unlocked' phones remain an issue

Much of the iPhone's profitability comes from revenue-sharing agreements that Apple has in place with AT&T Inc. (T) as well as its three European wireless partners.

Apple doesn't disclose how much revenue it gets from AT&T or its European partners, O2 in the U.K., T-Mobile in Germany and Orange in France. Those carriers each give Apple a payment every month for each customer that activates an iPhone on their networks.

But the issue of users buying an iPhone to "unlock" it from those carriers rose following Apple's last quarterly earnings report. Analysts noted a large discrepancy between sales figures provided by Apple compared to those of AT&T, and some concluded that as many as 1 million iPhones had been unlocked since the device went on sale.

Sacconaghi estimates that between 25% and 30% of the more than 4 million iPhones already sold have been unlocked to work on other wireless networks, and that each unlocked iPhone results in Apple missing out on $370 in earnings over the iPhone's two-year contract period.

If Apple were to hit its 10 million iPhone sales target, the unlocked devices would cause the company to forego between $1.1 billion and $1.3 billion over two years, he says.

Apple might be in a bit a of bind regarding what to do about the unlocked iPhones. Sacconaghi said that the unlocked iPhones "present significant strategic issues for Apple," particularly concerning the company's ability to cut the price of future devices and sign up new carriers to revenue sharing plans.

Because of this situation, Sacconaghi believes Apple will either have to continue to allow unlocked iPhones on the market, take more steps to keep the device from being unlocked, or accept the situation and begin selling its own unlocked version.

Thanks: http://money.cnn.com